-----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, P5gl6AjyopS3WnOsaFRrOaM9uuglbGwUQkpXI7gRIvI/xRhRhfdqntKkObOikRqP x3WGgQyVGbf7xuJ/7yxC2Q== 0000867665-04-000053.txt : 20041103 0000867665-04-000053.hdr.sgml : 20041103 20041103165157 ACCESSION NUMBER: 0000867665-04-000053 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20041028 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041103 DATE AS OF CHANGE: 20041103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABRAXAS PETROLEUM CORP CENTRAL INDEX KEY: 0000867665 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 742584033 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-16071 FILM NUMBER: 041116886 BUSINESS ADDRESS: STREET 1: 500 N LOOP 1604 E STE 100 CITY: SAN ANTONIO STATE: TX ZIP: 78232 BUSINESS PHONE: 2104904788 MAIL ADDRESS: STREET 1: 500 N LOOP 1604 EAST STE 100 CITY: SAN ANTONIO STATE: TX ZIP: 78232 8-K 1 refin8k.txt REFINANCE 8-K S UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 October 28, 2004 Date of Report (Date of earliest event reported) ABRAXAS PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) Nevada 0-19118 74-2584033 (State or other jurisdiction of (Commission (IRS Employer incorporation) File Number) Identification No.) 500 N. Loop 1604 East, Suite 100 San Antonio, Texas 78232 (210) 490-4788 (Address of principal executive offices and Registrant's telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 1.01 Entry into a Material Definitive Agreement On October 21, 2004, Abraxas Petroleum Corporation (the "Company"), its subsidiaries Eastside Coal Company, Inc., Sandia Oil & Gas Corporation, Sandia Operating Corp., Wamsutter Holdings, Inc. and Western Associated Energy Corporation (collectively, the "Subsidiary Guarantors") and Guggenheim Capital Markets, LLC (the "Initial Purchaser"), entered into a Purchase Agreement to issue and sell in a private placement, for resale under Rule 144A, Rule 501(a) and Regulation S of the Securities Act of 1933, as amended (the "Securities Act"), $125 million aggregate principal amount of floating rate senior secured notes due 2009 of the Company (the "New Notes"). Consummation of the transactions contemplated under the Purchase Agreement was subject to a number of conditions, all of which were either met or waived at the closing which took place on October 28, 2004. On October 28, 2004, the Company issued and sold the New Notes to the Initial Purchaser, and the following agreements were entered into in connection with the closing of such issuance and sale: (i) the Company, the Subsidiary Guarantors and U.S. Bank National Association, as trustee, entered into an indenture (the "Indenture") governing the New Notes; (ii) the Company executed the New Notes; (iii) the Company and each Subsidiary Guarantor executed a guarantee of the New Notes, and (iv) the Company and the Initial Purchaser entered into an exchange and registration rights agreement with respect to the New Notes (the "Registration Rights Agreement"). This Current Report on Form 8-K contains summaries of certain provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Copies of the documents referred to in this Current Report on Form 8-K are attached hereto as exhibits. The New Notes. The New Notes will mature on December 1, 2009 and will accrue interest from the date of issuance at a per annum floating rate of 6-month LIBOR plus 7.50%. The initial interest rate on the Notes is 9.72% per annum. The interest will be reset semi-annually on each June 1 and December 1, commencing on June 1, 2005. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2005. The New Notes rank equally among themselves and with all of the Company's unsubordinated and unsecured indebtedness, including the New Credit Facility (as defined below) and senior in right of payment to the Company's existing and future subordinated indebtedness, including the Bridge Loan (as defined below). Each of the Subsidiary Guarantors have unconditionally guaranteed, jointly and severally, the payment of the principal of, and premium and interest (including any additional interest) on, the New Notes on a senior secured basis. In addition, any other subsidiary or affiliate of the Company, including the Company's wholly-owned Canadian subsidiary, Grey Wolf Exploration Inc. ("Grey Wolf"), that in the future guarantees any other indebtedness with the Company, or its restricted subsidiaries, will also be required to guarantee the New Notes. Except under limited circumstances, the New Notes are not guaranteed by Grey Wolf, and are structurally subordinated in right to payment to all of its obligations, including Grey Wolf's new $35 million senior secured term loan (described below) and trade payables and other debt of Grey Wolf. The New Notes and the Subsidiary Guarantors' guarantees thereof, together with the New Credit Facility and the Subsidiary Guarantors' guarantees thereof, will be secured by shared first priority perfected security interests, subject to certain permitted encumbrances, in all of the Company's and each of its restricted subsidiaries' material property and assets, including substantially all of their natural gas and crude oil properties and all of the capital stock (or in the case of an unrestricted subsidiary that is a controlled foreign corporation, up to 65% of the outstanding capital stock) of any entity, other than Grey Wolf, owned by the Company and its restricted subsidiaries (collectively, the "Collateral"). The New Notes are not secured by any of the property or assets of Grey Wolf (unless it becomes a restricted subsidiary). The shares of capital stock of Grey Wolf owned by the Company do not constitute a part of the collateral. After April 28, 2007, the Company may redeem all or a portion of the New Notes at the redemption prices set forth in the Indenture, plus accrued and unpaid interest to the date of redemption. Prior to that date, the Company may redeem up to 35% of the aggregate original principal amount of the New Notes 2 using the net proceeds of one or more equity offerings, in each case at the redemption price equal to the product of (i) the principal amount of the New Notes being so redeemed and (ii) a redemption price factor of 1.00 plus the per annum interest rate on the New Notes (expressed as a decimal) on the applicable redemption date plus accrued and unpaid interest to the applicable redemption date, provided certain conditions are also met. If the Company experiences specific kinds of change of control events, each holder of New Notes may require the Company to repurchase all or any portion of such holder's New Notes at a purchase price equal to 101% of the principal amount of the New Notes, plus accrued and unpaid interest to the date of repurchase. The Indenture governing the New Notes contains covenants that, among other things, limit the Company's ability to: o incur or guarantee additional indebtedness and issue certain types of preferred stock or redeemable stock; o transfer or sell assets; o create liens on assets; o pay dividends or make other distributions on capital stock or make other restricted payments, including repurchasing, redeeming or retiring capital stock or subordinated debt or making certain investments or acquisitions; o engage in transactions with affiliates; o guarantee other indebtedness; o permit restrictions on the ability of its subsidiaries to distribute or lend money to the Company; o cause a restricted subsidiary to issue or sell its capital stock; and o consolidate, merge or transfer all or substantially all of the consolidated assets of the Company and its restricted subsidiaries. The Indenture also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default and cross acceleration to certain other indebtedness, including the New Credit Facility (as defined below) and Bridge Loan (as defined below), bankruptcy, and material judgments and liabilities. Registration Rights. Pursuant to the Registration Rights Agreement, the Company agreed to register with the Securities and Exchange Commission exchange notes (the "Exchange Notes") having substantially identical terms as the New Notes, as part of an offer to exchange freely tradable Exchange Notes for the New Notes. The Company agreed to file a registration statement for the Exchange Notes no later than 60 days after October 28, 2004 and use its reasonable best efforts to cause the Registration Statement to be declared effective within 180 days after October 28, 2004 and to consummate the Exchange Offer within 220 days after October 28, 2004. The Company has also agreed, in specified circumstances, to file a shelf registration statement to cover resales of the New Notes. If the Company fails to file the required registration statement, the SEC does not declare the required registration statement effective or the Company does not complete the exchange offer, in each case within the applicable time period specified above, the Company has agreed to pay additional interest to holders of the New Notes. New Credit Facility and Bridge Loan. On October 28, 2004, the Company and its Subsidiary Guarantors entered into a new senior secured revolving credit facility with Wells Fargo Foothill, Inc., as arranger and administrative agent and the lenders signatory thereto (the "New Credit Facility"), and a $25 million second lien increasing rate bridge loan with Guggenheim Corporate Funding, LLC, as arranger and administrative agent and the lenders signatory thereto (the "Bridge Loan"). The New Credit Facility has a maximum commitment of $15 million, which includes a $2.5 million subfacility for letters of credit. Availability under the New Credit Facility is subject to a borrowing base consistent with normal 3 and customary natural gas and crude oil lending transactions. Outstanding amounts under the New Credit Facility bear interest at the prime rate announced by Wells Fargo Bank, National Association plus 1.00%. Subject to earlier termination rights and events of default, the New Credit Facility's stated maturity date is October 28, 2008. The Company is permitted to terminate the New Credit Facility, and under certain circumstances, may be required, from time to time, to permanently reduce the lenders' aggregate commitment under the New Credit Facility. Such termination and each such reduction is subject to a premium equal to the percentage listed below multiplied by the lenders' aggregate commitment under the New Credit Facility, or, in the case of a partial reduction, the amount of such reduction. Year % Premium ------------ ------------------ 1 1.5 2 1.0 3 0.5 4 0.0 Each of the Subsidiary Guarantors has guaranteed, and each of the Company's future restricted subsidiaries will guarantee, the Company's obligations under the New Credit Facility on a senior secured basis. In addition, any other subsidiary or affiliate of the Company, including Grey Wolf, that in the future guarantees any other indebtedness of the Company or of its restricted subsidiaries will be required to guarantee the Company's obligations under the New Credit Facility. Obligations under the New Credit Facility are secured, together with the New Notes, by a shared first priority perfected security interest, subject to certain permitted encumbrances, in all of the Company's and each of its restricted subsidiaries' material property and assets, including the Collateral. Under the New Credit Facility, the Company is subject to customary covenants, including certain financial covenants and reporting requirements. The New Credit Facility requires the Company to maintain a minimum net cash interest coverage ratio and also requires the Company to enter into hedging agreements of not less than 25% or more than 75% of the Company's projected natural gas and crude oil production. In addition to the foregoing and other customary covenants, the New Credit Facility will contain a number of covenants that, among other things, will restrict the Company's ability to: o incur or guarantee additional indebtedness and issue certain types of preferred stock or redeemable stock; o transfer or sell assets; o create liens on assets; o pay dividends or make other distributions on capital stock or make other restricted payments, including repurchasing, redeeming or retiring capital stock or subordinated debt or making certain investments or acquisitions; o engage in transactions with affiliates; o guarantee other indebtedness; o make any change in the principal nature of its business; o prepay, redeem, purchase or otherwise acquire any of its or its restricted subsidiaries' indebtedness; o permit a change of control; o directly or indirectly make or acquire any investment; o cause a restricted subsidiary to issue or sell its capital stock; and o consolidate, merge or transfer all or substantially all of the consolidated assets of the Company and its restricted subsidiaries. 4 The New Credit Facility also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default and cross acceleration to certain other indebtedness, bankruptcy and material judgments and liabilities, and is subject to an Intercreditor, Security and Collateral Agency Agreement (the "Intercreditor Agreement") which specifies the rights of the parties thereto to proceeds from the Collateral. Bridge Loan. On October 28, 2004, the Company borrowed $25 million under the Bridge Loan. Interest on the Bridge Loan currently accrues at a rate of 12% per annum until October 28, 2005, and will be payable monthly in cash. Interest on the Bridge Loan will thereafter accrue at a rate of 15% per annum, and will be payable in-kind. Subject to earlier termination rights and events of default, the Bridge Loan's stated maturity date is October 28, 2010. The Company's obligations under the Bridge Loan are guaranteed by the Subsidiary Guarantors and each of the Company's future restricted subsidiaries. Obligations under the Bridge Loan are secured by a second priority perfected security interest, subject to certain permitted encumbrances, and all of the Company's and each of its restricted subsidiaries' material property assets, including the Collateral. The Bridge Loan is also secured by a first priority perfected security interest in all of the stock of Grey Wolf owned by the Company and its restricted subsidiaries. The Bridge Loan provides for the release of such security interest in connection with a sale of such stock by the Company as permitted by the terms of the Bridge Loan, but not a distribution thereof to the Company's shareholders. Except under limited circumstances, the Bridge Loan is not directly secured by any of the property or assets of Grey Wolf (unless it becomes a restricted subsidiary). Any prepayment of principal on the Bridge Loan will be repaid with an additional amount equal to the principal amount being so paid multiplied by a repayment factor. The repayment factor is currently equal to 1.025 and, following July 28, 2004, will increase monthly by 0.03. If the Bridge Loan is not fully repaid by January 28, 2006, so long as an event of default does not exist thereunder or under the New Credit Facility or the New Notes, the Bridge Loan lenders will have the right to require the Company and its restricted subsidiaries to consummate one or more asset sales. Each such asset sold will be required to be at a fair market value and to generate at least 80% of the proceeds in cash or cash equivalence. Net cash proceeds from each such asset sale (other than with respect to any stock of Grey Wolf, which will be exclusively applied to repay the Bridge Loan) will be applied by the Company and its restricted subsidiaries in the following order, to the extent available to: o first, pay any interest then due and payable under the New Credit Facility; o second, pay any interest then due and payable on the New Notes; o third, pay any accrued and unpaid interest on the New Credit Facility that was not paid under clause "first" of this paragraph; o fourth, to pay any outstanding principal of the New Credit Facility; o fifth, if the remaining aggregate amount of such net cash proceeds, together with any net cash proceeds in the Bridge Loan asset sale proceeds account from a previous asset sale consummated in accordance with the provisions described in the Indenture exceeds $5.0 million, the entire amount in the Bridge Loan asset sale proceeds account is to be used to make a net proceeds offer to purchase New Notes from all holders of the New Notes as if such net cash proceeds remaining after any payment made pursuant to clause "first," "second," "third" or "fourth" above, and any other net cash proceeds in the Bridge Loan asset sale proceeds account, are excess proceeds; and o sixth, after the payment of all amounts required by a net proceeds offer made in accordance with clause "fifth" above to repay all amounts outstanding under the Bridge Loan. Under the Bridge Loan, the Company is subject to substantially the same covenants and reporting requirements, and substantially the same events of default, as are set forth in the New Credit Facility. Intercreditor Agreement. The holders of the New Notes, together with the lenders under the Company's New Credit Facility and Bridge Loan, will be subject to the Intercreditor Agreement. The Intercreditor Agreement, among other things, (i) creates security interests in the Collateral in favor of a collateral agent for the benefit of the holders of the New Notes, the New Credit Facility lenders 5 and the Bridge Loan lenders and (ii) governs the priority of payments among such parties upon notice of an event of default under the Indenture, the New Credit Facility or the Bridge Loan. So long as no such event of default exists, the collateral agent will not collect payments under the New Credit Facility documents, the Indenture and other New Note documents or the Bridge Loan documents (collectively, the "Secured Documents"), and all payments will be made directly to the respective creditor under the applicable Secured Document. Upon notice of such an event of default and for so long as an event of default exists, payments to each New Credit Facility lender, holder of the New Notes and Bridge Loan lender from the Company and the Subsidiary Guarantors, and proceeds from any disposition of any collateral, will, subject to limited exceptions, be collected by the collateral agent for deposit into a collateral account and then distributed as provided in the following paragraph, provided, that, any payment made with proceeds from the sale or other disposition of Grey Wolf stock will be applied exclusively to pay amounts with respect to the Bridge Loan, and no such proceeds will be deposited into the collateral account or will be subject to the payment priority described in the following paragraph. Upon notice of any such event of default and so long as an event of default exists, funds in the collateral account will be distributed by the collateral agent generally in the following order of priority: first, to reimburse the collateral agent for expenses incurred in protecting and realizing upon the value of the Collateral; second, to reimburse the New Credit Facility administrative agent, the trustee and the Bridge Loan administrative agent, on a pro rata basis, for expenses incurred in protecting and realizing upon the value of the Collateral while any of these parties was acting on behalf of the Control Party (as defined below); third, to reimburse the New Credit Facility administrative agent, the trustee and the Bridge Loan administrative agent, on a pro rata basis, for expenses incurred in protecting and realizing upon the value of the Collateral while any of these parties was not acting on behalf of the Control Party (as defined below); fourth, to pay all accrued and unpaid interest (and then any unpaid commitment fees) under the New Credit Facility; fifth, if, the collateral coverage value of three times the outstanding obligations under the New Credit Facility would be met after giving effect to any payment under this clause "fifth," to pay all accrued and unpaid interest on the New Notes; sixth, to pay all outstanding principal of (and then any other unpaid amounts, including, without limitation, any fees, expenses, premiums and reimbursement obligations) the New Credit Facility; seventh, to pay all accrued and unpaid interest on the New Notes (if not paid under clause "fifth"); eighth, to pay all outstanding principal of (and then any other unpaid amounts, including, without limitation, any premium with respect to) the New Notes; ninth, to pay the Bridge Loan lenders all accrued and unpaid interest under the Bridge Loan; tenth, to pay all outstanding principal of (and then any other unpaid amounts, including, without limitation, any premium with respect to) the Bridge Loan; and eleventh, to pay each New Credit Facility lender, holder of the New Notes, Bridge Loan lender and other secured party, on a pro rata basis, all other amounts outstanding under the New Credit Facility, the New Notes and the Bridge Loan. To the extent there exists any excess monies or property in the collateral account after all obligations of the Company and the Subsidiary Guarantors under the New Credit Facility, the Indenture and the New Notes and the Bridge Loan are paid in full, the collateral agent will be required to return such excess to the Company. 6 The collateral agent will act in accordance with the Intercreditor Agreement and as directed by the "Control Party". Prior to the occurrence of any such event of default, the "Control Party" will be the holders of the New Notes and the New Credit Facility lenders, acting as a single class, by vote of the holders of a majority of the aggregate principal amount of outstanding obligations under the New Notes and the New Credit Facility. Upon notice of any such event of default, the Bridge Loan lenders will be the Control Party for 240 days following such notice. If a stay under the Bankruptcy Code occurs during such 240-day period, that period will be extended by the number of days during which that stay was effective. If the New Credit Facility lenders and holders of the New Notes have not been paid in full by the end of such specified period, they will become the Control Party, acting as a single class, by vote of the holders of a majority of the aggregate principal amount of outstanding obligations under the New Notes and the New Credit Facility. The Intercreditor Agreement provides that the lien on the assets constituting part of the Collateral that is sold or otherwise disposed of in accordance with the terms of each Secured Document may be released if (i) no default or event of default exists under any of the Secured Documents, (ii) the Company has delivered an officers' certificate to each of the collateral agent, the trustee, the New Credit Facility administrative agent and the Bridge Loan administrative agent, certifying that the proposed sale or other disposition of assets is either permitted or required by, and is in accordance with the provisions of, the applicable Secured Documents and (iii) the collateral agent has acknowledged such certificate. The Intercreditor Agreement provides for the termination of security interests on the date that all obligations under the Secured Documents are paid in full. Grey Wolf Loan. On October 28, 2004, Grey Wolf entered into an agreement with Guggenheim Corporate Funding, LLC for a $35 million senior secured term loan. Interest on the Grey Wolf term loan currently accrues at the prime rate announced by administrative agent plus 6.25% and will increase by 0.75% at the end of each six-month period during which the Grey Wolf term loan is outstanding. Such interest is payable quarterly in cash with the first interest payment to be made on January 1, 2005. If the Grey Wolf term loan is still outstanding at the end of the first year, an amortization schedule will require Grey Wolf to repay at least 5% of the initial principal amount of the loan at the end of each of the first three years and 10% of the initial principal amount of the loan at the end of the fourth year, with the balance of the loan due at maturity. Subject to early termination rights and events of default, the Grey Wolf term loan will mature on October 29, 2009. Grey Wolf's obligations under its term loan will be guaranteed by each of Grey Wolf's future subsidiaries. Obligations under the Grey Wolf term loan are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in all of Grey Wolf's and each of its subsidiaries' material property and assets, including substantially all of their natural gas and crude oil properties and all the capital stock in any entity owned by Grey Wolf and its subsidiaries. The Grey Wolf term loan is pre-payable, in whole or in part, on not less than 10 days' written notice, at Grey Wolf's option at any time at a price of 100% of the principal amount of the loan being prepaid, plus accrued and unpaid interest to the date of prepayment. Under the Grey Wolf term loan, Grey Wolf is subject to substantially the same covenants and reporting requirements, and substantially the same events of default, as are set forth in the Bridge Loan. Potential Conflicts. The Initial Purchaser advised the Company concerning its corporate strategy and the form and content of the refinancing described in this Current Report on Form 8-K. In addition, the Initial Purchaser and its affiliates participated in various transactions that compromised the refinancing, including as administrative agent and lender under the Bridge Loan and Grey Wolf term loan, and in connection with the refinancing received warrants to purchase up to 1,000,000 shares of the Company's common stock at a purchase price of $0.01 per share. Under the terms of the Bridge Loan and the Intercreditor Agreement, there are potential conflicts of interest between the lenders under the Bridge Loan, as represented by an affiliate of the Initial Purchaser as the administrative agent thereunder, and the New Notes. 7 Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of Registrant. See Item 1.01 above of this Current Report on Form 8-K with respect to the New Notes, the New Credit Facility, the Bridge Loan, the Intercreditor Agreement and the Grey Wolf term loan. Item 3.02 Unregistered Sales of Equity Securities. As stated in Item 1.1 above, in connection with the refinancing described in this Current Report on Form 8-K, the Initial Purchaser received warrants to purchase up to 1,000,000 shares of the Company's common stock at a purchase price of $0.01 per share pursuant to a Warrant also entered into on October 28, 2004 (the "IP Warrant"). The IP Warrant was issued to the Initial Purchaser pursuant to a private placement by the Company as an issuer under Section 4(2) of the Securities Act. From and after October 28, 2004 and until 5:00 P.M., New York time, on October 28, 2014, the holder of the IP Warrant may from time to time exercise it, on any business day, for all or any part of the number of shares of the Company's common stock purchasable thereunder. In order to exercise the IP Warrant, in whole or in part, the holder must (i) deliver to the Company (x) a written notice of the holder's election to exercise the IP Warrant, which notice shall be irrevocable and specify the number of shares of the Company's common stock to be purchased and (y) the IP Warrant, and (ii) pay to the Company the warrant price. The IP Warrant permits payment upon exercise of the IP Warrant to be made, at the option of the holder, by: (i) delivery of a certified or official bank check in the amount of the warrant price; (ii) instructing the Company to withhold a number of shares of warrant stock then issuable upon exercise of the IP Warrant with an aggregate fair value equal to the warrant price; or (iii) surrendering to the Company shares of the Company's common stock previously acquired by the holder with an aggregate fair value equal to the warrant price. The IP Warrant contains customary restrictions on transfer and anti-dilution provisions, including dilution caused by stock dividends, subdivisions, combinations, reorganizations, reclassifications, mergers, consolidations or disposition of assets. Pursuant to the IP Warrant, the Company has also agreed, in specified circumstances, to file a registration statement to cover the warrant stock underlying the IP warrant. Durham Capital Corporation, also received a warrant to purchase up to 100,000 shares of the Company's common stock at a purchase price of $0.01 per share (the "Durham Warrant"), pursuant to a private placement by the Company as an issuer under Section 4(2) of the Securities Act for advising the Company in connection with the refinancing described in this Current Report on Form 8-K. The Durham Warrant contains substantially the same rights and obligations as the IP Warrant. Item 9.01 Financial Statements and Exhibits (c) Exhibits. 4.1 Indenture dated as of October 28, 2004 by and among Abraxas Petroleum Corporation, the Subsidiary Guarantors party thereto and U.S. Bank National Association, as Trustee. 4.2 Form of Rule 144A Global Note for Floating Rate Senior Secured Notes due 2009. (Filed as Exhibit A-1 to Exhibit 4.1). 4.3 Form of Regulation S Global Note for Floating Rate Senior Secured Notes due 2009. (Filed as Exhibit A-2 to Exhibit 4.1). 4.4 Form of Accredited Investor Certificated Note for Floating Rate Senior Secured Notes due 2009. (Filed as Exhibit A-3 to Exhibit 4.1). 10.1 Purchase Agreement dated as of October 21, 2004 by and among Abraxas Petroleum Corporation, the Subsidiary Guarantors signatory thereto and Guggenheim Capital Markets, LLC. 8 10.2 Loan Agreement dated as of October 28, 2004 by and among Abraxas Petroleum Corporation, the Subsidiary Guarantors party thereto, Wells Fargo Foothill, Inc., as Arranger and Administrative Agent and the Lenders signatory thereto. 10.3 Loan Agreement dated as of October 28, 2004 by and among Abraxas Petroleum Corporation, the Subsidiary Guarantors party thereto, Guggenheim Corporate Funding, LLC, as Arranger and Administrative Agent and the Lenders signatory thereto. 10.4 Loan Agreement dated October 28, 2004 by and among Grey Wolf Exploration Inc., Guggenheim Corporate Funding, LLC as Arranger and Administrative Agent and the Lenders signatory thereto. 10.5 Intercreditor, Security and Collateral Agency Agreement dated as of October 28, 2004 by and among Abraxas Petroleum Corporation, the Subsidiary Guarantors party thereto, Wells Fargo Foothill, Inc., Guggenheim Corporate Funding, LLC and U.S. Bank National Association. 10.6 Warrant issued to Guggenheim Corporate Funding, LLC dated October 28, 2004. 10.7 Warrant issued to Durham Capital Corporation dated October 28, 2004. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Abraxas Petroleum Corporation By: ________________________________________ Chris Williford Executive Vice President, Chief Financial Officer and Treasurer Dated: November 3, 2004 EX-4 2 indenture.txt EXHIBIT 4.1 INDENTURE Exhibit 4.1 EXECUTION VERSION The indebtedness evidenced by this document is subject to the provisions of the Intercreditor, Security and Collateral Agency Agreement, dated as of October 28, 2004, among ABRAXAS PETROLEUM CORPORATION (the "Company"), the subsidiaries of the Company listed on Schedule I thereto, WELLS FARGO FOOTHILL, INC., in its capacity as agent for the lenders who are from time to time parties to a Loan Agreement dated as of October 28, 2004, U.S. BANK NATIONAL ASSOCIATION, in its capacities as trustee for the holders of the Company's Floating Rate Senior Secured Notes due 2009 issued under an Indenture dated as of October 28, 2004, and as collateral agent, and GUGGENHEIM CORPORATE FUNDING, LLC, in its capacity as agent for the lenders who are from time to time parties to a Loan Agreement dated as of October 28, 2004. ABRAXAS PETROLEUM CORPORATION each SUBSIDIARY GUARANTOR Named Herein and U.S. BANK NATIONAL ASSOCIATION, as Trustee INDENTURE Dated as of October 28, 2004 $125,000,000 Floating Rate Senior Secured Notes due 2009 TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 1.1 DEFINITIONS.....................................................1 1.2 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT...............35 1.3 RULES OF CONSTRUCTION...........................................35 1.4 ONE CLASS OF SECURITIES.........................................36 ARTICLE 2 THE NOTES 2.1 TITLE AND TERMS; FORM AND DATING................................36 2.2 DENOMINATIONS...................................................38 2.3 EXECUTION AND AUTHENTICATION....................................39 2.4 PERSONS DEEMED OWNERS AND HOLDERS LISTS.........................40 2.5 TRANSFER AND EXCHANGE...........................................40 2.6 REPLACEMENT SECURITIES..........................................54 2.7 OUTSTANDING SECURITIES..........................................55 2.8 TREASURY SECURITIES.............................................55 2.9 TEMPORARY SECURITIES............................................55 2.10 CANCELLATION....................................................56 2.11 DEFAULTED INTEREST..............................................56 2.12 CUSIP NUMBERS...................................................57 2.13 BOOK-ENTRY PROVISIONS FOR GLOBAL SECURITY.......................57 2.14 COMPUTATION OF INTEREST.........................................58 ARTICLE 3 SATISFACTION AND DISCHARGE 3.1 SATISFACTION AND DISCHARGE OF INDENTURE.........................58 3.2 APPLICATION OF TRUST MONEY......................................60 ARTICLE 4 REMEDIES 4.1 EVENTS OF DEFAULT AND REMEDIES..................................60 4.2 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT..............62 4.3 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.63 4.4 TRUSTEE MAY FILE PROOFS OF CLAIM................................64 4.5 TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES.....64 4.6 APPLICATION OF MONEY COLLECTED..................................65 4.7 LIMITATION ON SUITS.............................................65 i 4.8 UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PAYMENT...............66 4.9 RESTORATION OF RIGHTS AND REMEDIES..............................66 4.10 RIGHTS AND REMEDIES CUMULATIVE..................................66 4.11 DELAY OR OMISSION NOT WAIVER....................................66 4.12 CONTROL BY HOLDERS..............................................66 4.13 WAIVER OF PAST DEFAULTS.........................................67 4.14 WAIVER OF STAY..................................................67 ARTICLE 5 THE TRUSTEE 5.1 DUTIES OF TRUSTEE...............................................67 5.2 CERTAIN RIGHTS OF TRUSTEE.......................................68 5.3 TRUSTEE NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES..70 5.4 MAY HOLD SECURITIES.............................................70 5.5 MONEY HELD IN TRUST.............................................70 5.6 COMPENSATION AND REIMBURSEMENT..................................70 5.7 CORPORATE TRUSTEE REQUIRED: ELIGIBILITY........................71 5.8 CONFLICTING INTERESTS...........................................72 5.9 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR...............72 5.10 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR..........................73 5.11 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.....73 5.12 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY...............74 5.13 NOTICE OF DEFAULTS..............................................74 ARTICLE 6 HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY 6.1 HOLDERS' LISTS; HOLDER COMMUNICATIONS; DISCLOSURES RESPECTING HOLDERS.........................................................74 6.2 REPORTS BY TRUSTEE..............................................75 6.3 REPORTS BY COMPANY..............................................75 ARTICLE 7 CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OF OR LEASE 7.1 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS............76 7.2 SUCCESSOR SUBSTITUTED...........................................78 ARTICLE 8 AMENDMENTS, SUPPLEMENTS AND MODIFICATIONS 8.1 AMENDMENTS, SUPPLEMENTS AND MODIFICATIONS WITHOUT CONSENT OF HOLDERS.........................................................79 8.2 AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS AND WAIVERS WITH CONSENT OF HOLDERS..............................................80 ii 8.3 EXECUTION OF SUPPLEMENTAL INDENTURES............................82 8.4 EFFECT OF SUPPLEMENTAL INDENTURES...............................82 8.5 CONFORMITY WITH TRUST INDENTURE ACT.............................82 8.6 REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES..............82 8.7 NOTICE OF SUPPLEMENTAL INDENTURES AND WAIVERS...................82 ARTICLE 9 COVENANTS 9.1 PAYMENT OF SECURITIES...........................................82 9.2 MAINTENANCE OF OFFICE OR AGENCY.................................83 9.3 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.................83 9.4 CORPORATE EXISTENCE.............................................84 9.5 PAYMENT OF TAXES AND OTHER CLAIMS...............................84 9.6 MAINTENANCE OF PROPERTIES.......................................85 9.7 INSURANCE.......................................................85 9.8 STATEMENT BY OFFICER AS TO DEFAULT..............................85 9.9 REPORTS.........................................................86 9.10 LIMITATION ON RESTRICTED PAYMENTS...............................87 9.11 LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK..............................................91 9.12 LIMITATION ON GUARANTEES OF INDEBTEDNESS BY SUBSIDIARIES and other affiliates............................................92 9.13 LIMITATION ON ISSUANCE, SALE AND OWNERSHIP OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES......................................93 9.14 LIMITATION ON LIENS.............................................93 9.15 PURCHASE OF SECURITIES UPON CHANGE OF CONTROL...................94 9.16 LIMITATION OF ASSET SALES.......................................96 9.17 LIMITATION ON TRANSACTIONS WITH AFFILIATES.....................100 9.18 LIMITATION ON SALE-LEASEBACK TRANSACTIONS......................101 9.19 LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES..............................102 9.20 WAIVER OF CERTAIN COVENANTS....................................103 9.21 LIMITATION ON RESTRICTIVE COVENANTS............................103 ARTICLE 10 REDEMPTION OF SECURITIES 10.1 RIGHT OF REDEMPTION............................................103 10.2 APPLICABILITY OF ARTICLE.......................................104 10.3 ELECTION TO REDEEM; NOTICE TO TRUSTEE..........................104 10.4 SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED...................104 10.5 NOTICE OF REDEMPTION...........................................104 10.6 DEPOSIT OF REDEMPTION PRICE....................................105 10.7 NOTES PAYABLE ON REDEMPTION DATE...............................105 10.8 NOTES REDEEMED IN PART.........................................106 iii ARTICLE 11 COLLATERAL AND COLLATERAL DOCUMENTS 11.1 COLLATERAL DOCUMENTS...........................................106 11.2 RECORDING......................................................107 11.3 POSSESSION OF THE COLLATERAL...................................108 11.4 SUITS TO PROTECT THE COLLATERAL................................108 11.5 RELEASE OF COLLATERAL..........................................108 11.6 SPECIFIED RELEASES OF COLLATERAL...............................109 11.7 DISPOSITION OF COLLATERAL WITHOUT RELEASE......................112 11.8 SUFFICIENCY OF RELEASE.........................................113 11.9 ACTIONS BY THE TRUSTEE.........................................113 ARTICLE 12 DEFEASANCE AND DISCHARGE 12.1 COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE...113 12.2 DEFEASANCE AND DISCHARGE.......................................114 12.3 COVENANT DEFEASANCE............................................114 12.4 CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE................115 12.5 DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS.......................117 12.6 REINSTATEMENT..................................................117 ARTICLE 13 SUBSIDIARY GUARANTEES 13.1 UNCONDITIONAL GUARANTEE........................................117 13.2 SUBSIDIARY GUARANTOR MAY CONSOLIDATE, ETC., ON CERTAIN TERMS...119 13.3 RELEASE OF SUBSIDIARY GUARANTORS...............................119 13.4 LIMITATION OF SUBSIDIARY GUARANTORS' LIABILITY.................120 13.5 CONTRIBUTION...................................................121 13.6 EXECUTION AND DELIVERY OF NOTATIONS OF SUBSIDIARY GUARANTEES...121 13.7 SEVERABILITY...................................................121 13.8 ARTICLE 13 NOT TO PREVENT EVENTS OF DEFAULT....................121 13.9 PAYMENT........................................................122 ARTICLE 14 MISCELLANEOUS 14.1 COMPLIANCE CERTIFICATES AND OPINIONS...........................122 14.2 FORM OF DOCUMENTS DELIVERED TO TRUSTEE.........................122 14.3 ACTS OF HOLDERS................................................123 iv 14.4 NOTICES, ETC. TO TRUSTEE, COMPANY AND SUBSIDIARY GUARANTORS....124 14.5 NOTICE TO HOLDERS; WAIVER......................................124 14.6 EFFECT OF HEADINGS AND TABLE OF CONTENTS.......................125 14.7 SUCCESSORS AND ASSIGNS.........................................125 14.8 SEPARABILITY CLAUSE............................................125 14.9 BENEFITS OF INDENTURE..........................................125 14.10 GOVERNING LAW; TRUST INDENTURE ACT CONTROLS....................125 14.11 LEGAL HOLIDAYS.................................................126 14.12 NO RECOURSE AGAINST OTHERS.....................................126 14.13 DUPLICATE ORIGINALS............................................126 14.14 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS..................126 EXHIBITS A-1 Specimen of Rule 144A Global Note for Notes due 2009 A-2 Specimen of Regulation S Global Note for Note due 2009 A-3 Specimen of Institutional Accredited Investor Certificated Note for Notes due 2009 B Form of Certificate of Transfer C Form of Certificate of Exchange v Reconciliation and Tie between Trust Indenture Act of 1939 and Indenture, dated as of October 28, 2004 Trust Indenture Act Indenture Section 310(a)(1)....................................................................5.7 (a)(2)..................................................................5.7 (b)...........................................................5.7, 5.8, 5.9 311(a)......................................................................5.12 (b)....................................................................5.12 312 6.1 313 6.2 314(a).......................................................................6.3 (a)(4)...............................................................9.8(a) (c)(1).................................................................14.1 (c)(2).................................................................14.1 (d)............................................................11.5(b),14.1 (e)................................................................... 14.1 315(a).......................................................................5.1 (b)....................................................................5.13 (c).....................................................................5.1 (e).....................................................................5.1 316(a)(1)(A)................................................................4.12 (a)(1)(B)..............................................................4.13 (b).....................................................................4.8 (c).................................................................14.3(d) 317(a)(1)....................................................................4.3 (a)(2)..................................................................4.4 (b).....................................................................9.3 318(a)..................................................................14.10(b) vi THIS INDENTURE, dated as of October 28, 2004, is among ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (hereinafter called "Abraxas" or the "Company"), the SUBSIDIARY GUARANTORS (as defined hereinafter) and U.S. Bank National Association, a national banking association (hereinafter called the "Trustee"). RECITALS The Company has duly authorized the creation of an issue of Floating Rate Senior Secured Notes due 2009 herein, as amended or supplemented from time to time in accordance with the terms hereof, of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. The Company owns, directly or indirectly, all of the equity ownership of the outstanding Voting Stock of each initial Subsidiary Guarantor, and each initial Subsidiary Guarantor is a member of the Company's consolidated group of companies that are engaged in related businesses. Each initial Subsidiary Guarantor will derive direct and indirect benefit from the issuance of the Notes; accordingly, each initial Subsidiary Guarantor has authorized its guarantee of the Company's obligations under this Indenture and the Notes, and to provide therefor the initial Subsidiary Guarantors have duly authorized the execution and delivery of this Indenture. This Indenture is subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and will, to the extent applicable, be governed by such provisions. All things necessary have been done to make the Notes, when issued and executed by the Company and authenticated and delivered by the Trustee as herein provided, the valid obligations of the Company, to make the Subsidiary Guarantees, when the notations thereof on the Notes are executed by the initial Subsidiary Guarantors, the valid obligation of the initial Subsidiary Guarantors and to make this Indenture a valid agreement of the Company, the initial Subsidiary Guarantors and the Trustee, in accordance with their respective terms. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes (together with the related Subsidiary Guarantees) by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Notes (together with the related Subsidiary Guarantees), as follows: ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 1.1 DEFINITIONS. "144A Global Note" means a Global Note in the form of Exhibit A-1 hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Securities initially sold in reliance on Rule 144A. "2003 Indenture" means the Indenture dated as of January 23, 2003 among the Company, subsidiaries of the Company named in the Indenture and U.S. Bank National Association, as Trustee, as amended and supplemented from time to time. "2003 Notes" means the Company's 11.5% Secured Notes due 2007, Series A and Series B, issued pursuant to the 2003 Indenture that are outstanding on the date hereof. "Acquired Indebtedness" means Indebtedness of a Person (i) assumed in connection with an acquisition of Properties from such Person, which assumption and acquisition shall not be in violation of the provisions of this Indenture or (ii) outstanding at the time such Person becomes a Subsidiary of any other Person (in either case other than any Indebtedness incurred in connection with, or in contemplation of, such acquisition or such Person becoming such a Subsidiary). Acquired Indebtedness will be deemed to be incurred on the date of the related acquisition of Properties from any Person or the date the acquired Person becomes a Subsidiary. "Act," when used with respect to any Holder, has the meaning specified in Section 14.3 hereof. "Adjusted Net Assets" of a Subsidiary Guarantor means, on any date of determination, the amount by which the fair value of the Properties of such Subsidiary Guarantor exceeds the total amount of its liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under the Subsidiary Guarantee of such Subsidiary Guarantor. "Affiliate" of any specified Person means (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any other Person who is a director or executive officer of (a) such specified Person or (b) any Person described in the preceding clause (i). For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, will mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Agent" means any Note Registrar, Paying Agent, co-registrar, authenticating agent or securities custodian. "Agent Members" has the meaning specified in Section 2.13 hereof. "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear and Clearstream that apply to such transfer or exchange. "After-Acquired Property" means any and all assets or property acquired by Abraxas or a Restricted Subsidiary after the Closing Date. "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other disposition by the Company or any Restricted Subsidiary (including, without limitation, by way of merger or consolidation or by way of a sale and leaseback) (collectively, for purposes of this definition, a "transfer") to any Person 2 other than the Company or any Restricted Subsidiary, directly or indirectly, in one or a series of related transactions, of (1) any Capital Stock (other than Disqualified Stock) of any Restricted Subsidiary held by the Company or any Restricted Subsidiary, (2) all or substantially all of the properties and assets of the Company or any Restricted Subsidiary or (3) any other properties or assets of the Company or any Restricted Subsidiary (including Production Payments and Reserve Sales), other than: (a) a disposition for value of hydrocarbons or other mineral products (other than Production Payments and Reserve Sales), inventory, accounts receivable, cash, Cash Equivalents, Oil and Gas Hedging Contracts, Currency Exchange Contracts or Interest Rate Protection Obligations in the ordinary course of business, (b) any lease, abandonment, disposition or relinquishment of any undeveloped oil and gas property in the ordinary course of business or any other oil and gas property that is not capable of production in economic quantities, (c) any Farmout of oil and gas property consummated in the ordinary course of business pursuant to a Permitted Farmout Agreement, including the transfer to the respective farmee(s) of an interest in Farmout Property pursuant to the terms of such Permitted Farmout Agreement, (d) the liquidation of property or assets received in settlement of debts owing to the Company or any Restricted Subsidiary as a result of foreclosure, perfection or enforcement of any Lien or debt, which debt were owing to the Company or any Restricted Subsidiary in the ordinary course of business of the Company or such Restricted Subsidiary, (e) any transfer of properties or assets that is governed by, and made in accordance with, the provisions of Article 7 hereof, (f) any transfer of properties or assets if permitted under the covenant described under Section 9.10 hereof, (g) any Production Payment and Reserve Sales created, incurred, issued, assumed or Guaranteed in connection with the financing of, and within 60 days after, the acquisition of the property that is subject thereto, where the holder of such interest has recourse solely to such production or proceeds of production, subject to the obligation of the grantor or transferor to operate and maintain, or cause to be operated and maintained, such property in a reasonably prudent manner or other customary standard or subject to the obligation of the grantor or transferor to indemnify for environmental, title or other matters customary in the Oil and Gas Business, (h) any transfer of properties or assets to the Company or one or more Wholly Owned Restricted Subsidiaries, (i) any disposal in the ordinary course of business of operating assets and equipment that has become worn out, defective or obsolete or not used or useful in the business of the Company or any Restricted Subsidiary and which is, to the extent required by the Intercreditor Agreement or other Collateral Documents, replaced by property of substantially equivalent or greater value which becomes subject to the Lien of any of the Collateral Documents, (j) any payment of money in satisfaction of Indebtedness (including the Notes) Incurred in compliance with the terms of this Indenture, (k) an Event of Loss if the Collateral Agent is immediately granted a perfected first priority security interest (subject to Permitted Prior Liens) in the Net Loss Proceeds received by the Company or the Restricted Subsidiary, as the case may be, as additional Collateral under the Collateral Documents to secure the Secured Obligations, and such Net Loss Proceeds are deposited into an Asset Sale Proceeds Account, all on terms and pursuant to arrangements reasonably satisfactory to the Collateral Agent in its reasonable determination (which may include, at the Collateral Agent reasonable request, customary Officers' Certificates and legal opinions), and the Intercreditor Agreement and other Collateral Documents will include release provisions requiring the Collateral Agent to release such deposit as necessary to permit the Company or its Restricted Subsidiaries to apply such Net Loss Proceeds in the manner described under Section 9.16, unless the Collateral Agent has received written 3 notice that a Default or Event of Default has occurred and is continuing, and (l) any transfer, in one or a series of related transactions, of properties or assets in the ordinary course of business; provided that all properties and assets transferred pursuant to this clause (l) shall have an aggregate fair market value of less than $1,000,000, as determined in good faith by the Chief Executive Officer of the Company, in any fiscal year. "Asset Sale Proceeds Account" means a segregated account under the sole control of the Collateral Agent that includes only proceeds from the Sale of Collateral, Net Loss Proceeds and interest and investment income earned thereon. "Attributable Indebtedness" in respect of a Sale-Leaseback Transaction means, at the time of determination, the present value of such obligations implicit in such transaction, determined in accordance with GAAP. "Authentication Order" has the meaning specified in Section 2.3 hereof. "Authority" means any national, federal, state, municipal or local government or quasi governmental agency or authority. "Authorized Officers" means each or any one or more of the Chairman of the Board, the President or any Vice President and solely for purposes of attesting to, or certifying the authenticity of signatures, documents, instruments or agreements, Secretary or Assistant Secretary. "Average Life" means, with respect to any Indebtedness or Preferred Stock, as at any date of determination, the quotient obtained by dividing (i) the sum of the products of (a) the number of years (and any portion thereof rounded up to the nearest month) from the date of determination to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund or mandatory redemption payment requirements) of such Indebtedness or redemption or similar payment with respect to Preferred Stock multiplied by (b) the amount of each such payment by (ii) the sum of all such payments. "Board of Directors" means the board of directors of the Company and any committee of such Board of Directors duly authorized to act hereunder; provided that as the term "Board of Directors" is used in the definition of "Continuing Directors" it shall refer only to the Board of Directors of the Company and not to any committee thereof. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by its board of directors and to be in full force and effect on the date of such certification, and delivered to the Trustee, and, with respect to a Subsidiary of the Company, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Subsidiary to have been duly adopted by its board of directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Bridge Loan" means that certain second lien increasing rate bridge loan agreement, to be dated as of the Closing Date, with an aggregate principal amount of $25,000,000 among the Company, certain Subsidiaries of the Company, the Bridge Loan Administrative Agent and the lenders named therein, including any related notes, Guarantees, Collateral Documents, instruments and agreements 4 executed in connection therewith, or any successor or replacement agreement (together with any related successor or replacement notes, Guarantees, Collateral Documents, instruments and agreements executed in connection therewith), whether with the same or any other lender, group of lenders or agent, in each case as the same may be amended (including any amendment and restatement thereof), modified, supplemented, extended, restated, replaced, renewed or refinanced (up to an aggregate commitment of $25,000,000) from time to time in accordance with its terms and the applicable terms of the Intercreditor Agreement. "Bridge Loan Administrative Agent" means Guggenheim Corporate Funding, LLC, as administrative agent under the Bridge Loan, together with its successors in such capacity. "Bridge Loan Asset Sale Proceeds Account" means an Asset Sale Proceeds Account that includes only proceeds from the Sale of Collateral pursuant to an Asset Sale consummated under the Bridge Loan in accordance with the provisions described under [Section 9.16] hereof and interest and investment income earned on such proceeds. "Bridge Loan Obligations" means all Obligations under the Bridge Loan. "Broker-Dealer" has the meaning set forth in the Registration Rights Agreement. "Business Day" means any day other than a Saturday or Sunday, or a day on which banking institutions in The City of New York are authorized or required by law, regulation or executive order to remain closed. "Calculation Agent" means initially U.S. Bank National Association and any duly appointed successor, appointed by the Company, as its agent, pursuant to a calculation agent agreement to determine the Six-Month LIBOR rate on each Interest Determination Date in accordance with the terms of this Indenture. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations, rights in or other equivalents in the equity interests (however designated) in such Person, and any rights (other than debt securities convertible into an equity interest), warrants or options exercisable for, exchangeable for or convertible into such an equity interest in such Person. "Capitalized Lease Obligation" means, with respect to any Person, any obligation that is required to be classified and accounted for as a capital lease obligation under GAAP, and, for the purpose of this Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP; the stated maturity thereof shall be the date of the last payment of any amount due under such obligation prior to the first date upon which such obligation may be terminated by the obligee without payment of penalty. "Cash Equivalents" means: (i) any evidence of Indebtedness with a maturity of 180 days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof); (ii) demand and time deposits and certificates of deposit or acceptances with a maturity of 180 days or less of any financial institution that is a member of the Federal Reserve System having combined capital and 5 surplus and undivided profits of not less than $500,000,000; (iii) commercial paper with a maturity of 180 days or less issued by a corporation that is not an Affiliate of the Company and is organized under the laws of any state of the United States or the District of Columbia and rated at least A-1 by S&P or at least P-1 by Moody's; (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any commercial bank meeting the specifications of clause (ii) above; (v) overnight bank deposits and bankers' acceptances at any commercial bank meeting the qualifications specified in clause (ii) above; (vi) deposits available for withdrawal on demand with any commercial bank not meeting the qualifications specified in clause (ii) above but which is organized under the laws of any country in which the Company or any Restricted Subsidiary maintains an office or is engaged in the Oil and Gas Business, provided that (a) all such deposits are required to be made in such accounts in the ordinary course of business, (b) such deposits do not at any one time exceed $2,500,000 in the aggregate and (c) no funds so deposited remain on deposit in such bank for more than 30 days; (vii) deposits available for withdrawal on demand with any commercial bank not meeting the qualifications specified in clause (ii) above but which is a lending bank under any credit facility of the Company or any Restricted Subsidiary, provided that all such deposits do not exceed $2,500,000 in the aggregate at any one time; and (viii) investments in money market funds substantially all of whose assets comprise securities of the types described in clauses (i) through (v) above. "Cash Pay Preferred Stock" means any Capital Stock that, by its terms, by the terms of any security into which it is convertible or exchangeable, by contract or otherwise, requires, or upon the happening of an event or passage of time would require, the payment of dividends (other than dividends paid (1) in Qualified Capital Stock and/or (2) from a segregated reserve account funded solely out of amounts paid by the purchaser or purchasers of such Capital Stock in connection with the issuance of such Capital Stock) prior to the date that is 91 days after the final Stated Maturity of the Notes. "Change of Control" means the occurrence of any of the following events: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of shares representing more than 35% of the total voting power of the then outstanding Voting Stock of the Company other than by means of a Qualified Equity Offering; (ii) the Company is merged with or into or consolidated with another Person and, immediately after giving effect to the merger or consolidation, (a) less than 65% of the total voting power of the outstanding Voting Stock of the surviving or resulting Person is then "beneficially owned" (within the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by the stockholders of the Company immediately prior to such merger or consolidation and (b) any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total voting power of the Voting Stock of the surviving or resulting Person; (iii) the Company, either individually or in conjunction with one or more Restricted Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes of, or one or more Restricted Subsidiaries sells, assigns, conveys, transfers, leases or otherwise disposes of, all or substantially all of the Properties of the Company and the Restricted Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of the Restricted Subsidiaries, to any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the 6 Exchange Act) (other than the Company or one or more Wholly Owned Restricted Subsidiaries; (iv) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or (v) the liquidation or dissolution of the Company. "Change of Control Notice" has the meaning specified in Section 9.15(b) hereof. "Change of Control Offer" has the meaning specified in Section 9.15(a) hereof. "Change of Control Payment Date" has the meaning specified in Section 9.15(a) hereof. "Change of Control Purchase Price" has the meaning specified in Section 9.15(a) hereof. "Clearstream" means Clearstream Banking, S.A. "Closing Date" means the date on which Notes are originally issued under this Indenture. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" means, collectively, all of the property and assets that are from time to time subject to the Lien of the Collateral Documents, including the Liens, if any, required to be granted pursuant to this Indenture. "Collateral Account" means each collateral account established and maintained by the Collateral Agent pursuant to the Intercreditor Agreement for the receipt of Trust Monies, including an Asset Sale Proceeds Account. "Collateral Agent" means U.S. Bank National Association, in its capacity as collateral agent under the collateral agency agreement, together with its successors in such capacity. "Collateral Agent's Liens" means a Lien granted to the Collateral Agent as security for Secured Obligations. "Collateral Documents" means, collectively, the Intercreditor Agreement and the security agreements, mortgages, deeds of trust, account control agreements and other security documents applicable to the Collateral and given to secure the Secured Obligations, each as may be amended, modified, supplemented, restated or replaced from time to time in accordance with its terms. "Commission" or "SEC" means the Securities and Exchange Commission as from time to time constituted, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. 7 "Common Stock" of any Person means Capital Stock of such Person that does not rank prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding-up of such Person, to shares of Capital Stock of any other class of such Person. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person will have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" will mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman, its Chief Executive Officer, its President, any Vice President, its Treasurer or an Assistant Treasurer, and delivered to the Trustee. "Condemnation" means any taking of the Collateral or any part thereof, in or by condemnation, expropriation or similar proceeding, eminent domain proceedings, seizure or forfeiture, pursuant to any law, general or special, or by reason of the temporary requisition of the use of or occupancy of the Collateral, or any part thereof by any Authority. "Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio of (i) the sum of Consolidated Net Income and Consolidated Fixed Charges, Consolidated Income Tax Expense and Consolidated Non-Cash Charges (to the extent deducted in computing Consolidated Net Income in each case) for such period, of the Company and its Restricted Subsidiaries on a consolidated basis decreased (to the extent included in determining Consolidated Net Income for such period) by the sum of (y) the amount of deferred revenues that are amortized during such period and are attributable to reserves that are subject to Volumetric Production Payments and (x) amounts recorded for such period in accordance with GAAP as repayments of principal and interest pursuant to Dollar-Denominated Production Payments, to (ii) the Consolidated Fixed Charges for such period; provided, however, that: (a) the Consolidated Fixed Charge Coverage Ratio will be calculated on the assumption that (1) any Indebtedness to be Incurred (and all other Indebtedness Incurred after the first day of such period of four full fiscal quarters referred to in clause (1) of the first sentence of Section 9.11 hereof through and including the date of determination) and (if applicable) the application of the net proceeds therefrom (and from any other such Indebtedness), including to refinance other Indebtedness, but excluding the Incurrence or repayment of Indebtedness in the ordinary business for working capital purposes pursuant to working capital facilities, had been Incurred on the first day of such period and, in the case of Acquired Indebtedness or Indebtedness to be incurred in connection with an acquisition or other transaction, on the assumption that the related transaction (whether by means of purchase, merger or otherwise) also had occurred on such date with the appropriate adjustments with respect to such acquisition being included in such pro forma calculation and (2) any acquisition or disposition by the Company or any Restricted Subsidiary of any Properties outside the ordinary course of business, or any repayment of any principal amount of any Indebtedness of the Company or any Restricted Subsidiary prior to the Stated Maturity thereof, in either case since the first day of such period through and including the date of determination, had been consummated on such first day of such period; (b) in making such computation, the Consolidated Fixed Charges attributable to interest on any Indebtedness required to be computed on a pro forma basis in accordance with clause (1) of the first sentence of Section 9.11 hereof and (1) bearing a floating interest rate shall be computed as if the rate in effect on the date of 8 computation had been the applicable rate for the entire period and (2) which was not outstanding during the period for which the computation is being made but which bears, at the option of the Company, a fixed or floating rate of interest, shall be computed by applying, at the option of the Company, either the fixed or floating rate; (c) in making such computation, the Consolidated Fixed Charges attributable to interest on any Indebtedness under a revolving credit facility required to be computed on a pro forma basis in accordance with clause (1) of the first sentence of Section 9.11 hereof shall be computed based upon the average daily balance of such Indebtedness during the applicable period, provided that such average daily balance shall be reduced by the amount of any repayment of Indebtedness under a revolving credit facility during the applicable period, which repayment permanently reduced the commitments or amounts available to be reborrowed under such facility; (d) notwithstanding clauses (b) and (c) of this proviso, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Rate Protection Obligations, shall be deemed to have accrued at the rate per annum resulting after giving effect to the operation of such agreements; (e) in making such calculation, Consolidated Fixed Charges shall exclude interest attributable to Dollar-Denominated Production Payments; and (f) if after the first day of the period referred to in clause (i) of this definition the Company has retired any Indebtedness out of the net cash proceeds of the issue and sale of shares of Qualified Capital Stock of the Company within 30 days of such issuance and sale, Consolidated Fixed Charges shall be calculated on a pro forma basis as if such Indebtedness had been retired on the first day of such period. "Consolidated Fixed Charges" means, for any period, without duplication, (i) the sum of (a) the interest expense of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, (1) any amortization of original issue discount, (2) the net cost under Interest Rate Protection Obligations (including any amortization of discounts), (3) the interest portion of any deferred payment obligation constituting Indebtedness, (4) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, and (5) all accrued interest, in each case to the extent attributable to such period, (b) to the extent any Indebtedness of any Person (other than the Company or a Restricted Subsidiary) is guaranteed by the Company or any Restricted Subsidiary, the aggregate amount of interest paid (to the extent not accrued in a prior period) or accrued by such other Person during such period attributable to any such Indebtedness, in each case to the extent attributable to that period, (c) the aggregate amount of the interest component of Capitalized Lease Obligations paid (to the extent not accrued in a prior period), accrued and/or scheduled to be paid or accrued by the Company and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP; and (d) the aggregate amount of dividends paid (to the extent not accrued in a prior period) or accrued on Disqualified Stock of the Company and its Restricted Subsidiaries, to the extent such Disqualified Stock is owned by Persons other than the Company or its Restricted Subsidiaries and to the extent such dividends are not paid in Qualified Capital Stock; less (ii) to the extent included in clause (i) above, (A) amortization of capitalized debt issuance costs of the Company and its Restricted Subsidiaries during such period and (B) amounts paid, accrued and/or scheduled to be paid or accrued to the Company or any its Restricted Subsidiaries. "Consolidated Income Tax Expense" means, for any period, the provision for federal, state, local and foreign income taxes (including any state franchise taxes accounted for as income taxes in accordance with GAAP) of the Company and 9 its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Indebtedness" means, at any date, the consolidated Indebtedness of the Company and its Restricted Subsidiaries on such date. "Consolidated Net Income" means, for any period, the consolidated net income (or loss) of the Company and its Restricted Subsidiaries for such period as determined in accordance with GAAP, adjusted to the extent included in calculating such net income (or loss) by excluding, without duplication: (i) net after-tax extraordinary or non-recurring gains or losses to the extent classified as such in accordance with GAAP, (ii) net after-tax gains or losses (less all fees and expenses relating thereto) attributable to Asset Sales (or abandoned reserves related thereto), (iii) the net income (or net loss) of any Person (other than the Company or any of its Restricted Subsidiaries) in which the Company or any of its Restricted Subsidiaries has an ownership interest, except that the net income of such Person shall be included in Consolidated Net Income to the extent of the amount of dividends or other distributions or interest on Indebtedness actually paid to the Company or any of its Restricted Subsidiaries in cash by such other Person during such period (regardless of whether such cash dividends, distributions or interest on Indebtedness is attributable to net income (or net loss) of such Person during such period or during any prior period), (iv) the net income of any Subsidiary Guarantor to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary is not at the date of determination permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (v) the net income (or net loss) attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued); and (vi) in the case of a successor to the Company by consolidation or merger or as transferee of the Company's assets, the net income of the successor corporation prior to such consolidation, merger or transfer of assets. "Consolidated Non-Cash Charges" means, for any period, the aggregate depreciation, depletion, amortization and other non-cash expenses of the Company and its Restricted Subsidiaries reducing Consolidated Net Income for such period, determined on a consolidated basis in accordance with GAAP (excluding any such non-cash charge that requires an accrual of or reserve for cash charges for any future period). "Control Party" has the meaning given to such term in the Intercreditor Agreement. "Corporate Trust Office" means the principal corporate trust office of the Trustee at which at any particular time its corporate trust business will be administered, which office at the date of execution of this Indenture is located at 60 Livingston Avenue, EP-MN-WS3C, Saint Paul, Minnesota 55107. "Covenant Defeasance" has the meaning specified in Section 12.3 hereof. "Credit Facility Agent" means each respective "Agent" under the Revolver, the Bridge Loan or the Grey Wolf Term Loan. 10 "Currency Exchange Contract" means, with respect to the Company or its Restricted Subsidiaries, any foreign exchange contract, currency swap agreement or other similar agreement or arrangement that is entered into in the ordinary course of business for the purpose of protecting itself against fluctuations in currency values and not for the purpose of speculation. "Default" means any event, act or condition which with the passage of time or the giving of notice pursuant to this Indenture or both would be an Event of Default. "Defaulted Interest" has the meaning specified in Section 2.11 hereof. "Definitive Note" means a certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.5 hereof, in the form of Exhibit A-1 hereto except that such Note shall not bear the Global Note Legend and shall not have the "Schedule of Exchanges of Interests in the Global Note" attached thereto. "Depositary" means The Depository Trust Company, its nominees and their respective successors. "Designated LIBOR Page" means the display on the Moneyline service (or such other service or services as may be nominated by the British Bankers' Association) for the purpose of displaying London interbank rates of major banks for U.S. dollar deposits. If no such rate appears on an Interest Determination Date, the Six-Month LIBOR rate on such Interest Determination Date will be determined as described in clause (2) of the definition of "Six-Month LIBOR." "Disqualified Stock" means Capital Stock that is either Cash Pay Preferred Stock or Redeemable Capital Stock. "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which the Board of Directors of the Company is required to deliver a Board Resolution hereunder, a member of the Board of Directors of the Company who does not have any material direct or indirect financial interest (other than in interest arising solely from the beneficial ownership of Capital Stock of the Company) in or with respect to such transaction or series of transactions. "Dollar-Denominated Production Payments" means production payment obligations recorded as liabilities in accordance with GAAP, together with all undertakings and obligations in connection therewith. "Euroclear" means Euroclear SA/NV, as operator of the Euroclear system. "Event of Default" has the meaning specified in Section 4.1 hereof. "Event of Loss" means, with respect to any Collateral, any (1) loss, destruction or damage of such Collateral, (2) condemnation, seizure or taking by exercise of the power of eminent domain or otherwise of such Collateral, or confiscation of such Collateral or the requisition of the use of such Collateral, by any governmental or quasi-governmental entity or (3) settlement in lieu of clause (2) above. 11 "Excess Proceeds" has the meaning specified in Section 9.16(b) hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" means the notes issued in the Exchange Offer pursuant to Section 2.5 hereof. "Exchange Offer" has the meaning set forth in the Registration Rights Agreement. "Exchange Offer Registration Statement" has the meaning set forth in the Registration Rights Agreement. "Existing Senior Debt Facility" means the Loan and Security Agreement, dated as of January 22, 2003, among the Company, as borrower, each of its Subsidiaries, as a guarantor, the lenders named therein, Wells Fargo Foothill, Inc., as the arranger and administrative agent, and Guggenheim Corporate Funding, LLC, as the specified appointee, as in existence on the Closing Date. "Fair Market Value" means the fair market value of a Property (including shares of Capital Stock) as determined by the Board of Directors of the Company and evidenced by a Board Resolution in good faith, which determination will be conclusive for purposes of this Indenture; provided, however, that unless otherwise specified herein, the Board of Directors will be under no obligation to obtain any valuation or assessment from any investment banker, appraiser or other third party. "Farmout" means an arrangement whereby the owner(s) of one or more oil, gas and/or mineral lease or other oil and natural gas working interest with respect to Farmout Property (referred to as the "farmor") agrees to transfer or assign an interest in such Farmout Property to one or more other Persons (referred to as the "farmee") in exchange for the farmee (1) drilling, or participating in the cost of the drilling of, one or more oil and/or natural gas wells, or undertaking other exploration or development activity or participating in the cost of such other activity, to attempt to obtain production of hydrocarbons from such Farmout Property, (2) agreeing to so drill or undertake such other activity, or agreeing to participate in the cost of such drilling or such other activity, with respect to such Farmout Property, or (3) obtaining production of hydrocarbons from such Farmout Property, or participating in the costs of obtaining such production. "Farmout Agreement" means, with respect to a Farmout, the agreement or agreements governing such Farmout. "Farmout Property" means, with respect to a Farmout, the property from which production of hydrocarbons is sought to be obtained through such Farmout. The Farmout Property with respect to a Farmout may consist of only certain specified depths, strata, zones or geological formations under one or more tracts of land, but shall not include any depths, strata, zones or geological formations under such tract(s) of land (i) that, at the time of such Farmout, are being produced or developed by the farmor or any of its Affiliates in the same field or area or (ii) that have been subject to production or development 12 activity by the farmor or any of its Affiliates in the same field or area and such activity was discontinued with the desire or expectation of entering into a Farmout. "Farmout Property Value" means, with respect to a Farmout, the value of the Farmout Property of the Company or its Restricted Subsidiaries at the time the relevant Farmout Agreement is entered into determined as follows: o with respect to Farmout Property with a value not exceeding $1,000,000, as determined in good faith by the Chief Executive Officer of the Company and evidenced by an Officers' Certificate delivered to the Trustee; o with respect to Farmout Property with a value exceeding $1,000,000 but not exceeding $5,000,000, as determined in good faith by the Board of Directors of the Company and evidenced by a Board Resolution delivered to the Trustee; and o with respect to Farmout Property with a value exceeding $5,000,000, as reflected in an opinion or appraisal issued by an independent accounting or investment banking firm which is nationally recognized in the United States, or by a reputable independent appraisal or petroleum engineering firm, as appropriate under the circumstances, delivered to the Trustee "Foreign Unrestricted Subsidiary" means any Unrestricted Subsidiary that is a controlled foreign corporation (within the meaning of section 957(a) of the Internal Revenue Code of 1986, as amended). "Federal Bankruptcy Code" means the United States Bankruptcy Code of Title 11 of The United States Code, as amended from time to time. "Funding Guarantor" has the meaning specified in Section 13.5 hereof. "GAAP" means generally accepted accounting principles, consistently applied, that are 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 or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States of America, which were effective as of the Closing Date. "Global Note Legend" means the legend set forth in Section 2.5(g)(ii) hereof, which is required to be placed on all Global Notes issued under this Indenture. "Global Notes" means, individually and collectively, each of the Restricted Global Notes and the Unrestricted Global Notes, in the form of Exhibit A hereto issued in accordance with Sections 2.1, 2.5(b)(iv), 2.5(d)(ii) or 2.5(f) hereof. "Grey Wolf Loan Administrative Agent" means Guggenheim Corporate Funding, LLC, as administrative agent under the Grey Wolf Term Loan Agreement, together with its successors in such capacity. "Grey Wolf Term Loan" means that certain senior secured term loan agreement, to be dated as of the Closing Date, with an initial aggregate commitment of $35,000,000 among Grey Wolf, the Grey Wolf Loan Administrative 13 Agent and the lenders named therein, including any related notes, Guarantees, Collateral Documents, instruments and agreements executed in connection therewith, or any successor or replacement agreement (together with any related successor or replacement notes, Guarantees, Collateral Documents, instruments and agreements executed in connection therewith), whether with the same or any other lender, group of lenders, or agent, in each case as the same may be amended (including any amendment and restatement thereof), modified, supplemented, extended, restated, replaced, renewed or refinanced (up to an aggregate commitment of $35,000,000) from time to time in accordance with its terms and the applicable terms of the Intercreditor Agreement. "Guarantee" means any obligation, contingent or otherwise, of any Person guaranteeing Indebtedness of another Person (including, without limitation, obligations, agreements to purchase assets, securities or services, to take-or-pay such Indebtedness of another Person or to maintain financial statement conditions, or similar arrangements or agreements, in each case entered into for the purpose of assuring the obligee of such Indebtedness of the payment thereof, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit, or to protect such obligee against loss in respect thereof, in whole or in part), but excluding (i) endorsements of negotiable instruments for collection or deposit in the ordinary course of business and (ii) contingent obligations in connection with the sale or discount of accounts receivable and similar paper; provided, however, that a Guarantee by any Person shall not include a contractual commitment by one Person to invest in another Person and provided further that such Investment is otherwise permitted by this Indenture. When used as a verb, "Guarantee" shall have a corresponding meaning. "Holder" means a Person in whose name a Note is registered in a Note Register. "Incur" has the meaning specified in Section 9.11 hereof. "Indebtedness" means, with respect to any Person, without duplication: (i) all liabilities of such Person for borrowed money or for the deferred purchase price of Property or services (excluding any trade accounts payable and other accrued current liabilities incurred in the ordinary course of business), and all liabilities of such Person incurred in connection with any letters of credit, bankers' acceptances or other similar credit transactions, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP; (ii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP; (iii) all indebtedness of such Person created or arising under any conditional sale, title retention or similar agreement with respect to Property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such Property), but excluding trade accounts payable arising in the ordinary course of business; (iv) all Capitalized Lease Obligations of such Person; (v) all obligations of such Person under or in respect of Currency Exchange Contracts, Oil and Gas Hedging Contracts and Interest Rate Protection Obligations; (vi) all indebtedness referred to in the preceding clauses of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such Indebtedness has an existing right to be secured by) any Lien upon Property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable 14 for the payment of such Indebtedness (the amount of such obligation being deemed to be the lesser of the value of such Property or the amount of the obligation so secured); (vii) all Redeemable Capital Stock of such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued dividends; (viii) all Guarantees by such Person of Indebtedness referred to in this definition (including, with respect to any Production Payment and Reserve Sales, any warranties or Guarantees of production or payment by such Person with respect to such Production Payment and Reserve Sales, but excluding other contractual obligations of such Person with respect to such Production Payment and Reserve Sales); and (ix) all obligations of such Person under any agreement to purchase, redeem, exchange, convert or otherwise acquire for value any Capital Stock of such Person or any warrants, rights or options to acquire such Capital Stock outstanding on the date of this Indenture or thereafter if, and to the extent, such obligations would have caused such Capital Stock to have been Redeemable Capital Stock if such obligations had been included in the terms of such Capital Stock. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair Market Value shall be determined in good faith by the board of directors of the issuer of such Redeemable Capital Stock; provided, however, that if such Redeemable Capital Stock is not at the date of determination permitted or required to be repurchased, the "maximum fixed repurchase price" shall be the book value of such Redeemable Capital Stock. Subject to clause (viii) of the first sentence of this definition, neither Dollar-Denominated Production Payments nor Volumetric Production Payments shall be deemed to be Indebtedness. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Intercreditor Agreement" means that certain intercreditor agreement to be entered into on the Closing Date among Company, the initial Restricted Subsidiaries, the Trustee, the Revolving Credit Facility Administrative Agent, the Bridge Loan Administrative Agent and the Collateral Agent, as the same may be amended (including any amendment and restatement thereof), modified or supplemented from time to time in accordance with its terms. "Indirect Participant" means a Person who holds a beneficial interest in a Global Note through a Participant. "Initial Notes" means the LIBOR Floating Rate Senior Secured Notes due 2009 authenticated and delivered under this Indenture. "Insolvency" or "Liquidation Proceeding" mean, with respect to any Person, (i) an insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or similar case or proceeding in connection therewith, relative to such Person or its creditors, as such, or its assets or (ii) any liquidation, dissolution or other winding-up proceeding of such Person, whether voluntary or involuntary and whether or not involving insolvency or 15 bankruptcy or (iii) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of such Person. "Interest Determination Date" means the second London Business Day preceding each Interest Reset Date. "Interest Payment Date" means the first day of June and December, commencing on June 1, 2005; provided, that, if any such day is not a Business Day, such Interest Payment Date shall be the next succeeding Business Day. "Interest Rate Protection Obligations" means the obligations of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements or arrangements designed to protect against or manage such Person's and any of its Subsidiaries' exposure to fluctuations in interest rates. "Interest Reset Date" means the first day of June and December, commencing on June 1, 2005. "Investment" means, with respect to any Person, any direct or indirect advance, loan, Guarantee of Indebtedness or other extension of credit or capital contribution to (by means of any transfer of cash or other Property to others or any payment for Property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities (including derivatives) or evidences of Indebtedness issued by, any other Person. In addition: (i) the Fair Market Value as determined by the Board of Directors of the Company in good faith of the net assets of any Restricted Subsidiary (prorated for the Company's direct and indirect interest in the Capital Stock of such Restricted Subsidiary if such Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary) at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary shall be deemed to be an "Investment" made by the Company in such Unrestricted Subsidiary at such time; and (ii) the Fair Market Value of Capital Stock retained by the Company or a Restricted Subsidiary in connection with the sale or issuance of Capital Stock of a Restricted Subsidiary in accordance with Section 9.13 hereof that, as a result of such transaction, is no longer a Restricted Subsidiary (prorated for the Company's direct and indirect interest in such Capital Stock if such Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary immediately prior to such sale or issuance) shall be deemed to be an "Investment" made at the time of such transaction. "Investments" shall exclude: (a) extensions of trade credit under a joint operating agreement or otherwise in the ordinary course of business, workers' compensation, utility, lease and similar deposits and prepaid expenses made in the ordinary course of business; (b) Interest Rate Protection Obligations entered into in the ordinary course of business or as required by any Permitted Indebtedness or any other Indebtedness incurred in compliance with Section 9.11 hereof, but only to the extent that the stated aggregate notional amounts of such Interest Rate Protection Obligations do not exceed 105% of the aggregate principal amount of such Indebtedness to which such Interest Rate Protection Obligations relate; (c) bonds, notes, debentures or other securities received as a result of Asset Sales 16 permitted under Section 9.16 hereof; and (d) endorsements of negotiable instruments and documents for collection in the ordinary course of business. "Legal Defeasance" has the meaning specified in Section 12.2 hereof. "Legal Requirements" means, at any time, any and all judicial and administrative rulings and decisions, and any and all Federal, state and local laws, ordinances, rules, regulations, permits and certificates, of any Authority, in each case applicable, at such time to the Company or the Collateral (or the ownership or use thereof). "Letter of Transmittal" means the letter of transmittal to be prepared by the Company and sent to all Holders of the Initial Notes for use by such Holders in connection with the Exchange Offer. "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance or similar agreement or preferential arrangement of any kind or nature whatsoever serving to provide security for an obligation, whether or not filed, recorded or otherwise perfected under applicable law (including, without limitation, any agreement to give or grant a lien or any lease, conditional sale, title retention or similar agreement having substantially the same economic effect as any of the foregoing) upon or with respect to any Property of any kind. A Person shall be deemed to own subject to a Lien any Property that such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Liquidated Damages" means all additional interest then owing pursuant to Section 3 of the Registration Rights Agreement. "London Business Day" means any day on which dealings in U.S. dollars generally are transacted in the London interbank market. "Material Subsidiary" means, at any particular time, any Restricted Subsidiary that, together with its Subsidiaries, (a) accounted for more than 5% of the consolidated revenues of the Company and its Restricted Subsidiaries for the most recently completed fiscal year of the Company or (b) was the owner of more than 5% of the consolidated assets of the Company and its Restricted Subsidiaries at the end of such fiscal year, all as shown in the case of (a) and (b) on the consolidated financial statements of the Company and its Restricted Subsidiaries for such fiscal year. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, with respect to any Asset Sale, sale, transfer or other disposition by any Person, the aggregate proceeds thereof in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), pursuant to, or monetization of, a note or installment receivable or otherwise, net of: (i) brokerage commissions and other 17 fees and expenses (including, without limitation, fees and expenses of legal counsel, accountants, petroleum engineering firms and investment banks) incurred by such Person related to such Asset Sale, sale, transfer or other disposition; (ii) the amount of any Indebtedness (including Redeemable Capital Stock or Preferred Stock of a Subsidiary) that is required to be repaid by such Person or its Affiliates in connection with such Asset Sale, sale, transfer or other disposition; (iii) provisions for all taxes, including income taxes, payable as a result of such Asset Sale, sale transfer or other disposition or attributable to required prepayments or repayments of Indebtedness with the proceeds of such Asset Sale, sale, transfer or other disposition; (iv) amounts required to be paid to any Person or its Affiliates (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale, sale, transfer, or other disposition or to holders of minority interests in a Restricted Subsidiary or other entity as a result of such Asset Sale, sale, transfer or other disposition; and (v) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve in accordance with GAAP applied against post closing adjustments or any liabilities associated with such Asset Sale, sale, transfer or other disposition and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, sale, transfer or other disposition, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, sale, transfer or other disposition, all as reflected in an Officers' Certificate delivered to the Trustee; provided, however, that any amounts remaining after adjustments, revaluations or liquidations of such reserves shall constitute Net Cash Proceeds. "Net Loss Proceeds" means, with respect to any Event of Loss, the proceeds in the form of cash or Cash Equivalents received by the Company or any of its Restricted Subsidiaries from such Event of Loss net of: (a) reasonable out-of-pocket expenses and fees relating to such Event of Loss (including, without limitation, fees and expenses of legal counsel, accountants, petroleum engineering firms and investment banks), (b) provisions for all taxes, including income taxes, payable as a result of such Event of Loss after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements; and (c) repayment of Indebtedness that is secured by, or directly related to, the property or assets that are the subject of such Event of Loss. "Net Proceeds Deficiency" has the meaning specified in Section 9.16(c)(ii) hereof. "Net Proceeds Offer" has the meaning specified in Section 9.16(c)(i) hereof. "Net Proceeds Payment Date" has the meaning specified in Section 9.16(c)(iv) hereof. "Note Documents" means this Indenture, the Notes (including all additional notes and all exchange notes therefor), the Subsidiary Guarantees and the Collateral Documents to the extent the Collateral Documents secure obligations under this Indenture, the Notes or the Subsidiary Guarantees. "Note Obligations" means all Obligations under the Note Documents. 18 "Note Register" means the register maintained by or for the Company in which the Company shall provide for the registration of the Notes and of transfer of the Notes. "Note Registrar" has the meaning specified in Section 2.3.1 hereof. "Notes" means the Initial Notes and the Exchange Notes, as amended or supplemented from time to time in accordance with the terms hereof, that are issued pursuant to this Indenture. "Obligations" means any principal, premium (if any), interest (including additional or special interest), if any, and interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company or its Restricted Subsidiaries whether or not a claim for post-filing interest is allowed in such proceeding), penalties, fees, charges, expenses, indemnifications, reimbursement obligations, damages (including additional or special interest), Guarantees (including the Subsidiary Guarantees) and other liabilities or amounts payable under the documentation governing any Indebtedness or in respect thereof. "Offered Price" has the meaning specified in Section 9.16(c)(ii) hereof. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer or the Treasurer of such Person. "Officers' Certificate" means a certificate signed by two Authorized Officers of the Company. "Oil and Gas Business" means: (i) the acquisition, exploration, development, operation and disposition of interests in oil, gas and other hydrocarbon Properties; (ii) the gathering, marketing, treating, processing, storage, selling and transporting of any production from such interests or Properties; (iii) any business relating to or arising from exploration for or development, production, treatment, processing, storage, transportation or marketing of oil, gas, hydrocarbons and other minerals and products produced in association therewith; (iv) any business relating to oil field sales and service; and (v) any activity necessary, appropriate or incidental to the activities described in the foregoing clauses (i) through (iv) of this definition. "Oil and Gas Hedging Contracts" means, with respect to the Company or its Restricted Subsidiaries, any agreement or arrangement, or any combination thereof, relating to hydrocarbon prices, transportation or basis costs or differentials or other similar financial factors, that is customary in the Oil and Gas Business and is entered into in the ordinary course of business for the purpose of limiting or managing risks associated with fluctuations in such prices, costs, differentials or similar factors and not for the purpose of speculation. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company (or any Subsidiary Guarantor), including an employee of the Company (or any Subsidiary Guarantor), and who shall be reasonably acceptable to the Trustee. "Outstanding," when used with respect to Notes, means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: 19 (i) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company is acting as its own Paying Agent) for the Holders of such Notes, provided that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Notes, except to the extent provided in Sections 12.2 and 12.3 hereof, with respect to which the Company has effected Legal Defeasance or Covenant Defeasance as provided in Article 12 hereof; and (iv) Notes which have been paid pursuant to Article 2 hereof or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there will have been presented to the Trustee proof satisfactory to it that such securities are held by a bona fide purchaser in whose hands the Notes are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes have given any request, demand, authorization, direction, consent, notice or waiver hereunder, and for the purpose of making the calculations required by Section 313 of the TIA, Notes owned by the Company, any Subsidiary Guarantor or any other obligor upon the Notes or any Affiliate of the Company, any Subsidiary Guarantor or such other obligor will be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee will be protected in making such calculation or in relying upon any such request, demand, authorization, direction, consent, notice or waiver, only Notes which a Responsible Officer of the Trustee actually knows to be so owned will be so disregarded. Notes so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right to so act with respect to such Notes and that the pledgee is not the Company, any Subsidiary Guarantor or any other obligor upon the Notes or any Affiliate of the Company, any Subsidiary Guarantor or such other obligor. "Participant" means, with respect to the Depositary, Euroclear or Clearstream, a Person who has an account with the Depositary, Euroclear or Clearstream, respectively (and, with respect to The Depository Trust Company, shall include Euroclear and Clearstream). "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of, or the premium, if any, interest or Liquidated Damages, if any, on, any Note on behalf of the Company. "Payment Amount" has the meaning specified in Section 9.16(c)(i) hereof. "Permitted Farmout Agreement" means any Farmout Agreement entered into by the Company and/or any Restricted Subsidiary, as the farmor, in the ordinary course of business, (a) covering Farmout Property of the Company and/or one or more Restricted Subsidiaries that does not include proved oil or natural gas properties (other than those (i) proved by the efforts to obtain production 20 taken pursuant to such Farmout Agreement or (ii) that are not then otherwise included in the Company's PV-10 or as a proved reserve in any reserve or other report prepared by or on behalf of the Company in amount which exceeds either $150,000 with respect to any individual property subject to such Farmout Agreement or $500,000 when aggregated with any other proved oil or natural gas property then subject to such Farmout Agreement or any other Farmout Agreement) and (b) that, as determined in good faith by the Board of Directors of the Company and evidenced by a Board Resolution delivered to the Trustee (or, solely with respect to any Farmout with a Farmout Property Value not exceeding $1,000,000, as determined in good faith by the Chief Executive Officer of the Company and evidenced by an Officers' Certificate delivered to the Trustee), is in the best interests of the holders of the Notes and does not adversely affect the ability of the Company, the Restricted Subsidiaries and the Subsidiary Guarantors to perform their respective obligations under the Notes, this Indenture and the Subsidiary Guarantees, as applicable. "Permitted Indebtedness" means any of the following: (i) Indebtedness under the Revolving Credit Facility (but if Incurred under any renewal, substitution, refinancing or replacement thereof, only to the extent permitted by clause (ix) of this definition) in an aggregate principal amount at any one time outstanding not to exceed $15,000,000 (less the aggregate amount of permanent reductions of the lenders' commitment under the Revolving Credit Facility made pursuant to the covenants described under Section 9.16 hereof, any Guarantee of any such Indebtedness (including by any Subsidiary of Abraxas) and any interest, fees, premiums, expenses (including costs of collection), indemnities and other amounts payable in connection with such Indebtedness, including, without limitation, Related Revolving Indebtedness; provided, that, the aggregate amount of all permanent reductions of the lenders' commitment under the Revolving Credit Facility made pursuant to the covenants described under Section 9.16 hereof, can be established by the Company at any time by providing the Trustee with an Officers' Certificate stating such amount; (ii) Indebtedness under the Notes (including any Notes issued pursuant to an exchange offer made in accordance with the Registration Rights Agreement), the Subsidiary Guarantees (including any Subsidiary Guarantees issued pursuant to an exchange offer made in accordance with the Registration Rights Agreement) and the Collateral Documents to the extent they secure the Notes or the Subsidiary Guarantees; (iii) Indebtedness under the Bridge Loan (but if Incurred under any renewal, substitution, refinancing or replacement thereof, only to the extent permitted by clause (x) of this definition) in an aggregate principal amount at any one time outstanding not to exceed $25,000,000 any Guarantee of any such Indebtedness (including by any Subsidiary of the Company) and any interest, fees, premiums, expenses (including costs of collection), indemnities and other amounts payable in connection with such Indebtedness; (iv) (a) Indebtedness outstanding on the date of this Indenture and not repaid or defeased with the proceeds of the Notes, the Bridge Loan or the Grey Wolf Term Loan (but if Incurred under any renewal, substitution, refinancing or replacement thereof, only to the extent permitted by clause (x) of this definition), (b) the 2003 Notes and (c) the Existing Senior Debt Facility; 21 provided that the 2003 Notes and the Existing Senior Debt Facility are repaid and defeased, respectively, with the proceeds of the Notes, the Bridge Loan and/or the Grey Wolf Term Loan on the Closing Date and that the 2003 Notes are redeemed on or prior to the date that is 90 days after the Closing Date; (v) Indebtedness of the Company or a Restricted Subsidiary pursuant to (a) Interest Rate Protection Obligations, but only to the extent that the stated aggregate notional amounts of such obligations do not exceed 105% of the aggregate principal amount of the Indebtedness covered by such Interest Rate Protection Obligations, (b) Currency Exchange Contracts and (c) obligations under Oil and Gas Hedging Contracts, in each case, entered into in the ordinary course of business and not for speculative purposes; (vi) Indebtedness of the Company owed to a Wholly Owned Restricted Subsidiary and Indebtedness of a Restricted Subsidiary owed to the Company or a Wholly Owned Restricted Subsidiary; provided, however, that such Indebtedness is owned beneficially by the Company or such Restricted Subsidiary and constitutes Subordinated Indebtedness; provided further, that the incurrence of such Indebtedness does not violate Section 9.10; and provided further, that upon any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Company or a Wholly Owned Restricted Subsidiary), such Indebtedness shall be deemed, in each case, to be incurred and shall be treated as an incurrence for purposes of Sections 9.10 and 9.11 hereof at the time the Wholly Owned Restricted Subsidiary in question ceased to be a Wholly Owned Restricted Subsidiary; (vii) Indebtedness in respect of bid, performance or surety bonds issued for the account of the Company or any Restricted Subsidiary in the ordinary course of business, including Guarantees and letters of credit supporting such bid, performance or surety obligations (in each case other than for an obligation for money borrowed); (viii) any Guarantee of Indebtedness incurred in compliance with Section 9.11 hereof, by a Restricted Subsidiary or the Company; (ix) Indebtedness under any renewal, substitution, refinancing or replacement (each, for purposes of this clause, a "refinancing") by the Company or a Restricted Subsidiary of any Indebtedness incurred pursuant to clause (i) of this definition (or any refinancing thereof under this paragraph (ix)), including any successive refinancings by the Company or such Restricted Subsidiary not incurred in violation of this Indenture, so long as (a) any such refinancing shall be in a principal amount that does not exceed the aggregate amount of Indebtedness then permitted to be Incurred under clause (i) of this definition, (b) in the case such Indebtedness being refinanced is secured, the Liens securing such new Indebtedness (1) are not materially less favorable to the holders of the Notes and are not materially more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being refinanced and (2) are limited to all or part of the same property that was or would have been encumbered by the original Lien under the terms of the documents governing the original Indebtedness; provided, that, if the terms of the Intercreditor Agreement apply to the Liens securing such new Indebtedness, then such Liens will be considered to have satisfied the conditions of this clause (b), (c) such new Indebtedness has a final Stated Maturity not earlier than the final Stated Maturity of the Indebtedness being 22 refinanced and (d) such new Indebtedness is incurred by either the Company or a Restricted Subsidiary who is the obligor of the Indebtedness being refinanced; (x) Indebtedness under any renewal, substitution, refinancing or replacement (each, for purposes of this clause, a "refinancing") by Abraxas or a Restricted Subsidiary of any Indebtedness incurred pursuant to clause (iii) or (iv) of this definition (or any refinancing thereof under this paragraph (x)) or Indebtedness (excluding Permitted Indebtedness) incurred after the Closing Date in compliance with the covenant described under Section 9.11 hereof, including any successive refinancings by the Company or such Restricted Subsidiary not incurred in violation of this Indenture, so long as (a) any such refinancing shall be in a principal amount that does not exceed the principal amount (or, if such Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) so refinanced plus the amount of accrued interest thereon plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness refinanced or the amount of any premium reasonably determined by the Company or such Restricted Subsidiary as necessary to accomplish such refinancing, plus the amount of expenses of the Company or such Restricted Subsidiary incurred in connection with such refinancing (all of which amounts are included as Permitted Indebtedness under this clause (x)), (b) in the case of any refinancing of Indebtedness of the Company that is Subordinated Indebtedness, such new Indebtedness shall be subordinated in right of payment to the Notes on terms at least as favorable to the holders of the Notes as those contained in the documentation governing the Indebtedness being refinanced, (c) in the case of any refinancing of Indebtedness that is secured, the Liens securing such new Indebtedness (1) are not materially less favorable to the holders of the Notes and are not materially more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being refinanced and (2) are limited to all or part of the same property that was or would have been encumbered by the original Lien under the terms of the documents governing the original Indebtedness, (d) such new Indebtedness has an Average Life equal to or greater than the Average Life of the Indebtedness being refinanced and a final Stated Maturity not earlier than the final Stated Maturity of the Indebtedness being refinanced and (e) such new Indebtedness is incurred by either the Company or a Restricted Subsidiary who is the obligor of the Indebtedness being refinanced; (xi) any Indebtedness incurred to finance unpaid insurance premiums, provided, however, that recourse with respect to such Indebtedness is limited to the insurance policies with respect to which premiums have been financed; (xii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within two Business Days of incurrence; (xiii) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or any of its Restricted Subsidiaries, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business; and 23 (xiv) additional Indebtedness of Abraxas or any of its Restricted Subsidiaries, other than Indebtedness Incurred under the Revolving Credit Facility, in an aggregate principal amount at any time outstanding not to exceed $500,000 under this clause (xiv). "Permitted Investments" means any of the following: (i) Investments in Cash Equivalents; (ii) Investments in the Company or any of its Restricted Subsidiaries; (iii) Investments by the Company or any of its Restricted Subsidiaries in another Person, if as a result of such Investment (a) such other Person becomes a Restricted Subsidiary or (b) such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all of its Properties to, the Company or a Restricted Subsidiary; (iv) Investments and expenditures made in the ordinary course of, and of a nature that is or shall have become customary in, the Oil and Gas Business as a means of actively exploiting, exploring for, acquiring, developing, processing, gathering, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit a Person to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of the Oil and Gas Business jointly with third parties, including, without limitation, (a) ownership interests in oil and gas properties or gathering systems and (b) Investments and expenditures in the form of or pursuant to operating agreements, processing agreements, Farmout Agreements, development agreements, area of mutual interest agreements, unitization agreements, pooling arrangements, joint bidding agreements, service contracts, joint venture agreements, partnership agreements (whether general or limited), limited liability company agreements, subscription agreements, stock purchase agreements and other similar agreements with third parties (including Unrestricted Subsidiaries); (v) Investments arising in connection with Oil and Gas Hedging Contracts entered into in the ordinary course of business solely for the purpose of protecting the production of the Company or any Restricted Subsidiary against fluctuations in oil or natural gas prices; (vi) Investments arising in connection with Interest Rate Protection Obligations or Currency Exchange Contracts, in each case Incurred in the ordinary course of business and not for speculative purposes; (vii) Investments in stock, obligations or securities received in settlement of debts owing to the Company or a Restricted Subsidiary as a result of bankruptcy or insolvency proceedings or upon the foreclosure, perfection or enforcement of any Lien in favor of the Company or a Restricted Subsidiary, in each case as to debt owing to the Company or a Restricted Subsidiary that arose in the ordinary course of business of the Company or any such Restricted Subsidiary; (viii) any Investment received in settlement of debts, claims or disputes owed to the Company or any Restricted Subsidiary that arose out of transactions in the ordinary course of business; (ix) Investments in the form of intercompany Indebtedness or Guarantees of Indebtedness of a Restricted Subsidiary permitted under the covenant described under Section 9.11 hereof; (x) any security or other Investment received or Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under Section 9.16 hereof; (xi) advances and extensions of credit in the nature of accounts receivable arising from the sale or lease of goods or services in the ordinary course of business; (xii) Investments in the form of, or pursuant to, working interests, royalty interests, mineral leases, Farmout Agreements or contracts for the sale of oil and natural gas, in each case, made or entered into the ordinary course of the business, excluding, however, investments in other Persons; (xiii) so long as Grey Wolf is a Subsidiary of the Company, up to an aggregate principal amount of $1,000,000 of intercompany loans made to Grey Wolf for use by Grey Wolf solely for its working capital purposes in a manner consistent with its operations on the Closing Date; and (xiv) other Investments by the Company or any Restricted 24 Subsidiary in any Person having an aggregate fair market value (determined in good faith by the Chief Executive Officer of the Company and measured as of the date each such Investment is made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (xiv) (net of returns of capital, dividends and interest paid on Investments and sales, liquidations and redemptions of Investments), not in excess of $500,000. "Permitted Liens" means any and all of the following: (i) Liens existing as of the Closing Date; (ii) Liens securing the Notes, the Subsidiary Guarantees or other obligations arising under this Indenture; (iii) Liens securing the Revolving Credit Facility Obligations; (iv) Liens securing the Bridge Loan Obligations; (v) any Liens existing on any Property of a Person at the time such Person is merged or consolidated with or into the Company or a Subsidiary Guarantor or becomes a Restricted Subsidiary that is a Subsidiary Guarantor (and not incurred in anticipation of such transaction), provided that such Liens are not extended to other Property of the Company or the Subsidiary Guarantors; (vi) any Lien existing on any Property at the time of the acquisition thereof (and not incurred in anticipation of such transaction), provided that such Liens are not extended to other Property of the Company or the Subsidiary Guarantors; (vii) Liens on cash and Cash Equivalents securing the performance of Oil and Gas Hedging Contracts, Currency Exchange Contracts and Interest Rate Protection Obligations permitted by the terms of this Indenture; (viii) Liens with respect to amounts payable as reimbursement of premiums in favor of Persons financing unpaid insurance premiums, provided, however, such Liens are limited to insurance policies with respect to which premiums are financed; (ix) Liens securing any permitted extension, renewal, refinancing, refunding or exchange (or successive extensions, renewals, refinancings, refundings or exchanges), in whole or in part, of or for any Indebtedness secured by Liens referred to in clauses (i), (ii), (iv), (v) and (vi) above and this clause (ix); provided, however, that (a) such new Lien shall be limited to all or part of the same Property that was or would have been encumbered by the original Lien under the terms of the documents governing the original Indebtedness, and (b) the Indebtedness secured by such Lien at the time of such extension, renewal, refinancing, refunding or exchange (and such successive extension, renewal, refinancing, refunding or exchange) is not increased to any amount greater than the sum of (I) the outstanding principal amount of the Indebtedness secured by such original Lien immediately prior to such extension, renewal, refinancing, refunding or exchange and accrued interest thereon and (II) an amount necessary to pay any fees and expenses, including premiums, 25 related to such refinancing, refunding, extension, renewal or replacement; (x) Liens securing Indebtedness Incurred under clause (ix) of the definition of Permitted Indebtedness; (xi) Liens in favor of the Company or a Subsidiary Guarantor; (xii) Liens for taxes, assessments or governmental charges or claims either (a) not yet delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or a Restricted Subsidiary, as the case may be, shall have set aside on its books such reserves as may be required pursuant to GAAP; (xiii) statutory and contractual Liens of (a) landlords arising in the ordinary course of business to secure rent not yet delinquent, but only to the extent such Liens relate only to the tangible property of the lessee which is located on such property and (b) carriers, warehousemen, mechanics, builders, suppliers, materialmen, repairmen and other similar Liens incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith by appropriate proceedings, in each case, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (xiv) Liens incurred on deposits made in the ordinary course of business (a) in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or (b) to secure performance bonds, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (xv) easements, rights-of-way, zoning restrictions, restrictive covenants, minor imperfections in title and other similar charges or encumbrances in respect of real property that, individually or in the aggregate, are not interfering in any material respect with the ordinary conduct of the business of the Company or any Restricted Subsidiary; (xvi) any interest or title of a lessor under any Capitalized Lease Obligation permitted by the terms of this Indenture; provided that such Liens do not extend to any property which is not the leased property subject to such Capitalized Lease Obligation; (xvii) Liens securing reimbursement obligations, not to exceed $100,000 in the aggregate at any time outstanding, with respect to commercial letters of credit other than those issued under the Revolving Credit Facility which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (xviii) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any Restricted Subsidiary, including rights of offset and setoff; 26 (xix) statutory Liens on pipeline or pipeline facilities, hydrocarbons or properties and assets of the Company or any Restricted Subsidiary which arise out of operation of law and are not voluntarily granted; (xx) royalties, overriding royalties, net profit interests, reversionary interests, operating agreements and other similar interests, properties, arrangements and agreements, all as ordinarily exist with respect to properties of the Company and its Restricted Subsidiaries or otherwise as are customary in the Oil and Gas Business and all as relate to mineral leases and mineral interests of the Company and its Restricted Subsidiaries; (xxi) Liens pursuant to documents governing Permitted Farmout Agreements; (xxii) any (a) interest or title of a lessor or sublessor under any mineral lease or operating lease, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to (including, without limitation, ground leases or other prior leases of the demised premises, mortgages, mechanics' Liens, builders' Liens, tax Liens, and easements) that, individually or in the aggregate, are not interfering in any material respect with the ordinary course of the business of the Company or any Restricted Subsidiary or (c) subordination of the interest of the lessee or sublessee under such lease to any restrictions or encumbrance referred to in the preceding clause (b); (xxiii) Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback, subject to an account control agreement constituting a Collateral Document, with respect to money or instruments of the Company or any Restricted Subsidiary on deposit with or in possession of such bank; (xxiv) judgment and attachment Liens not giving rise to an Event of Default; (xxv) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary securing Indebtedness of the Company or such Restricted Subsidiary permitted by the terms of this Indenture in an aggregate principal amount at any time outstanding not exceeding the sum of $250,000 in the aggregate; and (xxvi) Liens pursuant to the documents governing Production Payments and Reserved Sales on the property to which such Production Payments and Reserved Sales relate and with respect to which the Liens of the Collateral Documents have been released in compliance with the terms of this Indenture or the Intercreditor Agreement. "Permitted Prior Lien" means (a) Liens described in clauses (i), (iii), (v), (vi), (vii) (to the extent securing obligations of not more than $250,000 in the aggregate), (viii) (to the extent securing obligations of not more than $200,000 in the aggregate), (ix), (x), (xiv) (to the extent securing obligations of not more than $250,000 in the aggregate), (xvi), (xviii) (to the extent securing obligations of not more than $50,000 in the aggregate), (xxiii) and (xxv) of the definition of Permitted Liens and (b) Liens which arise by operation of law and are not consensually granted, to the extent entitled by law to priority over the security interests created by the Collateral Documents. 27 "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Note" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 2.3 hereof in exchange for a mutilated Note or in lieu of a lost, destroyed or stolen Note will be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note. "Preferred Stock" as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "Private Placement Legend" means the legend set forth in Section 2.5(g)(i) hereof to be placed on all Notes issued under this Indenture except where otherwise permitted by the provisions of this Indenture. "Production Payments and Reserve Sales" means the grant and transfer to any Person of a Dollar-Denominated Production Payment, Volumetric Production Payment, royalty, overriding royalty, net profits interest, master limited partnership interest or other similar interest in oil and natural gas properties, reserves or the right to receive all or a portion of the production or the proceeds from the sale of production attributable to such properties. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including, without limitation, Capital Stock in any other Person. "Purchase Notice" has the meaning specified in Section 9.16(c)(i) hereof. "PV-10" means estimated future net revenue, discounted at a rate of 10% per annum, before income taxes and with no price or cost escalation or de-escalation in accordance with guidelines promulgated by the SEC. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Disqualified Stock. "Qualified Equity Offering" means a public or private sale for cash by the Company of Qualified Capital Stock of Abraxas other than public offerings with respect to the Company's common stock, options, warrants or rights registered on Form S-4 or S-8. "Record Date" means a Regular Record Date or a Special Record Date. "Redeemable Capital Stock" means any Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise, is, or upon the happening of an event or passage of 28 time would be, required to be redeemed (other than for shares of Qualified Capital Stock) prior to the date that is 91 days after the final Stated Maturity of the Notes or is redeemable (other than for shares of Qualified Capital Stock) at the option of the holder thereof, in whole or in part, at any time prior to such date, or at any time prior to such date is convertible into or exchangeable for anything other than Qualified Capital Stock or securities or instruments evidencing Indebtedness that is permitted to be Incurred by the terms of this Indenture. "Redemption Date," when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price," when used with respect to any Note to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Refinancing Indebtedness" means Indebtedness under any renewals, substitutions, refinancings or replacements Incurred in compliance with clause (ix) or (x) of the definition of Permitted Indebtedness. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the Closing Date, by and among the Company, the Subsidiary Guarantors and the other parties named on the signature pages thereof. "Regular Record Date" for the interest payable on any Interest Payment Date means the May 15 or November 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Note" means a Regulation S Temporary Global Note or Regulation S Permanent Global Note, as appropriate. "Regulation S Permanent Global Note" means a permanent global Note in the form of Exhibit A-1 hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Regulation S Temporary Global Note upon expiration of the Restricted Period. "Regulation S Temporary Global Note" means a temporary global Note in the form of Exhibit A-2 hereto bearing the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Notes initially sold in reliance on Rule 903. "Related Revolving Indebtedness" means (i) Indebtedness related to any fees and expenses incurred by the Company or any of its Subsidiaries (including, but not limited to, those owed to any Person not an Affiliate of the Company or any of its Subsidiaries) in connection with any amendment (including any amendment and restatement thereof), supplement, replacement, restatement, substitution, renewal or other modification from time to time, including any agreements (and related instruments and documents) extending the maturity of, refinancing, 29 replacing, substituting, renewing or other restructuring of all or any portion of the Indebtedness under the Revolving Credit Facility or any successor or replacement agreements (and related instruments and documents) and (ii) any capitalized interest, fees, or other expenses incurred by the Company or any of its Subsidiaries whether or not charged to a loan account or any similar account created under the Revolving Credit Facility. "Responsible Officer," when used with respect to the Trustee, means any officer in the corporate trust department of the Trustee, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively. "Restricted Definitive Note" means a Definitive Note bearing the Private Placement Legend. "Restricted Global Note" means a Global Note bearing the Private Placement Legend. "Restricted Payment" has the meaning specified in Section 9.10(a)(v) hereof. "Restricted Period" means the 40-day restricted period as defined in Regulation S. "Restricted Subsidiary" means any Subsidiary of the Company, whether existing on or after the date of this Indenture, unless such Subsidiary of the Company is an Unrestricted Subsidiary or is designated as an Unrestricted Subsidiary pursuant to the terms of this Indenture. "Revolving Credit Facility" means that certain senior secured revolving credit facility, to be dated as of the Closing Date, with an initial aggregate commitment of $15,000,000 among the Company, certain Subsidiaries of the Company, the Revolving Credit Facility Agent and the lenders named therein, including any related notes, Guarantees, Collateral Documents, instruments and agreements executed in connection therewith, or any successor or replacement agreement (together with any related notes, Guarantees, Collateral Documents, instruments and agreements executed in connection therewith), whether with the same or any other lender, group of lenders or agent, in each case as the same may be amended (including any amendment and restatement thereof), modified, supplemented, extended, restated, substituted, replaced, renewed or refinanced (up to an aggregate amount of Indebtedness then permitted to be Incurred under clause (i) of the definition of Permitted Indebtedness) from time to time in accordance with its terms and the applicable terms of the Intercreditor Agreement. "Revolving Credit Facility Administrative Agent" means Wells Fargo Foothill, Inc., as administrative agent under the Revolving Credit Facility, together with its successors in such capacity. "Revolving Credit Facility Obligations" means all Obligations, including, without limitation, Related Revolving Indebtedness, under the Revolving Credit Facility. "Rule 144" means Rule 144 promulgated under the Securities Act. 30 "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 903" means Rule 903 promulgated under the Securities Act. "Rule 904" means Rule 904 promulgated under the Securities Act. "S&P" means Standard and Poor's Ratings Service, a division of McGraw-Hill, Inc., and its successors. "Sale-Leaseback Transaction" means any transaction or series of related transactions whereby the Company or a Restricted Subsidiary sells or transfers any of its assets or properties (the "Sold Assets") and, as part of such transaction or series of related transactions, either (i) leases (as lessee or sublessee) back such assets or properties (or any part thereof) or (ii) leases (as lessee or sublessee) any other assets or properties (or any part thereof) (the "Leased Assets") from the same Person (or group of Persons) or from an Affiliate of the same Person (or group of Persons) to whom the Sold Assets are sold and which Leased Assets are intended to be used by the Company and the Restricted Subsidiaries for substantially the same purpose or purposes as the Sold Assets were used by the Company and the Restricted Subsidiaries (and in the case of mineral leases, such mineral leases constituting Leased Assets are in substantially the same geographic location as the mineral leases constituting Sold Assets). "Sale of Collateral" means any Asset Sale to the extent involving assets, rights or other property that constitutes Collateral under the Collateral Documents. "Secured Obligations" means, collectively, the Revolving Credit Facility Obligations, the Note Obligations and the Bridge Loan Obligations. "Securities Act" means the Securities Act of 1933, as amended. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Six-Month LIBOR" means the rate determined in accordance with the following provisions: (1) On each Interest Determination Date, the Calculation Agent will determine the Six-Month LIBOR rate, which shall be the rate for deposits in the London interbank market in U.S. dollars having a six-month maturity commencing on the succeeding Interest Reset Date immediately following such Interest Determination Date which appears on the Designated LIBOR Page as of 11:00 a.m., London time, on such Interest Determination Date. (2) With respect to an Interest Determination Date for which no such rate appears, the Calculation Agent will request the principal London offices of each of four major reference banks in the London interbank market, as selected by the Calculation Agent (after consultation with the Company), to provide the Calculation Agent with its offered quotation for deposits in U.S. dollars having a six-month maturity commencing on the Interest Reset Date immediately following such Interest Determination Date to prime banks in the London interbank market at approximately 11:00 a.m., London time, on such Interest Determination Date 31 and in a principal amount not less than $1,000,000 that is representative for a single transaction in U.S. dollars in such market at such time. If at least two such quotations are provided, the Six-Month LIBOR rate on such Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two quotations are provided, the Six-Month LIBOR rate determined on such Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 a.m., New York City time, on such Interest Determination Date by three major banks in The City of New York selected by the Calculation Agent (after consultation with the Company) for loans in U.S. dollars to leading European banks, having a six-month maturity and in a principal amount not less than $1,000,000 that is representative for a single transaction in U.S. dollars in such market at such time. However, if the banks so selected by the Calculation Agent are not quoting as mentioned above, the Six-Month LIBOR rate with respect to such Interest Determination Date will be the Six-Month LIBOR rate in effect immediately prior to such Interest Determination Date. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Article 2 hereof. "Stated Maturity" means, when used with respect to any Note or any installment of interest thereon, the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable, and, when used with respect to any other Indebtedness or any installment of interest thereon, means the date specified in the instrument evidencing or governing such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of interest is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company or a Restricted Subsidiary which is expressly subordinated in right of payment or security to the Notes or a Subsidiary Guarantee, as applicable. "Subsidiary" means, with respect to any Person, (i) a corporation a majority of whose Voting Stock is at the time, directly or indirectly, owned by such Person, by one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) including, without limitation, a joint venture, in which such Person, one or more Subsidiaries thereof or such Person and one or more Subsidiaries thereof, directly or indirectly, at the date of determination thereof, have at least majority ownership interest entitled to vote in the election of directors, managers or trustees thereof (or other Persons performing similar functions). "Subsidiary Guarantee" means any Guarantee of the Notes by any Subsidiary Guarantor, as specified in Section 13.1 hereof. "Subsidiary Guarantor" means (1) initially the several Restricted Subsidiaries named in this Indenture as a party hereto, (2) each of the other Restricted Subsidiaries, if any, executing a supplemental indenture to this Indenture in compliance with the provisions described under Article 8 hereof and (3) any Person that becomes a successor guarantor of the Notes in compliance with the provisions described under Article 13 hereof. "Surviving Entity" has the meaning specified in Section 7.1(A)(1)(b) hereof. 32 "Trigger Date" has the meaning specified in Section 9.16(c) hereof. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended and in force at the date as of which this Indenture was executed, except as provided in Section 8.5 hereof. "Trust Monies" means, subject to the Intercreditor Agreement, all cash and Cash Equivalents received by the Collateral Agent: (1) upon the release of Collateral from the Collateral Agent's Liens; (2) pursuant to the Collateral Documents; (3) as proceeds of any sale or other disposition of all or any part of the Collateral by or on behalf of the Collateral Agent or any collection, recovery, receipt, appropriation or other realization of or from all or any part of the Collateral pursuant to this Indenture or any of the Collateral Documents or otherwise; or (4) for application as provided in the relevant provisions of the Indenture or any Collateral Document for which disposition is not otherwise specifically provided for in this Indenture or in the Intercreditor Agreement or any other Collateral Document; provided, however, that Trust Monies shall in no event include any property deposited with the Trustee for any redemption, Legal Defeasance or Covenant Defeasance of the Notes, for the satisfaction and discharge of this Indenture or to pay the purchase price of Notes pursuant to a Change of Control Offer or Net Proceeds Offer. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee will have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" will mean such successor Trustee. "Unrestricted Definitive Note" means one or more Definitive Notes that do not bear and are not required to bear the Private Placement Legend. "Unrestricted Global Note" means a permanent global security in the form of Exhibit A-1 attached hereto that bears the Global Note Legend and that has the "Schedule of Exchanges of Interests in the Global Note" attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, representing a series of Notes that do not bear the Private Placement Legend. "Unrestricted Subsidiary" means: (a) Grey Wolf Exploration Inc., an Alberta corporation, and each of its Subsidiaries (whether or not existing on the Closing Date) unless otherwise designated as a Restricted Subsidiary in compliance with the provisions of this definition; (b) any Subsidiary of the Company that at the time of determination is designated an Unrestricted Subsidiary by the Board of Directors of the Company as provided below; and (c) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company may designate any Subsidiary of the Company as an Unrestricted Subsidiary so long as: (i) neither the Company nor any Restricted Subsidiary is directly or indirectly liable pursuant to the terms of any Indebtedness of such 33 Subsidiary; (ii) no default with respect to any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or otherwise) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its Stated Maturity; (iii) neither the Company nor any Restricted Subsidiary has made an Investment in such Subsidiary (other than Investments made in such Subsidiary by the Company and any Restricted Subsidiary (A) in an aggregate amount that would be permitted to be made on the date of such designation pursuant to, and in accordance with, Section 9.10 hereof or (B) in the ordinary course of the Oil and Gas Business as described in clause (iv) of the definition of Permitted Investments); and (iv) such designation will not result in the creation or imposition of any Lien on any of the Properties of the Company or any Restricted Subsidiary (other than any Permitted Lien or any Lien the creation or imposition of which is in compliance with Section 9.14 hereof); provided, however, that with respect to clause (i), the Company or a Restricted Subsidiary may be liable for Indebtedness of an Unrestricted Subsidiary if (x) such liability constituted a Permitted Investment or a Restricted Payment permitted by Section 9.10 hereof, in each case at the time of incurrence, or (y) the liability would be a Permitted Investment at the time of designation of such Subsidiary as an Unrestricted Subsidiary. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by the delivery of a Board Resolution to the Trustee giving effect to such designation. The Board of Directors of Company may designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving effect to such designation, (1) no Default or Event of Default shall have occurred and be continuing, (2) the Company could Incur $1.00 of additional Indebtedness (excluding Permitted Indebtedness) in compliance with the covenant described under Section 9.11 hereof, (3) if any of the properties or assets of the Company or any of its Restricted Subsidiaries would upon such designation become subject to any Lien (other than a Permitted Lien), the creation or imposition of such Lien shall have been in compliance with the covenant described under Section 9.14 hereof, (4) it takes such actions described under Article 13 hereof in respect of an Unrestricted Subsidiary becoming a Restricted Subsidiary and (5) such Restricted Subsidiary takes such actions described under Article 11 hereof if applicable, as are necessary to cause a valid and enforceable perfected first priority security interest (subject to Permitted Prior Liens) in the Collateral owned by such Restricted Subsidiary to be created in favor of the Collateral Agent as security for the Note Obligations. Without limiting the foregoing sentence, Grey Wolf will not be permitted to become a Restricted Subsidiary until 91 days after all of the Bridge Loan Obligations are repaid in full and the Bridge Loan is terminated. "Unsubordinated Indebtedness" means any Indebtedness of the Company or a Restricted Subsidiary which is not Subordinated Indebtedness. "U.S. Government Obligations" has the meaning specified in Section 12.4(a) hereof. "U.S. Person" means a U.S. person as defined in Rule 902(k) under the Securities Act. "Vice President" when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." 34 "Volumetric Production Payments" means production payment obligations recorded as deferred revenue in accordance with GAAP, together with all undertakings and obligations in connection therewith. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any Person (irrespective of whether or not, at the time, stock of any other class or classes shall have, or might have, voting power by reason of the happening of any contingency). "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary to the extent (i) all of the Capital Stock or other ownership interests in such Restricted Subsidiary, other than any directors' qualifying shares mandated by applicable law, is owned directly or indirectly by the Company or (ii) such Restricted Subsidiary is organized in a foreign jurisdiction and is required by the applicable laws and regulations of such foreign jurisdiction to be partially owned by the government of such foreign jurisdiction or individual or corporate citizens of such foreign jurisdiction in order for such Restricted Subsidiary to transact business in such foreign jurisdiction, provided that the Company, directly or indirectly, owns the remaining Capital Stock or ownership interest in such Restricted Subsidiary and, by contract or otherwise, controls the management and business of such Restricted Subsidiary and derives the economic benefits of ownership of such Restricted Subsidiary to substantially the same extent as if such Restricted Subsidiary were a wholly owned Subsidiary. 1.2 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company or any other obligor on the Notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rules and not otherwise defined herein have the meanings assigned to them therein. 1.3 RULES OF CONSTRUCTION. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: 35 (a) The terms defined in this Article 1 have the meanings assigned to them in this Article 1, and include the plural as well as the singular; (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (c) the words "herein," "hereof," and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (d) the masculine gender includes the feminine and the neuter; (e) provisions apply to successive events and transactions; (f) a reference herein to any Person to this Indenture or to any other agreement or instrument refer to such Person's successors and permitted assigns; (g) a reference herein to any agreement or instrument refers to such agreement or instrument (together with any schedule or exhibit attached thereto) as it may have been, or may hereafter be, amended, modified, supplemented, waived or restated from time to time in accordance with its terms, but only to the extent not prohibited by this Indenture; (h) a reference herein to any law, statute or other legislation or to any provision thereof includes, unless otherwise expressly provided herein, any amendment, modification or re-enactment thereof, any legislative provision substituted therefor and all regulations, rules and interpretations issued thereunder or pursuant thereto; and (i) all references herein to "$," money, funds and dollars refer to currency of the United States of America. 1.4 ONE CLASS OF SECURITIES The Initial Notes and the Exchange Notes shall vote and consent together on all matters as one class and neither the Initial Notes nor the Exchange Notes shall have the right to vote or consent as a separate class on any matter. ARTICLE 2......... THE NOTES 2.1 TITLE AND TERMS; FORM AND DATING (a) General. The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture for original issue is limited to $125,000,000. The Notes will be known and designated as the "Floating Rate Senior Secured Notes Due 2009," of the Company. The Stated Maturity on which principal of the Notes is due and payable is December 1, 2009. The Notes will bear interest at 36 the rate, and such interest will accrue and be payable, pursuant to the terms and provisions contained in the Notes and this Indenture. The Notes will be redeemable as provided in Article 10 hereof. The Notes will be subject to defeasance at the option of the Company as provided in Article 12 hereof. The Notes will be guaranteed by the Subsidiary Guarantors as provided in Article 13 hereof. The Notes will be senior in right of payment to the Company's existing and future Subordinated Indebtedness. The Notes will be secured by a first priority perfected security interest (subject to Permitted Prior Liens) in all material real and personal property and assets of the Company and its Restricted Subsidiaries, pursuant to the terms of the Intercreditor Agreement. The Initial Notes and the Exchange Notes (including the notations thereon relating to the Subsidiary Guarantees and the Trustee's certificate of authentication) will be issued substantially in the form of Exhibit A hereto. Any Note that is a Restricted Definitive Note or a Restricted Global Note shall bear a Private Placement Legend as set forth in Section 2.5(g)(i) hereof. Any portion of the text of any Note may be set forth on the reverse thereof. The Notes may also have set forth on the reverse side thereof a form of assignment and forms to elect purchase by the Company pursuant to Section 9.15 or 9.16 hereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company, the Subsidiary Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. The Notes will be printed, lithographed or engraved on steel-engraved borders or may be produced in any other manner, all as determined by the Officers executing such Notes or notations of Subsidiary Guarantees, as the case may be, as evidenced by their execution of such Notes or notations of Subsidiary Guarantees, as the case may be. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes shall be in denominations of $1,000 and integral multiples thereof. (b) Global Notes. Notes issued in global form shall be substantially in the form of Exhibit A-1 or A-2 hereto (including the Global Note Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Notes issued in definitive form shall be substantially in the form of Exhibit A-1 hereto (but without the Global Note Legend thereon and without the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Each Global Note shall 37 represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased (subject to the limitation set forth in Section 2.1(a) hereof), as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee as custodian for the Depositary in accordance with written instructions given by the Holder thereof as required by Section 2.5 hereof. (c) Temporary Global Notes. Notes offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Note, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee, at its New York City office, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Clearstream, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Restricted Period shall be terminated upon the receipt by the Trustee of (i) a written certificate from the Depositary, together with copies of certificates from Euroclear and Clearstream certifying that they have received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Note (except to the extent of any beneficial owner thereof who acquired an interest therein during the Restricted Period pursuant to another exemption from registration under the Securities Act and who will take delivery of a beneficial ownership interest in a 144A Global Note bearing a Private Placement Legend, all as contemplated by Section 2.5(a)(ii) hereof) and (ii) an Officers' Certificate from the Company certifying that a 40-day distribution compliance period (within the meaning of Regulation S) with respect to the Notes has expired. Following the termination of the Restricted Period, beneficial interests in the Regulation S Temporary Global Note shall be exchanged for beneficial interests in Regulation S Permanent Global Notes pursuant to the Applicable Procedures. Simultaneously with the authentication of Regulation S Permanent Global Notes, the Trustee shall cancel the Regulation S Temporary Global Note. The aggregate principal amount of the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. (d) Euroclear, Clearstream Procedures Applicable. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and Conditions of Clearstream Banking" and "Customer Handbook" of Clearstream shall be applicable to transfers of beneficial interests in the Regulation S Temporary Global Note and the Regulation S Global Notes that are held by Participants through Euroclear or Clearstream. 2.2 DENOMINATIONS 38 The Notes will be issuable only in denominations of $1,000 and any integral multiple thereof. 2.3 EXECUTION AND AUTHENTICATION The Notes will be executed on behalf of the Company by its Chairman, its President or a Vice President of the Company and attested by its Secretary or an Assistant Secretary of the Company. The signature of any two of these Officers on the Notes may be manual or facsimile signatures of the present or any future such Authorized Officer and may be imprinted or otherwise reproduced on the Notes. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company will bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time after the execution and delivery of this Indenture, the Company may deliver Notes executed by the Company and having the notations of Subsidiary Guarantees executed by the Subsidiary Guarantors to the Trustee for authentication, together with a Company Order signed by two officers of the Company (the "Authentication Order") for the authentication and delivery of such Notes, and the Trustee, in accordance with such Company Order, will authenticate and deliver such Notes for original issue up to the aggregate principal amount of $125,000,000 with the notations of Subsidiary Guarantees thereon as provided in this Indenture. No Note will be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature of the Trustee and such certificate upon any Note will be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company, pursuant to and in compliance with Article 7 hereof, will be consolidated or merged with or into any other Person or will sell, convey, transfer, lease or otherwise dispose of all or substantially all of its Properties to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company will have been merged, or the Person which will have received a sale, conveyance, transfer, lease or other disposition as aforesaid, will have executed an indenture supplemental hereto with the Trustee pursuant to Article 7 hereof, any of the Notes authenticated or delivered prior to such sale, consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person be exchanged for other Notes executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the securities surrendered for such exchange and of like principal amount; and the Trustee, upon Company Request of the successor Person, will authenticate and deliver Notes as specified in such request for the purpose of such exchange. If Notes will at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section 2.3 in exchange or substitution for or upon registration of transfer of any Notes, such successor Person, at the option of the Holders but without expense to them, will provide for the exchange of all Notes at the time Outstanding for Notes authenticated and delivered in such new name. 39 The Trustee may (at the expense of the Company) appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders or an Affiliate of the Company and has the same protections under Article 5 herein. 2.3.1 NOTE REGISTRAR AND PAYING AGENT The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("Note Registrar") and an office or agency where Notes may be presented for payment. The Note Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more paying agents. The term "Note Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Note Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Note Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries (including any Subsidiary Guarantor) may act as Paying Agent or Note Registrar. The Company initially appoints The Depository Trust Company to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Note Registrar and the Paying Agent and to act as custodian with respect to the Global Notes. 2.4 PERSONS DEEMED OWNERS AND HOLDERS LISTS Prior to the due presentment of a Note for registration of transfer, the Company, the Subsidiary Guarantors, the Note Registrar, the Trustee and any agent of the Company, the Subsidiary Guarantors or the Trustee may treat the Person in whose name such Note is registered as the owner of such Note for the purpose of receiving payment of principal of (and premium, if any, on) and (subject to Section 2.11 hereof) interest and Liquidated Damages, if any, on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and none of the Company, the Subsidiary Guarantors, the Note Registrar, the Trustee or any agent of the Company, the Subsidiary Guarantors or the Trustee will be affected by notice to the contrary. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with Section 312(a) of the TIA. If the Trustee is not the Note Registrar, the Company shall furnish to the Trustee at least seven Business Days before each Interest Payment Date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Company shall otherwise comply with Section 312(a) of the TIA. 2.5 TRANSFER AND EXCHANGE 40 (a) Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Notes will be exchanged by the Company for Definitive Notes if (i) the Company delivers to the Trustee written notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary or (ii) the Company in its sole discretion determines that the Global Notes (in whole but not in part) should be exchanged for Definitive Notes and delivers a written notice to such effect to the Trustee; provided that in no event shall the Regulation S Temporary Global Note be exchanged by the Company for Definitive Notes prior to (x) the expiration of the Restricted Period and (y) the receipt by the Note Registrar of any certificate required pursuant to Rule 903(b)(3)(ii)(B) under the Securities Act. Upon the occurrence of either of the preceding events in (i) or (ii) above, Definitive Notes shall be issued in such names as the Depositary shall instruct the Trustee in writing. Global Notes also may be exchanged or replaced, in whole or in part, as provided in Sections 2.6 and 2.9 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note or any portion thereof, pursuant to this Section 2.5 or Section 2.6 or 2.9 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note. A Global Note may not be exchanged for another Note other than as provided in this Section 2.5(a), however, beneficial interests in a Global Note may be transferred and exchanged as provided in Section 3.5(b), (c) or (f) hereof. (b) Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes shall be effected through the Depositary in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs, as applicable: (i) Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Private Placement Legend; provided, however, that prior to the expiration of the Restricted Period, transfers of beneficial interests in the Temporary Regulation S Global Note may not be made to a U.S. Person or for the account or benefit of a U.S. Person (other than the Initial Purchaser). Beneficial interests in any Unrestricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note. No written orders or instructions shall be required to be delivered to the Note Registrar to effect the transfers described in this Section 2.5(b)(i). 41 (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.5(b)(i) hereof, the transferor of such beneficial interest must deliver to the Note Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Note Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (B)(1) above; provided that in no event shall Definitive securities be issued upon the transfer or exchange of beneficial interests in the Regulation S Temporary Global Note prior to (x) the expiration of the Restricted Period and (y) the receipt by the Note Registrar of any certificate required pursuant to Rule 903(b)(3)(ii)(B) under the Securities Act. Upon consummation of an Exchange Offer by the Company in accordance with Section 2.5(f) hereof, the requirements of this Section 2.5(b)(ii) shall be deemed to have been satisfied upon receipt by the Note Registrar of the instructions contained in the Letter of Transmittal delivered by the holder of such beneficial interests in the Restricted Global Notes. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.5(h) hereof. (iii) Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.5(b)(ii) hereof and the Note Registrar receives the following: (A) if the transferee will take delivery in the form of a beneficial interest in the 144A Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; and (B) if the transferee will take delivery in the form of a beneficial interest in the Regulation S Temporary Global Note or the Regulation S Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof. (iv) Transfer and Exchange of Beneficial Interests in a Restricted Global Note for Beneficial Interests in the Unrestricted Global Note. A beneficial interest in any Restricted Global Note may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Note or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note if the exchange or transfer complies with the requirements of Section 2.5(b)(ii) hereof and: 42 (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of the beneficial interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Note Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Note Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Note Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. If any such transfer is effected pursuant to subparagraph (B) or (D) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.3 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the aggregate principal amount of beneficial interests transferred pursuant to subparagraph (B) or (D) above. Beneficial interests in an Unrestricted Global Note cannot be exchanged for, or transferred to Persons who take delivery thereof in the form of, a beneficial interest in a Restricted Global Note. (c) Transfer or Exchange of Beneficial Interests for Definitive Notes. 43 (i) Beneficial Interests in Restricted Global Notes to Restricted Definitive Notes. If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Note, then, upon receipt by the Note Registrar of the following documentation: (A) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof; (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (F) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.5(h) hereof, and the Company shall execute and the Trustee shall, upon receipt of an Authentication Order in accordance with Section 2.3 hereof, authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.5(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Note Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall (at the expense of the Company) deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.5(c)(i) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein. 44 Notwithstanding Sections 2.5(c)(i)(A) and (C) hereof, a beneficial interest in the Regulation S Temporary Global Note may not be exchanged for a Definitive Note or transferred to a Person who takes delivery thereof in the form of a Definitive Note prior to (x) the expiration of the Restricted Period and (y) the receipt by the Note Registrar of any certificates required pursuant to Rule 903(b)(3)(ii)(B) under the Securities Act, except in the case of a transfer pursuant to an exemption from the registration requirements of the Securities Act other than Rule 903 or Rule 904. (ii) Beneficial Interests in Restricted Global Notes to Unrestricted Definitive Notes. A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Definitive Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the Letter of Transmittal that it is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Note Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof, and, in each such case set forth in this subparagraph (D), if the Note Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Note Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. 45 (iii) Beneficial Interests in Unrestricted Global Notes to Unrestricted Definitive Notes. If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.5(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.5(h) hereof, and the Company shall execute and the Trustee, shall upon receipt of an Authentication Order in accordance with Section 2.3 hereof, authenticate and (at the expense of the Company) deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.5(c)(iii) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Note Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall (at the expense of the Company) deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.5(c)(iii) shall not bear the Private Placement Legend. (d) Transfer and Exchange of Definitive Notes for Beneficial Interests. (i) Restricted Definitive Notes to Beneficial Interests in Restricted Global Notes. If any Holder of a Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note or to transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Note, then, upon receipt by the Note Registrar of the following documentation: (A) if the Holder of such Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof; (B) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such Restricted Definitive Note is being transferred to a non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such Restricted Definitive Note is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; 46 (E) if such Restricted Definitive Note is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (F) if such Restricted Definitive Note is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cancel the Restricted Definitive Note, increase or cause to be increased the aggregate principal amount of, in the case of clause (A) above, the appropriate Restricted Global Note, in the case of clause (B) above, the 144A Global Note, and in the case of clause (C) above, the Regulation S Global Note. (ii) Restricted Definitive Note to Beneficial Interests in Unrestricted Global Notes. A Holder of a Restricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the Letter of Transmittal that it is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Note Registrar receives the following: (1) if the Holder of such Definitive Notes proposes to exchange such Notes for a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or (2) if the Holder of such Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Note Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Note Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and 47 in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.5(d)(ii), the Trustee shall cancel the Definitive Notes and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note. (iii) Unrestricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note at any time. Upon receipt of a written request for such an exchange or transfer, the Trustee shall cancel the applicable Unrestricted Definitive Note and increase or cause to be increased the aggregate principal amount of one of the Unrestricted Global Notes. If any such exchange or transfer from a Definitive Note to a beneficial interest is effected pursuant to Section 2.5(d)(ii)(B), (ii)(D) or (iii) hereof at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.3 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of Definitive Notes so transferred. (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.5(e), the Note Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Note Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Note Registrar duly executed by such Holder or by his attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.5(e). (i) Restricted Definitive Notes to Restricted Definitive Notes. Any Restricted Definitive Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Definitive Note if the Note Registrar receives the following: (A) if the transfer will be made pursuant to Rule 144A, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, 48 including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable. (ii) Restricted Definitive Notes to Unrestricted Definitive Notes. Any Restricted Definitive Note may be exchanged by the Holder thereof for an Unrestricted Definitive Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Note if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the Letter of Transmittal that it is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Note Registrar receives the following: (1) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or (2) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Note Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Note Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes. A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon receipt of a request to register such a transfer, the Note Registrar shall register the Unrestricted Definitive Notes pursuant to the instructions from the Holder thereof. 49 (f) Exchange Offer. Upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.3 hereof, the Trustee shall authenticate (i) one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of the beneficial interests in the Restricted Global Notes tendered for acceptance by Persons that certify in the Letters of Transmittal that (x) they are not Broker-Dealers, (y) they are not participating in a distribution of the Exchange Notes and (z) they are not affiliates (as defined in Rule 144) of the Company, and accepted for exchange in the Exchange Offer and (ii) Definitive Notes in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly, and the Company shall execute and the Trustee shall authenticate and (at the expense of the Company) deliver to the Persons designated by the Holders of Definitive securities so accepted Definitive Notes in the appropriate principal amount. (g) Legends. The following legends shall appear on the face of all Global Notes and Definitive Notes issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture. (i) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Note and each Definitive Note (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form: "THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES, TO OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR NOTES), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE 50 SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a) UNDER THE SECURITIES ACT THAT IS AN ACCREDITED INVESTOR ACQUIRING THE NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF $100,000 OF NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. (B) Notwithstanding the foregoing, any Global Note or Definitive Note issued pursuant to subparagraph (b)(iv), (c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.5 (and all Notes issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend. (ii) Global Note Legend. Each Global Note shall bear a legend in substantially the following form: "THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.6 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.5(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.10 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE 51 TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY." (iii) Regulation S Temporary Global Note Legend. The Regulation S Temporary Global Note shall bear a legend in substantially the following form: "THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON. PRIOR TO EXPIRATION OF THE 40-DAY DISTRIBUTION COMPLIANCE PERIOD (AS DEFINED IN REGULATION S ("REGULATION S") UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")), THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES (AS DEFINED IN REGULATION S) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, A U.S. PERSON (AS DEFINED IN REGULATION S), EXCEPT TO A PERSON REASONABLY BELIEVED TO BE A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A ("RULE 144A") UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A AND THE INDENTURE REFERRED TO HEREIN OR AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE NOTES OF $100,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT." (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.10 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of securities represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall 52 be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. (i) General Provisions Relating to Transfers and Exchanges. (A) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Notes and Definitive Notes upon receipt of an Authentication Order in accordance with Section 2.3 hereof or upon receipt of a written request of the Note Registrar. (B) No service charge shall be made to a holder of a beneficial interest in a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.9, 8.6, 9.15, 9.16 and 10.8). (C) The Note Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (D) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (E) The Company shall not be required (1) to issue, to register the transfer of or to exchange any Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 10.4 hereof and ending at the close of business on the day of selection, (2) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part, or (3) to register the transfer of or to exchange a Note between a Record Date and the next succeeding Interest Payment Date. (F) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Company shall be affected by notice to the contrary. (G) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 3.3 hereof. 53 (H) All certifications, certificates and Opinions of Counsel required to be submitted to the Note Registrar pursuant to this Section 3.5 to effect a registration of transfer or exchange may be submitted by facsimile. (I) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among Depositary participants or beneficial owners of interests in any Global Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirement hereof. 2.6 REPLACEMENT SECURITIES If (i) any mutilated Note is surrendered to the Trustee or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, and there is delivered to the Company, the Subsidiary Guarantors and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Note has been acquired by a bona fide purchaser, the Company will execute, and upon Company Order the Trustee will authenticate and deliver, in exchange for any such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a new Note of the tenor and principal amount bearing a number not contemporaneously outstanding, and the Subsidiary Guarantors will execute the notation of Subsidiary Guarantees thereon. In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note, pay such Note. Upon the issuance of any new Note under this Section 2.6, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expense (including the fees and expenses of the Trustee) connected therewith. Every new Note issued pursuant to this Section 2.6 in lieu of any mutilated, destroyed, lost or stolen Note will constitute an original additional continual obligation of the Company and the respective Subsidiary Guarantors, whether or not the mutilated, destroyed, lost or stolen Note will be at any time enforceable by anyone, and will be entitled to all benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section 2.6 are exclusive and will preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. If required by the Trustee, the Company or a Subsidiary Guarantor, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee, the Company and each Subsidiary Guarantor to protect the Company, each Subsidiary Guarantor, the Trustee, any Agent and any 54 authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company and the Trustee may charge for their expenses in replacing a Note. 2.7 OUTSTANDING SECURITIES The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof and those described in this Section 2.7 as not outstanding. Except as set forth in Section 2.8 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. If a Note is replaced pursuant to Section 2.6 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 9.1 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. 2.8 TREASURY SECURITIES In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company or any Subsidiary Guarantor, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any Subsidiary Guarantor shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. 2.9 TEMPORARY SECURITIES Pending the preparation of Definitive Notes, the Company may execute, and upon Company Order the Trustee will authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the Definitive Notes in lieu of which they are issued and having the notations of Subsidiary Guarantees thereon and with such appropriate insertions, omissions, substitutions and other variations as the Authorized Officers executing such Notes and notations of Subsidiary Guarantees may determine, as conclusively evidenced by their execution of such Notes and notations of Subsidiary Guarantees. If temporary Notes are issued, the Company will cause Definitive Notes to be prepared without unreasonable delay. After the preparation of Definitive Notes, the temporary Notes will be exchangeable for Definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 9.2, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the 55 Company will execute and the Trustee will authenticate and deliver in exchange therefor a like principal amount of Definitive Notes of authorized denominations having the notations of Subsidiary Guarantees thereon. Until so exchanged, the temporary Notes will in all respects be entitled to the same benefits under this Indenture as Definitive Notes. 2.10 CANCELLATION All Notes surrendered for payment, redemption, registration of transfer or exchange will, if surrendered to any Person other than the Trustee, be delivered to the Trustee and will be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Notes so delivered will be promptly canceled by the Trustee. No Notes will be authenticated in lieu of or in exchange for any Notes canceled as provided in this Section 2.10, except as expressly permitted by this Indenture. All canceled Notes held by the Trustee will be destroyed in accordance with the Trustee's usual practice and a certificate of destruction will be sent to the Company. 2.11 DEFAULTED INTEREST Interest on any Note which is payable, and is punctually paid or duly provided for, on any Interest Payment Date will be paid to the Person in whose name such Note (or one or more Predecessor Notes) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 9.2 hereof. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date will forthwith cease to be payable to the Holder on the Regular Record Date by virtue of having been such Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Notes (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") may be paid by the Company, at its election in each case, as provided in clause (i) or (ii) below: (i) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which will be fixed in the following manner. The Company will notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Note and the date of the proposed payment, and at the same time the Company will deposit with the Trustee an amount of money equal in the aggregate amount proposed to be paid in respect of such Defaulted Interest or will make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, and such money when deposited will be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee will fix a Special Record Date for the payment of such Defaulted Interest which will be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee will promptly notify the Company of such Special Record Date, and in the name and at the expense of the Company, will cause notice of the proposed payment of such Defaulted Interest and the Special Record Date 56 therefor to be given in the manner provided for in Section 14.5 hereof, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so given, such Defaulted Interest will be paid to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on such Special Record Date and will no longer be payable pursuant to the following clause (ii). (ii) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if any, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment will be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section 2.11, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note will carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. 2.12 CUSIP NUMBERS The Company in issuing the Notes may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders, provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. 2.13 BOOK-ENTRY PROVISIONS FOR GLOBAL SECURITY. Each Global Note will be registered in the name of the Depositary for such Global Note or the nominee of such Depositary and be delivered to the Trustee as custodian for such Depositary. Members of, or participants in, the Depositary ("Agent Members") will have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, or the Trustee as its custodian, or under such Global Note, and the Depositary may be treated by the Company, the Subsidiary Guarantors, the Trustee and any agent of the Company, the Subsidiary Guarantors or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein will prevent the Company, the Subsidiary Guarantors or the Trustee or any agent of the Company, the Subsidiary Guarantors or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or will impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Note. Transfers of a Global Note will be limited to transfers of such Global Note in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Note may be transferred or exchanged for Definitive Notes in accordance with the rules and procedures of 57 the Depositary. Definitive Notes will be transferred to all beneficial owners in exchange for their beneficial interests in a Global Note if, and only if, either (i) the Depositary notifies the Company that it is unwilling or unable to continue as depositary for the Global Note and a successor depositary is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Note Registrar has received a request from the Depositary to issue Definitive Notes in lieu of all or a portion of the Global Note (in which case the Company will deliver Definitive Notes within 30 days of such request). In connection with the transfer of an entire Global Note to beneficial owners pursuant to this Section 2.13, the Global Note will be deemed to be surrendered to the Trustee for cancellation, and the Company will execute, and the Trustee will authenticate and deliver, to each beneficial owner identified by the Depositary, in exchange for its beneficial interest in the Global Note, an equal aggregate principal amount of Definitive Notes of authorized denominations. The Holder of the Global Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. 2.14 COMPUTATION OF INTEREST. The amount of interest for each day that a Note is Outstanding shall be calculated by dividing the interest rate in effect for such Note on such day by 360 and multiplying the result thereof by the principal amount of such Note on such day. Except as otherwise provided by the terms and provisions contained in a Note, the amount of interest to be paid on an Interest Payment Date in respect of such Note shall be calculated by adding the daily interest amount for each day on which such Note is Outstanding during the interest period to which such Interest Payment Date relates. ARTICLE 3 SATISFACTION AND DISCHARGE 3.1 SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture will upon Company Request cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Notes, as expressly provided for in this Indenture) as to all Outstanding Notes, and the Trustee, at the expense of the Company, will, upon payment of all amounts due the Trustee under Section 5.6 hereof, execute proper instruments acknowledging satisfaction and discharge of this Indenture when: (a) either (i) all Notes theretofore authenticated and delivered (other than (1) Notes that have been mutilated, destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.6 hereof and (2) Notes for whose payment of money or United States governmental obligations of the type described in clause (i) of the definition of Cash Equivalents have theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by 58 the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 9.3 hereof) have been delivered to the Trustee for cancellation, or (b) all such Notes not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their final Stated Maturity within a period of time that does not have more than one Interest Reset Date, or (iii) have been or are to be called for redemption, within a period of time that does not have more than one Interest Reset Date under the terms of this Indenture for the serving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of clause (b)(i), (b)(ii) or (b)(iii) above, has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of (and premium, if any, on) and interest on the Notes to the date of such deposit (in the case of Notes which have become due and payable) or to such final Stated Maturity or Redemption Date, provided, that, if the day on which such deposit is made is not after the Interest Reset Date immediately preceding such final Stated Maturity or redemption date, as the case may be, the interest rate from and after such Interest Reset Date used to calculate such amount to be so deposited shall be the interest rate on the Notes on the day immediately preceding such Interest Reset Date plus the greater of (a) 2.00% and (b) such other percent as may be requested by the Trustee in order to provide reasonable assurance in the judgment of the Trustee that the amount being so deposited will be sufficient to pay and discharge the principal of, and premium, if any, and interest on, the Outstanding Notes on such final Stated Maturity or redemption date, as the case may be, together with instructions from the Company irrevocably directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (c) the Company has paid or caused to be paid all other sums then due and payable hereunder by the Company; and (d) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in form and substance reasonably satisfactory to the Trustee, each stating that all conditions precedent herein relating to the satisfaction and discharge of this Indenture have been satisfied. Following the date upon which the entire principal of, and all premium, if any, and interest on, all of the Outstanding Notes is then due and payable, the Trustee shall unless there is then an Event of Default, upon request made to it by the Company, be required to pay to the Company the difference, if any, of (x) the aggregate amount deposited with the Trustee in accordance with clause (a) of the immediately preceding paragraph and (y) the aggregate amount of any principal of, and all premium, if any, and interest on, the Notes which is then due and payable. 59 Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 5.6 hereof and, if money will have been deposited with the Trustee pursuant to this Section 3.1, the obligations of the Trustee under Section 3.2 hereof and the last paragraph of Section 9.3 hereof will survive. 3.2 APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of Section 9.3 hereof, all money deposited with the Trustee pursuant to Section 3.1 hereof will be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whom payment such money has been deposited with the Trustee. ARTICLE 4 REMEDIES 4.1 EVENTS OF DEFAULT AND REMEDIES. "Event of Default," wherever used herein, means any one of the following events: (a) default in the payment when due of interest on, or Liquidated Damages with respect to, the Notes, and such Default continues for 30 days; or (b) default in the payment when due of the principal of or premium on any Note, whether such payment is due at Stated Maturity, upon redemption, upon repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, upon declaration of acceleration or otherwise; or (c) default in the performance or breach of the provisions of Section 9.15, Section 9.16 or Section 7.1; or (d) failure by the Company or any Restricted Subsidiary to comply with any other term, covenant or agreement contained in the Notes, any Subsidiary Guarantee, any Collateral Document or this Indenture (other than a default specified in clause (a), (b) or (c) above or clause (j) or (k) below) for a period of 60 days after written notice of such failure stating that it is a "notice of default" under this Indenture and requiring the Company or such Restricted Subsidiary, as the case may be, to remedy the same; or (e) the occurrence and continuation beyond any applicable grace period of any default in the payment when due of the principal of, or premium or interest on, any Indebtedness for borrowed money of the Company (other than the Notes) or any Restricted Subsidiary or any other default resulting in acceleration of any Indebtedness for borrowed money of the Company or any Restricted Subsidiary, but only in the event that the aggregate principal amount of such Indebtedness shall exceed $2,000,000; or (f) without limiting clause (e) above, the occurrence and continuation of an "event of default" under either the Revolving Credit Facility or the Bridge Loan; or 60 (g) any Subsidiary Guarantee shall for any reason cease to be, or be asserted by the Company, any Subsidiary Guarantor, any of their respective Affiliates or any Person acting on behalf of any of the foregoing not to be, in full force and effect and enforceable in any material respect in accordance with its terms (except pursuant to the release or termination of any such Subsidiary Guarantee in accordance with this Indenture); or (h) any Collateral Document shall for any reason cease to be, or be asserted by the Company, any Restricted Subsidiary, any of their respective Affiliates or any Person acting on behalf of any of the foregoing not to be, in full force and effect and enforceable in any material respect in accordance with its terms or to not otherwise grant a duly perfected first priority security interest in the Collateral in favor of the holders of the Note Obligations (subject to Permitted Prior Liens and except pursuant to a release or termination thereof consummated in accordance with this Indenture and the Intercreditor Agreement and other Collateral Documents) for a period of 30 days after written notice thereof stating that it is a "notice of default" under this Indenture and requiring the Company or the respective Restricted Subsidiary, as the case may be, to remedy the same; or (i) final judgments or orders rendered against the Company or any Restricted Subsidiary that are unsatisfied and that require the payment in money, either individually or in an aggregate amount, that is more than $2,000,000 over the coverage under applicable insurance policies and either (a) commencement by any creditor of an enforcement proceeding upon such judgment (other than a judgment that is stayed by reason of pending appeal or otherwise) or (b) the occurrence of a 60-day period during which a stay of such judgment or order, by reason of pending appeal or otherwise, was not in effect; or (j) the entry of a decree or order by a court having jurisdiction in the premises (a) for relief in respect of the Company or any Subsidiary in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or (b) adjudging the Company or any Subsidiary bankrupt or insolvent, or approving a petition seeking reorganization, arrangement, adjustment or composition of the Company or any Subsidiary under any applicable Federal or state law, or appointing under any such law a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Subsidiary or of a substantial part of its consolidated assets, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (k) the commencement by the Company or any Subsidiary of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or any other case or proceeding to be adjudicated bankrupt or insolvent, or the consent by the Company or any Subsidiary to the entry of a decree or order for relief in respect thereof in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by the Company or any Subsidiary of a petition or consent seeking reorganization or relief under any applicable Federal or state law, or the consent by it under any such law to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of any of the Company or any Subsidiary or of any substantial part of its consolidated assets, or the making by it of an 61 assignment for the benefit of creditors under any such law, or the admission by it in writing of its inability to pay its debts generally as they become due or the taking of corporate action by the Company or any Subsidiary in furtherance of any such action. 4.2 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If any Event of Default (other than an Event of Default specified in Section 4.1(j) or 4.1(k) hereof) occurs and is continuing, the Trustee, by written notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Notes then Outstanding, by notice to the Trustee and the Company, may, and the Trustee upon the request of the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes shall declare the principal of, premium, if any, and accrued interest on all of the Notes due and payable immediately, upon which declaration all amounts payable in respect of the Notes will be immediately due and payable; if an Event of Default specified in Section 4.1(j) or 4.1(k) hereof occurs and is continuing, then the principal of, and premium, if any, and accrued interest on, all of the Notes shall automatically become and be immediately due and payable without any declaration, notice or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration under this Indenture has been made, but before a judgment or decree for payment of the money due has been obtained by the Trustee or Holders of the Notes as hereinafter permitted in this Article 4, the Holders of a majority in aggregate principal amount of the Outstanding Notes, by written notice to the Company, the Subsidiary Guarantors and the Trustee, may (i) rescind such declaration and its consequences and (ii) on behalf of the Holders of all the Notes, waive any existing Event of Default and its consequences, except a continuing Event of Default specified in Section 4.1(a) hereof, if (a) the Company or any Subsidiary Guarantor has paid or deposited with the Trustee a sum sufficient to pay, (i) all sums paid or advanced by the Trustee under this Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Outstanding Notes, (iii) the unpaid principal of (and premium, if any, on) any Outstanding Notes which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes, and (iv) to the extent that payment of such interest is lawful, interest on overdue interest and overdue principal at the rate borne by the Notes (without duplication of any amount paid or deposited pursuant to clause (ii) or (iii) above); (b) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction as certified to the Trustee by the Company; and 62 (c) all Defaults and Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived as provided in this Indenture. Notwithstanding the foregoing, if an Event of Default specified in Section 4.1(e) hereof shall have occurred and be continuing, such Event of Default and any consequential acceleration shall be automatically rescinded if the Indebtedness that is the subject of such Event of Default has been repaid, or if the default relating to such Indebtedness is waived or cured and if such Indebtedness has been accelerated, then the holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness (provided, in each case, that such repayment, waiver, cure or rescission is effected within a period of 10 days from the continuation of such default beyond the applicable grace period or the occurrence of such acceleration), and written notice of such repayment, cure, waiver or rescission, as the case may be, will have been given to the Trustee by the Company and countersigned by the holders of such Indebtedness or a trustee, fiduciary or agent for such holders or other evidence satisfactory to the Trustee of such events is provided to the Trustee, within 30 days after any such acceleration in respect of the Notes, and so long as such rescission of any such acceleration of the Notes does not conflict with any judgment or decree as certified to the Trustee by the Company. No such rescission will affect any subsequent default or impair any right consequent thereon. 4.3 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Company covenants that if: (a) default is made in the payment of any installment of interest or Liquidated Damages, if any, on any Note when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of (or premium, if any, on) any Note at the Stated Maturity thereof or with respect to any Note required to have been purchased by the Company on the Change of Control Payment Date or the Net Proceeds Payment Date pursuant to a Change of Control Offer or Net Proceeds Offer, as applicable, the Company will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Notes, the whole amount then due and payable on each such Note for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest will be legally enforceable, upon any overdue installment of interest, at the rate borne by the Notes, and, in addition thereto, such further amount as will be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Notes and collect the money 63 adjudged or decreed to be payable in the manner provided by law out of the Property of the Company or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 4.4 TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company, any Restricted Subsidiary, any Subsidiary Guarantor or any other obligor upon the Notes, their creditors or the Property of the Company, any Restricted Subsidiary, any Subsidiary Guarantor or of such other obligor, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company, the Subsidiary Guarantors or such other obligor for the payment of overdue principal, premium, if any, or interest) will be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Notes and to file such other papers or documents and take any other action, including participation as a full member of any creditor or other committee, as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other Property payable or deliverable on any such claim and to distribute the same, and any custodian receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amount due the Trustee under Section 5.6 hereof. Nothing herein contained will be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the Subsidiary Guarantees or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of such Holders, vote for the election of a trustee in bankruptcy or similar official. 4.5 TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES. All rights of action and claims under this Indenture or the Notes or the Subsidiary Guarantees may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding 64 relating thereto, and any such proceeding instituted by the Trustee will be brought in its own name and as trustee of an express trust, and any recovery of judgment will, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. 4.6 APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article 4 will be applied in the following order, at the date or dates fixed by the Trustee and, in the case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: to the payment of all amounts due the Trustee under Section 5.6 hereof; SECOND: to the payment of the amounts then due and unpaid for principal of (and premium, if any, on) and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (and premium, if any) and interest, respectively; and THIRD: the balance, if any, to the Company; provided that, upon the occurrence and during the continuation of an Event of Default hereunder or of an event of default under the terms of the Revolving Credit Facility or the Bridge Loan, all money collected by the Trustee shall be promptly paid to the Collateral Agent for the account of the Secured Parties and shall be applied pursuant to the terms of the Intercreditor Agreement. 4.7 LIMITATION ON SUITS. No Holder of any Notes will have any right to institute any proceeding, with respect to this Indenture, or any other remedy hereunder, unless: (a) such Holder has notified the Trustee in writing of a continuing Event of Default; (b) the Holders of at least 25% in aggregate principal amount of the Outstanding Notes shall have made written request to the Trustee to institute proceedings or pursue such remedy in respect of such Event of Default in its own name as Trustee hereunder and offered to the Trustee reasonable indemnity satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with the request; (c) the Trustee for 60 days after its receipt of such request and offer of indemnity has failed to institute any such proceeding; and (d) no direction inconsistent, in the opinion of the Trustee, with such written request has been given to the Trustee during such 60 day period by the Holders of a majority in aggregate principal amount of the Outstanding Notes, 65 it being understood and intended that no Holder shall have any right in any manner by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holder, or to obtain or to seek to obtain priority or preference over any other Holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. 4.8 UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision in this Indenture, the Holder of any Note will have the right, which is absolute and unconditional, to receive payment, as provided herein and in such Note of the principal of (and premium if any, on) and (subject to Article 2 hereof) interest and Liquidated Damages, if any, on such Note on the respective Stated Maturities expressed in such Note (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights will not be impaired without the consent of such Holder. 4.9 RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Subsidiary Guarantors, the Trustee and the Holders will be restored severally and respectively to their former positions hereunder and all rights and remedies of the Trustee and the Holders will continue as though no such proceeding had been instituted. 4.10 RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes described in Article 2 hereof, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy will, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, will not prevent the concurrent assertion or employment of any other appropriate right or remedy. 4.11 DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy occurring upon any Event of Default will impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence thereof. Every right and remedy given by this Article 4 or by law or in equity to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. 4.12 CONTROL BY HOLDERS. 66 Subject to the provisions of the Intercreditor Agreement, the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that: (a) such direction will not be in conflict with any rule of law or with this Indenture; (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction; and (c) the Trustee need not take any action which might involve it in personal liability or be unduly prejudicial to the Holders not joining therein. 4.13 WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in aggregate principal amount of the Outstanding Notes may, on behalf of the Holders of all the Notes, waive any existing Default or Event of Default hereunder and its consequences, except (i) a Default or Event of Default in the payment of principal of, or premium, if any, interest or Liquidated Damages, if any, on, the Notes, or (ii) in respect of a covenant or provision hereof which under Article 8 hereof cannot be modified or amended without the consent of the Holder of each Outstanding Note affected thereby. Upon any such waiver, such Default or Event of Default will cease to exist for every purpose under this Indenture, but no such waiver will extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. Any such waiver may (but need not) be given in connection with a tender offer or exchange offer for the Notes. 4.14 WAIVER OF STAY. Each of the Company and the Subsidiary Guarantors covenants (to the extent that each may lawfully do so) that it will not at any time insist upon, plead or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company or any Subsidiary Guarantor from paying all or any portion of the principal of, or premium, if any, or interest on, the Notes as contemplated herein, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) each of the Company and the Subsidiary Guarantors hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 5 THE TRUSTEE 5.1 DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee will exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise or 67 use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations will be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, and will be fully protected in so relying, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided, however, the Trustee will examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). (iii) No provision of this Indenture will be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (A) this subsection will not be construed to limit the effect of Section 5.1(a) hereof; (B) the Trustee will not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; (C) the Trustee will not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 4.12 hereof; and (D) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (iv) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 5.1. 5.2 CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of Section 5.1 hereof: (a) the Trustee may conclusively rely and will be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, 68 note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein will be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee will deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence is herein specifically prescribed) may in the absence of bad faith on its part conclusively rely upon an Officers' Certificate; (d) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel will be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee will be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders will have offered to the Trustee reasonable security or indemnity satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee will not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may reasonably see fit, and, if the Trustee will determine to make such further inquiry or investigation, it will be entitled to examine, during the business hours and upon reasonable notice, the books, records and premises of the Company and its Subsidiaries, personally or by agent or attorney at the sole cost of the Company and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, and the Trustee will not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the Trustee will not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (i) the Trustee will not be deemed to have notice or knowledge of any matter (including any Default or Event of Default) unless a Responsible Officer has actual knowledge thereof or unless written notice thereof is received by the Trustee at its Corporate Trust Office and such notice references the Notes generally, the Company or this Indenture; 69 (j) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and other Person employed by the Trustee to act hereunder; and (k) the Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers' Certificate may be signed by any person authorized to sign an Officers' Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded. The Trustee will not be required to advance, expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it will have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. 5.3 TRUSTEE NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The recitals contained herein and in the Notes and the notations of Subsidiary Guarantees thereon, except for the Trustee's certificates of authentication, will be taken as the statements of the Company or the Subsidiary Guarantors, as the case may be, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture, the Subsidiary Guarantees or the Notes, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Notes and perform its obligations hereunder, and that the statements made by it in a Statement of Eligibility and Qualification on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein. The Trustee will not be accountable for the use or application by the Company of Notes or the proceeds thereof. 5.4 MAY HOLD SECURITIES. The Trustee, any Paying Agent any Note Registrar or any other agent of the Company, the Subsidiary Guarantors or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and, subject to Sections 310(b) and 311 of the TIA in the case of the Trustee, may otherwise deal with the Company and the Subsidiary Guarantors with the same rights it would have if it were not the Trustee, Paying Agent, Note Registrar or such other agent. 5.5 MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee will be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company or any Subsidiary Guarantor. 5.6 COMPENSATION AND REIMBURSEMENT. The Company agrees: 70 (a) to pay to the Trustee from time to time such compensation as the Company and the Trustee shall from time to time agree in writing for all services rendered by it hereunder (which compensation will not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to the Trustee's willful misconduct, negligence or bad faith; and (c) to indemnify each of the Trustee or any predecessor Trustee and their agents for, and to hold them harmless against, any and all loss, liability, damage, claim or expense, including taxes (other than those based upon, measured by or determined by the income of the Trustee), incurred without willful misconduct, negligence or bad faith on its part (i) arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability (whether assisted by the Company, any Holder or any other person) in connection with the exercise or performance of any of its powers or duties hereunder or (ii) in connection with enforcing this indemnification provision. The obligations of the Company under this Section 5.6 to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee will survive the satisfaction and discharge of this Indenture or any other termination under any Insolvency or Liquidation Proceeding and the resignation or removal of the Trustee. As security for the performance of such obligations of the Company, the Trustee will have a claim and lien prior to the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for payment of principal of (and premium, if any, on) or interest on particular Notes. Such lien will survive the satisfaction and discharge of this Indenture or any other termination under any Insolvency or Liquidation Proceeding. When the Trustee incurs expenses or renders services after the occurrence of an Event of Default specified in paragraph (j) or (k) of Section 4.1 hereof, such expenses and the compensation for such services are intended to constitute expenses of administration under any Insolvency or Liquidation Proceeding. 5.7 CORPORATE TRUSTEE REQUIRED: ELIGIBILITY. There will at all times be a Trustee hereunder which will be eligible to act as Trustee under Section 310(a)(1) of the TIA and will have a combined capital and surplus of at least $10,000,000 in the case of the initial Trustee hereunder and $50,000,000 in the case of any successor Trustee. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section 5.7, the combined capital and surplus of such Person will be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at 71 any time the Trustee will cease to be eligible in accordance with the provisions of this Section 5.7, it will resign immediately in the manner with which the effect hereinafter specified in this Article 5. 5.8 CONFLICTING INTERESTS. The Trustee will comply with the provisions of Section 310(b) of the TIA; provided, however, that there will be excluded from the operation of Section 310(b)(1) of the TIA any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are Outstanding if the requirements for such exclusion set forth in Section 310(b)(1) of the TIA are met. The duties and interests of the Trustee under this Indenture shall be subject to its duties as Collateral Agent and the security interest established pursuant to the Intercreditor Agreement. 5.9 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article 5 will become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 5.10 hereof. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 5.10 hereof will not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition, at the Company's expense, any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by an Act of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes, delivered to the Trustee and to the Company. (d) If at any time: (i) the Trustee shall have failed to comply with the provisions of Section 310(b) of the TIA after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months; or (ii) the Trustee shall have ceased to be eligible under Section 5.7 hereof and shall have failed to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months; or (iii) the Trustee shall have become incapable of acting or shall have been adjudged bankrupt or insolvent or a receiver of the Trustee or of its property will be appointed or any public officer shall have taken charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (A) the Company, by a Board Resolution, may remove the Trustee or (B) subject to Section 315(e) of the TIA, any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of itself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 72 (e) If the Trustee shall have resigned, been removed or become incapable of acting, or if a vacancy shall have occurred in the office of Trustee for any cause, the Company, by a Board Resolution, will promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall have been appointed by Act of the Holders of a majority in aggregate principal amount of the Outstanding Notes delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of itself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. The evidence of such successorship may, but need not be, evidenced by a supplemental indenture to this Indenture. (f) The Company will give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Notes in the manner provided for in Section 14.5 hereof. Each notice will include the name of the successor Trustee and the address of its Corporate Trust Office. 5.10 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. Every successor Trustee appointed hereunder will execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee will become effective and such successor Trustee, without any further act, deed or conveyance, will become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee will, upon payment of all amounts due it under Section 5.6 hereof, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and will duly assign, transfer and deliver to such successor Trustee all money and other Property held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company will execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee will accept its appointment unless at the time of such acceptance such successor Trustee will be qualified and eligible under this Article 5. 5.11 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee will be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, will be the successor of the Trustee hereunder, provided such corporation will be otherwise qualified and eligible under this Article 5, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Note shall have been authenticated, but not delivered, by the Trustee then in office, any successor 73 by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such securities; and in case at that time any of the Notes shall not have been authenticated, any successor Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Notes in the name of any predecessor Trustee will apply only to its successor or successors by merger, conversion or consolidation. 5.12 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. If and when the Trustee is or becomes a creditor of the Company (or any other obligor under the Notes), the Trustee will be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). 5.13 NOTICE OF DEFAULTS. Within 60 days after the occurrence of any Default hereunder, the Trustee will transmit in the manner and to the extent provided in Section 313(c) of the TIA, notice of such Default hereunder known to the Trustee, unless such Default will have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of, or premium, Liquidated Damages, or interest on, any Note, the Trustee will be protected in withholding such notice if and so long as the board of directors of the Trustee, committee of its board of directors or a committee of Trust officers determines in good faith that the withholding of such notice is in the interest of the Holders. ARTICLE 6 HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY 6.1 HOLDERS' LISTS; HOLDER COMMUNICATIONS; DISCLOSURES RESPECTING HOLDERS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of the Holders. Neither the Company, any Subsidiary Guarantor nor the Trustee shall have any responsibility with regard to the accuracy of such list. If the Trustee is not the Note Registrar, the Company will furnish to the Trustee semi-annually before each Regular Record Date, and at such other times as the Trustee may reasonably request in writing, a list, in such form as the Trustee may reasonably request, as of such date of the names and addresses of the Holders then known to the Company. The Company and the Trustee will also satisfy any other requirement imposed upon each of them by Section 312(a) of the TIA. Holders may communicate pursuant to Section 312(b) of the TIA with other Holders with respect to their rights under this Indenture or the Notes. Every Holder of Notes, by receiving and holding the same, agrees with the Company, the Subsidiary Guarantors, the Note Registrar and the Trustee that (i) none of the Company, the Subsidiary Guarantors, the Note Registrar or the 74 Trustee, or any agent of any of them, shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Holders in accordance with Section 312 of the TIA, regardless of the source from which such information was derived, (ii) each of such Persons shall have the protection of Section 312(c) of the TIA and (iii) the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 312(b) of the TIA. 6.2 REPORTS BY TRUSTEE. Within 60 days after May 15th of each year commencing with May 15th, 2005, the Trustee will transmit by mail to the Holders, as their names and addresses appear in the Note Register, a brief report dated as of such in accordance with and to the extent required under Section 313(a) of the TIA. The Trustee will also comply with Sections 313(b) and 313(c) of the TIA. The Company will promptly notify the Trustee in writing if the Notes become listed on any stock exchange or automatic quotation system and of any delisting thereof. A copy of each Trustee's report, at the time of its mailing to Holders of Notes, will be mailed to the Company and filed with the Commission and each stock exchange or automatic quotation system, if any, on which the Notes are listed or quoted, as the case may be. 6.3 REPORTS BY COMPANY. The Company will: (a) file with the Trustee, within 30 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then the Company will file with the Trustee such information, documents or reports as required pursuant to Section 9.9 hereof; (b) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (c) transmit by mail to all Holders, in the manner and to the extent provided in Section 313(c) of the TIA, such summaries of any information, documents and reports (without exhibits except to the extent required by Section 313(c) of the TIA) required to be filed by the Company pursuant to paragraph (i) or (ii) of this Section 6.3 as may be required by rules and regulations prescribed from time to time by the Commission. (d) Delivery of such reports, information and documents to the Trustee pursuant to this Section 6.3 is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any 75 information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). ARTICLE 7 CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OF OR LEASE 7.1 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company shall not, in any single transaction or a series of related transactions, merge or consolidate with or into any other Person, or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of the Properties of the Company and its Restricted Subsidiaries on a consolidated basis to any other Person or group of Affiliated Persons (other than the Company and its Wholly Owned Restricted Subsidiaries), and the Company shall not permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in a sale, assignment, conveyance, transfer, lease or other disposition of all or substantially all of the Properties of the Company and its Restricted Subsidiaries on a consolidated basis to any other Person or group of Affiliated Persons other than the Company and its Wholly Owned Restricted Subsidiaries, unless at the time and after giving effect thereto, either: (a) (i) either (A) if the transaction is a merger or consolidation, the Company will be the surviving Person of such merger or consolidation or (B) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which the Properties of the Company or its Restricted Subsidiaries, as the case may be, are sold, assigned, conveyed, transferred, leased or otherwise disposed of (any such surviving Person or transferee Person being the "Surviving Entity") will be a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia and will, in either case, (I) expressly assume by a supplemental indenture to this Indenture and, if the Registration Rights Agreement is then in effect, a joinder agreement to the Registration Rights Agreement, each executed and delivered to the Trustee, in form and substance reasonably, satisfactory to the Trustee, all the obligations of the Company under the Notes and this Indenture, and, if applicable, the Registration Rights Agreement and (II) take such actions required under this Indenture so that the transaction does not result in the surviving Entity owning or having acquired Collateral that is not subject to a valid and enforceable perfected first priority security interest (subject to Permitted Prior Liens) in favor of the Collateral Agent as security for the Note Obligations, and, in the case of a transaction described under (A) or (B), the Notes, this Indenture and, if applicable, the Registration Rights Agreement shall remain in full force and effect; (ii) immediately before and immediately after giving effect to such transaction or series of transactions on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company or any of its Restricted Subsidiaries which becomes the obligation of the Company or any of its Restricted Subsidiaries in connection with or as a result of such transaction or transactions as having been incurred at the time of such transaction or transactions), no Default or Event of Default will have occurred and be continuing; 76 (iii) except in the case of the consolidation or merger of any Restricted Subsidiary with or into the Company, immediately after giving effect to such transaction or transactions on a pro forma basis, the Consolidated Fixed Charge Coverage Ratio of the Company (or the Surviving Entity if the Company is not the continuing obligor under this Indenture) is not less than the Consolidated Fixed Charge Coverage Ratio of the Company immediately before such transaction or transactions; (iv) except in the case of the consolidation or merger of the Company with or into a Wholly Owned Restricted Subsidiary or of any Restricted Subsidiary with or into the Company or any Wholly Owned Restricted Subsidiary, immediately before and immediately after giving effect to such transaction or transactions on a pro forma basis (on the assumption that the transaction or transactions occurred on the first day of the period of four full fiscal quarters for which financial statements are available ending immediately prior to the consummation of such transaction or transactions, with the appropriate adjustments with respect to the transaction or transactions being included in such pro forma calculation), the Company (or the Surviving Entity if the Company is not the continuing obligor under this Indenture) could Incur $1.00 of additional Indebtedness (excluding Permitted Indebtedness) under the terms of Section 9.11 hereof; (v) if any of the Properties of the Company or any of its Restricted Subsidiaries would, upon such transaction or series of related transactions, become subject to any Lien (other than a Permitted Lien), the creation or imposition of such Lien will have been in compliance with Section 9.14 hereof; (vi) if the Company is not the continuing obligor under this Indenture, then any Subsidiary Guarantor, unless it is the Surviving Entity, shall have, by supplemental indenture to this Indenture in form and substance reasonably satisfactory to the Trustee, confirmed that its Subsidiary Guarantee of the Notes will apply to the Surviving Entity's obligations under this Indenture and the Notes; and (vii) the Company (or the Surviving Entity if the Company is not the continuing obligor under this Indenture) shall have delivered to the Trustee, in form and substance reasonably satisfactory to the Trustee, (A) an Officers' Certificate stating that such transaction or series of related transactions and, if a supplemental indenture to this Indenture is required in connection with such transaction, such supplemental indenture, comply with this Indenture and (B) an Opinion of Counsel stating that (I) the requirements of clause (i) of this paragraph have been satisfied and (II) any supplemental indenture to this Indenture or joinder agreement to the Registration Rights Agreement delivered to the Trustee in accordance with the requirements of this paragraph has been duly authorized, executed and delivered by the Surviving Entity or any Subsidiary Guarantor a party thereto and constitutes a legal, valid and binding obligation of the Surviving Entity and any such Subsidiary Guarantor; or (b) the transaction is effected in compliance with Section 9.16 hereof; provided that all of the Notes then Outstanding are paid in full in accordance with such Section 9.16 hereof; provided that so long as the Fair Market Value of the Capital Stock of Grey Wolf owned by the Company and its Subsidiaries does not exceed 50% of the Fair Market Value of all of the Properties of the Company and its Subsidiaries on a 77 consolidated basis, then any disposition of all or a portion of such Capital Stock of Grey Wolf by the Company and its Restricted Subsidiaries will not constitute a sale of all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries on a consolidated basis for purposes of the covenants described under this Article 7 or for purposes of clause (iii) of the definition of "Change of Control" hereunder. 7.2 SUCCESSOR SUBSTITUTED. (a) Upon any consolidation of the Company with or merger of the Company into any other corporation or any sale, assignment, lease, conveyance, transfer or other disposition of all or substantially all of the Properties of the Company and its Restricted Subsidiaries on a consolidated basis in accordance with Section 7.1 hereof, in which the Company is not the continuing corporation, the Surviving Entity will succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such Surviving Entity had been named as the Company herein, and in the event of any such sale, assignment, conveyance, transfer or other disposition (but not a lease), the Company (which term will for this purpose mean the Person named as the "Company" in the first paragraph of this Indenture or any successor Person which has theretofore become such in the manner described in Section 7.1 hereof) will be discharged of all obligations and covenants under this Indenture and the Notes and the Company may be dissolved and liquidated and such dissolution and liquidation will not cause a Change of Control under clause (iii) of the definition thereof to occur unless such sale, assignment, conveyance, transfer or other disposition of all or substantially all of the Properties of the Company and its Restricted Subsidiaries on a consolidated basis to any Person otherwise results in a Change of Control. (b) The Company will not permit any Subsidiary Guarantor to consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of related transactions, all or substantially all of its properties and assets to any Person unless: (i) the resulting, surviving or transferee Person (if not such Subsidiary Guarantor) shall be a Person organized and existing under the laws of the jurisdiction under which such Subsidiary Guarantor was organized or under the laws of the United States of America, any state thereof or the District of Columbia, and such Person shall (I) expressly assume by a supplemental indenture to this Indenture and, if the Registration Rights Agreement is then in effect, a joinder agreement to the Registration Rights Agreement, each executed and delivered to the Trustee, in form and substance reasonably satisfactory to the Trustee, all the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee and, if applicable, the Registration Rights Agreement and (II) take such actions required under this Indenture, such that the transaction does not result in either (x) such Person owning or having acquired Collateral that is not subject to a valid and enforceable perfected first priority security interest (subject to Permitted Prior Liens) in favor of the Collateral Agent as security for the Note Obligations or (y) all of the Capital Stock of such Person owned directly or indirectly by the Company being duly pledged as a first priority perfected security interest (subject to Permitted Prior Liens) to the Collateral Agent for the benefit of the holders of the Note Obligations; 78 (ii) immediately after giving effect to such transaction or transactions on a pro forma basis (and treating any Indebtedness which becomes an obligation of the resulting, surviving or transferee Person as a result of such transaction as having been issued by such Person at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; (iii) the Company would be permitted by virtue of its pro forma Consolidated Fixed Charge Coverage Ratio, immediately after giving effect to such transaction, to Incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the terms of clause (1) of the first sentence of Section 9.11 hereof; and (iv) the Company delivers to the Trustee an (a) Officers' Certificate and an Opinion of Counsel (in form and substance satisfactory to the Trustee), each stating that such consolidation, merger or transfer and, if a supplemental indenture to this Indenture is required in connection with such transaction or transactions, such supplemental indenture, complies with this Indenture and (b) an Opinion of Counsel stating that (I) the requirements of clause (i) of this paragraph have been satisfied and (II) any supplemental indenture of this Indenture or joinder agreement to the Registration Rights Agreement delivered to the Trustee in accordance with the requirements of this paragraph has been duly authorized, executed and delivered by the resulting, surviving or transferee Person and constitutes a legal, valid and binding obligation of such Person; provided, however, that clauses (i), (iii) and (iv)(b) above shall not apply if such transactions comply with Section 9.16 hereof and such resulting, surviving or transferee Person is no longer a Subsidiary of the Company. ARTICLE 8 AMENDMENTS, SUPPLEMENTS AND MODIFICATIONS 8.1 AMENDMENTS, SUPPLEMENTS AND MODIFICATIONS WITHOUT CONSENT OF HOLDERS. Subject to the terms of the Intercreditor Agreement, without the consent of any Holder, the Company, when authorized by a Board Resolution, each of the Subsidiary Guarantors, when authorized by a Board Resolution, and the Trustee upon Company Request, at any time and from time to time, may enter into one or more amendments, supplements or modifications to this Indenture and the Notes (by indentures supplemental hereto) or to any Collateral Documents, each in form satisfactory to the Trustee, for any of the following purposes: (a) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture provided that such actions do not adversely affect the interests of the Holders in any material respect; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes, provided such uncertificated Notes are in registered form for the purposes of the Code; (c) provide for the assumption of the Company's obligations to Holders of Notes in the case of a merger or consolidation or a sale in accordance with the terms of this Indenture; or 79 (d) to add or release a Subsidiary Guarantor from its Subsidiary Guarantee pursuant to Section 13.3 hereof and the Intercreditor Agreement; (e) make, complete or confirm any grant of a Lien on Collateral permitted or required by the Collateral Documents or this Indenture or any release of a Lien on Collateral that becomes effective in compliance with terms and provision of this Indenture and the Intercreditor Agreement and other Collateral Documents; (f) to make any change that would provide additional rights or benefits to the Holders and does not adversely affect the interests of any such Holders in any material respect; (g) to comply with the requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. (h) to add additional Events of Default; (i) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Sections 5.9 and 5.10 hereof or for the acceptance of appointment under a Collateral Document by a successor Collateral Agent; (j) to secure the Notes pursuant to the requirements of this Indenture; (k) to add any Restricted Subsidiary as an additional Subsidiary Guarantor as provided in Section 9.12(a) hereof or to evidence the succession of another Person to any Subsidiary Guarantor pursuant to Section 13.2(b) hereof and the assumption by any such successor of the covenants and agreements of such Subsidiary Guarantor contained herein, in the Notes and in the Subsidiary Guarantee of such Subsidiary Guarantor; (l) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company contained herein and in the Notes; 8.2 AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS AND WAIVERS WITH CONSENT OF HOLDERS. Subject to the Intercreditor Agreement, with the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes (which consent may, but need not, be given in connection with any tender offer or exchange offer for the Notes), by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, each of the Subsidiary Guarantors, when authorized by a Board Resolution, and the Trustee upon Company Request, may enter into amendments, supplements or modifications to this Indenture and the Notes (by indenture or indentures supplemental hereto) or any Collateral Document for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions thereof or of modifying in any manner the rights of the Holders thereunder; provided, however, that no such amendment, supplement or modification shall, without the consent of the Holder of each Outstanding Note affected thereby: (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; 80 (b) reduce the principal of or change the final Stated Maturity of the principal of, any Note, reduce the premium payable upon the redemption or repurchase of any Note, change the time at which any Note may be redeemed or alter any other provisions with respect to the redemption of the Notes, other than provisions relating to Sections 9.15 and 9.16(c) hereof; (c) reduce the rate of interest, including Defaulted Interest, on any Note or change the time stated in any Note or this Indenture for the payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of (or the premium, if any on), or interest or Liquidated Damages, if any, on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the then Outstanding Notes and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated in the Notes; (f) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders of Notes to be paid the principal of, or the premium, if any, or interest or Liquidated Damages, if any, on the Notes or to bring suit to enforce such payment; (g) waive any redemption payment with respect to any Note (other than a payment required by Section 9.15 or 9.16(c) hereof); (h) modify any Subsidiary Guarantee in any manner that, except in accordance with the terms of the Indenture and the Intercreditor Agreement and other Collateral Documents, releases or otherwise impairs or limits the unconditional obligation of the respective Subsidiary Guarantor (or any other Person that has Guaranteed the Notes) to fully and promptly perform the Company's obligations under the Indenture and the Notes, including, without limitation, the payment of principal of, and premium, interest and Liquidated Damages, if any, on, the Notes, when due; (i) make any change to any Note or Subsidiary Guarantee (or any other Guarantee of the Notes) in a manner that causes such Note or Subsidiary Guarantee (or other Guarantee) not to be senior indebtedness that is at least pari passu (subject to the terms of the Intercreditor Agreement) with all unsubordinated and unsecured Indebtedness of the Company or the respective Subsidiary Guarantor (or other person providing such a Guarantee of the Notes), as the case may be; (j) release any Collateral from the Obligations created by the Collateral Documents except as provided in this Indenture and the Intercreditor Agreement and other Collateral Documents; or (k) make any change in the foregoing amendment and waiver provisions. It will not be necessary for any Act of the Holders under this Section to approve the particular form of any proposed amendment, supplement or modification, but it will be sufficient if such Act will approve the substance thereof. 81 8.3 EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article 8 or the modifications thereby of the trusts created by this Indenture, the Trustee will be entitled to receive, and will be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but will not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. 8.4 EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article 8, this Indenture will be modified in accordance therewith, and such supplemental indenture will form a part of this Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder will be bound thereby. 8.5 CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article 8 will conform to the requirements of the Trust Indenture Act as then in effect. 8.6 REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article 8 may, and will if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company will so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company, with the notations of Subsidiary Guarantees thereon executed by the Subsidiary Guarantors, and authenticated and delivered by the Trustee in exchange for Outstanding Notes. 8.7 NOTICE OF SUPPLEMENTAL INDENTURES AND WAIVERS. Promptly after (i) the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 8.2 hereof or (ii) a waiver under Section 4.13 or 9.20 hereof becomes effective, the Company will give notice thereof to the Holders of each Outstanding Note affected, in the manner provided for in Section 14.5 hereof, setting forth in general terms the substance of such supplemental indenture or waiver, as the case may be. ARTICLE 9 COVENANTS 9.1 PAYMENT OF SECURITIES. The Company covenants and agrees for the benefit of the Holders that it will duly and punctually pay the principal of (and premium, if any, on) and interest and Liquidated Damages, if any, on the Notes in The City of New York, 82 New York in accordance with the terms of the Notes and this Indenture. 9.2 MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in The City of New York an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes, the Subsidiary Guarantees and this Indenture may be served. The Corporate Trust Office of the Trustee will be such office or agency of the Company, unless the Company will designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such Office or agency. If at any time the Company will fail to maintain any such required office or agency or will fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office, and the Company hereby appoints the Trustee as its agent to receive all such presentation, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. 9.3 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST. If the Company will at any time act as its own Paying Agent, it will, on or before 11:00 a.m. Eastern Time, on each due date of the principal of (and premium, if any, on) or interest on any of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sum will be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company will have one or more Paying Agents for the Notes, it will on or before 11:00 a.m. Eastern Time, on each due date of the principal of (and premium, if any, on), or interest on, any Notes, deposit with a Paying Agent immediately available funds in a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such funds to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. The Company will cause each Paying Agent (other than the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent will agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of (and premium, if any), interest or Liquidated Damages, if any, on Notes in trust for the benefit of the Persons entitled thereto until such sums will be paid to such Persons or otherwise disposed of as herein provided; 83 (b) give the Trustee notice of any default by the Company (or any other obligor upon the Notes) in the making of any payment of principal (and premium, if any) or interest; and (c) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent will be released from all further liability with respect to such sums. Subject to applicable escheat and abandoned property laws, any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any, on) or interest on any Note and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable will be paid to the Company on Company Request, or (if then held by the Company) will be discharged from such trust; and the Holder of such Note will thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, will thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified herein, which will not be less than 30 days from the date of each publication, any unclaimed balance of such money then remaining will be repaid to the Company. 9.4 CORPORATE EXISTENCE. Except as expressly permitted by Article 7 hereof, Section 9.17 hereof or other provisions of this Indenture, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of the Company and each Restricted Subsidiary; provided, however, that the Company will not be required to preserve any such existence of its Restricted Subsidiaries, rights or franchises, if the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries, taken as a whole, and that the loss thereof is not disadvantageous in any material respect to the Holders. 9.5 PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged, before the same will become delinquent, (i) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Restricted Subsidiary or upon the income, profits or Property of the Company or any Restricted Subsidiary and (ii) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a Lien upon the Property of the 84 Company or any Restricted Subsidiary; provided, however, that the Company will not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate provision has been made in accordance with GAAP. 9.6 MAINTENANCE OF PROPERTIES. The Company will cause all material Properties owned by the Company or any Restricted Subsidiary and used or held for use in the conduct of its business or the business of any Restricted Subsidiary to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted), all as in the judgment of the Company or such Restricted Subsidiary may be necessary so that its or its Restricted Subsidiary's business may be properly and advantageously conducted at all times; provided, however, that nothing in this Section will prevent the Company or any Restricted Subsidiary from discontinuing the maintenance of any of such Properties if such discontinuance is, in the judgment of the Company or such Restricted Subsidiary, as the case may be, desirable in the conduct of the business of the Company or such Restricted Subsidiary and not disadvantageous in any material respect to the Holders. Notwithstanding the foregoing, nothing contained in this Section 9.6 will limit or impair in any way the right of the Company and its Restricted Subsidiaries to sell, divest and otherwise to engage in transactions that are otherwise permitted by this Indenture. 9.7 INSURANCE The Company will at all times keep all of its, and cause its Restricted Subsidiaries to keep their, Properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character and in a similar location is usually so insured by corporations similarly situated and owning like Properties. The Company or any Restricted Subsidiary may adopt such other plan or method of protection, in lieu of or supplemental to insurance with insurers, whether by the establishment of an insurance fund or reserve to be held and applied to make good losses from casualties, or otherwise, conforming to the systems of self-insurance maintained by corporations similarly situated and in a similar location and owning like Properties, as may be determined by the Board of Directors of the Company or such Restricted Subsidiary. 9.8 STATEMENT BY OFFICER AS TO DEFAULT. (a) The Company will deliver to the Trustee, within 90 days after the end of each fiscal year of the Company and within 45 days of the end of each of the first, second and third quarters of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its Restricted Subsidiaries during the preceding fiscal quarter or fiscal year, as applicable, has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of such Officer's knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and no Default or Event of Default has 85 occurred and is continuing (or, if a Default or Event of Default will have occurred, describing all such Defaults or Events of Default of which such Officer may have knowledge and what action the Company is taking or proposes to take with respect thereto). Such Officers' Certificate will comply with Section 314(a)(4) of the TIA. For purposes of this Section 9.8(a), such compliance will be determined without regard to any period of grace or requirement of notice under this Indenture. (b) The Company will, so long as any of the Notes are outstanding, deliver to the Trustee promptly upon any of its Officers becoming aware of any Default or Event of Default an Officers' Certificate specifying such Default or Event of Default and what action the Company proposes to take with respect thereto. 9.9 REPORTS. So long as any Note is Outstanding and the Company is required by the rules and regulations of the SEC, the Company will file with the SEC via the Electronic Data Gathering and Retrieval system ("EDGAR") for public availability (unless the SEC will not accept such a filing), within the time periods specified in the SEC's rules and regulations: o all quarterly and annual reports that would be required to be filed with the SEC on Forms 10-Q and 10-K if it were required to file such reports; and o all current reports that the Company would be required to file with the SEC on Form 8-K if it were required to file such reports. The Company will also concurrently post on its website each such report so filed with the SEC. The Company will not take any action for the purpose of causing the SEC not to accept any such filings via EDGAR or otherwise. All such reports will be prepared in all material respects in accordance with all of the rules and regulations applicable to such reports. Each annual report on Form 10-K will include a report on the Company's consolidated financial statements by a firm of certified independent accountants. If, at any time, the Company is no longer subject to the periodic reporting requirements of the Exchange Act for any reason or is not otherwise required to file with the SEC the reports specified in the first paragraph under this covenant, the Company will instead furnish, or provide to the Trustee and cause the Trustee to furnish at the Company's expense, to the Holders of the Notes the information required in each such report within the time period specified in the SEC's rules and regulations (as if the Company was required to file such report with the SEC); provided, however, the Company will not be required to include any officer's certification which would be required to be filed as an exhibit to such report had such report been filed with the SEC. The Company's quarterly and annual financial information required by the first paragraph under this covenant will include, for any period during which at least one of its Subsidiaries continues to be an Unrestricted Subsidiary, a reasonably detailed presentation, either on the face of the financial statements 86 or in the footnotes thereto, of the Company's financial condition and results of operations and those of its Restricted Subsidiaries separate from the financial condition and results of operations of its Unrestricted Subsidiaries. In addition, the Company agrees that, for so long as any Notes remain outstanding, if at any time it is not required to file with the SEC the reports specified in this first paragraph under this covenant, the Company will furnish to the Holders of Notes and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. 9.10 LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, take the following actions: (i) declare or pay any dividend or make any other payment or distribution (including, without limitation, any payment or distribution in connection with any merger or consolidation involving the Company or any Restricted Subsidiary) on account of the Capital Stock of the Company or any Restricted Subsidiary or to the direct or indirect holders of Capital Stock of the Company or any Restricted Subsidiary in their capacity as such, in each case other than dividends or distributions (A) payable solely in shares of Qualified Capital Stock of the Company or, if all of the Bridge Loan Obligations have been repaid in full, in shares of Qualified Capital Stock of Grey Wolf or (B) declared or paid to the Company or any Restricted Subsidiary; (ii) purchase, redeem or otherwise acquire or retire for value (including without limitation, in connection with any merger or consolidation involving the Company or any Restricted Subsidiary) any Capital Stock of the Company or any Affiliate thereof (other than any Wholly Owned Restricted Subsidiary) in a transaction that does not constitute a Permitted Investment; (iii) make any payment to purchase, redeem, defease or otherwise acquire or retire for value, Subordinated Indebtedness, except (1) for payment of principal and interest at its Stated Maturity, (2) out of a Net Proceeds Deficiency following a Net Proceeds Offer in accordance with Section 9.16 hereof or (3) upon a Change of Control to the extent (and only to the extent) required by the indenture or other agreement or instrument pursuant to which such Subordinated Indebtedness was issued, provided that the Company is then in compliance with its obligations under Section 9.15 hereof or (4) for repayment of the Bridge Loan Obligations in accordance with the provisions of this Indenture, the Bridge Loan and Intercreditor Agreement (including, without limitation, with proceeds from the sale by the Company, any Restricted Subsidiary or Grey Wolf of existing or newly issued shares of Capital Stock of Grey Wolf or from any other Asset Sale); or (iv) make any Investment (other than any Permitted Investment); (such payments or other actions described in (but not excluded from) clauses (i) through (iv) are collectively referred to as "Restricted Payments"), unless at the time of and after giving effect to the proposed Restricted Payment: (1) no Default or Event of Default shall have occurred and be continuing (or would result therefrom), (2) the Company could Incur $1.00 of additional Indebtedness (excluding Permitted Indebtedness) in 87 accordance with Section 9.11 hereof, and (3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments declared or made after the date of this Indenture will not exceed the sum (without duplication) of the following: (A) 50% of the sum of (1) Consolidated Net Income plus (2) non-cash asset impairment charges determined pursuant to GAAP (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenses in any future period) in each case accrued during the period beginning on July 1, 2004 and ending on the last day of the Company's last fiscal quarter ending prior to the date of such proposed Restricted Payment for which internal financial statements are available (or, if such aggregate Consolidated Net Income shall be a loss, minus 100% of such loss), plus (B) 100% of the aggregate Net Cash Proceeds received by the Company after the date of this Indenture by the Company as equity contributions to the Company from a holder of Capital Stock of the Company, plus (C) 100% of the aggregate Net Cash Proceeds received after the date of this Indenture by the Company from the issuance or sale (other than to any of its Restricted Subsidiaries) of shares of Qualified Capital Stock of the Company or any options, warrants or rights to purchase such shares of Qualified Capital Stock of the Company (but excluding any debt security that is convertible into, or in exchange for Qualified Capital Stock of the Company), plus (D) 100% of the aggregate Net Cash Proceeds received after the date of this Indenture by the Company (other than from any of its Restricted Subsidiaries) upon the exercise of any options, warrants or rights to purchase shares of Qualified Capital Stock of the Company, plus (E) 100% of the aggregate Net Cash Proceeds received after the date of this Indenture by the Company from the issuance or sale (other than to any of its Restricted Subsidiaries) of debt securities or shares of Disqualified Capital Stock that have been converted into or exchanged for Qualified Capital Stock of the Company, together with the aggregate net cash received by the Company at the time of such conversion or exchange, plus (F) an amount equal to the sum of (1) the aggregate amount returned in cash or Cash Equivalents to the Company or its Restricted Subsidiaries on or with respect to any Investment (other than a Permitted Investment) made by the Company or any of its Restricted Subsidiaries subsequent to the date of this Indenture in any Person whether through payments of interest, dividends, repayments of loans or advances, or other transfers or distributions of property, in an amount not to exceed the book value of such Investment previously made in such Person that was treated as Restricted Payments, (2) the net cash proceeds received by the Company or its restricted Subsidiaries from the disposition of all or any portion of such Investment (other than to a Subsidiary of the Company) in an amount not to exceed the book value of such Investment previously made in such Person that was treated as 88 Restricted Payments and (3) upon the designation of any Unrestricted Subsidiary as a Restricted Subsidiary, in an amount not to exceed the lesser of (x) the book value of such Investment previously made in such Unrestricted Subsidiary that was treated as Restricted Payments, and (y) the fair market value of such Unrestricted Subsidiary, and, with respect to clauses (x) and (y) of this clause (3), after deducting any Indebtedness of the Unrestricted Subsidiary so designated (and, in each case, as determined in good faith by the Board of Directors of the Company as evidenced by a Board Resolution delivered to the Trustee, unless determined in good faith by the Chief Executive Officer of the Company to not exceed $1,000,000 and evidenced by an Officers' Certificate delivered to the Trustee, and, if so determined to be in excess of $5,000,000, based upon an opinion or appraisal issued by an independent accounting or investment banking firm which is nationally recognized in the United States, or a reputable independent appraisal or petroleum engineering firm which is reasonably satisfactory to the Trustee, as appropriate under the circumstances), only to the extent that the sum of clauses (1), (2) and (3) above does not exceed the aggregate amount of all such Investments made subsequent to the date of this Indenture. (b) Notwithstanding paragraph (a) above, the Company and its Restricted Subsidiaries may take the following actions or make the following payments so long as (in the case of clauses (ii) through (v) and (vii) below, no Default or Event of Default shall have occurred and be continuing or occur as a consequence of actions or payments set forth therein): (i) pay any dividend on any Capital Stock of the Company or any Restricted Subsidiary within 60 days after the date of declaration thereof, if at such declaration date such declaration complied with the provisions of paragraph (a) above (and such payment will be deemed to have been paid on such date of declaration for purposes of any calculation required by the provisions of paragraph (a) above); (ii) repurchase, redeem, retire, defease or otherwise acquire any shares of any class of Capital Stock of the Company or any Restricted Subsidiary, in exchange for, or out of the aggregate net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary) of shares of Qualified Capital Stock of the Company; (iii) repurchase, redeem, repay, defease or otherwise acquire or retire for value any Subordinated Indebtedness in exchange for, or out of the aggregate net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary) of (A) shares of Qualified Capital Stock of the Company or (B) Refinancing Indebtedness; (iv) repurchases by the Company of options to acquire Capital Stock from one or more former officers, directors and employees of the Company or any of its Subsidiaries (or any of their authorized representatives) upon the death, disability or termination of employment or directorship, as applicable, provided that the amount paid by the Company with respect to all such purchases (other than any purchase for which payment was made in Qualified Capital Stock of the Company) from and after the date of this Indenture does not exceed $500,000 in the aggregate for so long as any Note remains outstanding, and provided, 89 further, that, in the case of such options to acquire Capital Stock (other than any such option being purchased with Qualified Capital Stock of the Company), the market price of the Capital Stock for which such options are exercisable is at least 40% lower than the exercise price of such options; (v) the repurchase or redemption of any Indebtedness in the event of a change of control in accordance with provisions similar to the covenant described under Section 9.15 hereof, provided, that, prior to or simultaneously with such repurchase, the Company has made the Change of Control Offer as provided in such covenant with respect to the Notes and has purchased all Notes validly tendered for payment in connection with such Change of Control Offer; (vi) (A) defease or otherwise acquire all of the Outstanding 2003 Notes on the Closing Date and (B) redeem all of the Outstanding 2003 Notes on a date that is no later than 60 days after the Closing Date, and pay related fees and expenses, with all the proceeds from the issuance of the Notes; and (vii) other Restricted Payments in an aggregate amount not to exceed $500,000 from and after the date of this Indenture. The actions described in clause (i) of this paragraph (b) will be Restricted Payments that will be permitted to be taken in accordance with this paragraph (b) but which will reduce the amount that would otherwise be available for Restricted Payments under clause (iv)(C) of paragraph (a) above when declared, (but not also when subsequently paid pursuant to such clause (i)). The actions described in clauses (iii), (iv), (v) and (vii) of this paragraph (b) will be Restricted Payments that will be permitted to be taken in accordance with this paragraph (b) but which will, except with respect to exchanges referred to in such clause (iii), reduce the amount that would otherwise be available for Restricted Payments under clause (iv)(C) of paragraph (a) above. The actions described in clause (ii) of this paragraph (b), and clause (vi) of this paragraph (b) to the extent the actions described in such clause (vi) constitute Restricted Payments, will be Restricted Payments that will be permitted to be taken in accordance with this paragraph (b) and will not reduce the amount that would otherwise be available for Restricted Payments under clause (iv)(C) of paragraph (a) above. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the assets or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment. The fair market value of any assets or securities that are required to be so valued under the terms of this Indenture shall be determined in good faith by the Board of Directors of the Company prior to the making of the respective Restricted Payment and evidenced by a Board Resolution delivered to the Trustee (or, solely with respect to assets and securities in an amount not exceeding $1,000,000, as determined in good faith by the Chief Executive Officer of the Company and evidenced by an Officers' Certificate delivered to the Trustee). If the fair market value so determined exceeds $5,000,000, the Board of Directors' determination must be based upon an opinion or appraisal issued prior to the making of the respective Restricted Payment by an independent accounting or investment banking firm which is nationally recognized in the United States, or a reputable independent appraisal or petroleum engineering firm which is reasonably satisfactory to the Trustee, as appropriate under the circumstances. Not later than (i) the date upon which the Company or any Restricted Subsidiary makes a Restricted Payment in excess of $1,000,000 or upon which the last 90 Restricted Payment of a series of related Restricted Payments exceeding $1,000,000 in the aggregate is made by the Company or any Restricted Subsidiary or (ii) 45 days after the end of any fiscal quarter in which the Company or any Restricted Subsidiary makes Restricted Payments in excess of $1,000,000 in the aggregate (excluding any Restricted Payment for which an Officers' Certificate has previously been delivered to the Trustee as contemplated by clause (i)), the Company will be required to deliver to the Trustee an Officers' Certificate stating that each such Restricted Payment is (or was) permitted and setting forth the basis upon which the required calculations were computed, together with a copy of any such required Board Resolution and/or fairness opinion or appraisal. (c) In computing Consolidated Net Income of the Company under paragraph (a) above, (i) the Company will use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (ii) the Company will be permitted to rely in good faith on the financial statements and other financial data derived from the books and records of the Company that are available on the date of determination. If the Company makes a Restricted Payment which, at the time of the making of such Restricted Payment would in the good faith determination of the Company be permitted under the requirements of this Indenture, such Restricted Payment will be deemed to have been made in compliance with this Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Net Income of the Company for any period. 9.11 LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK. The Company will not, and will not permit any of its Restricted Subsidiaries to, create, incur, assume, Guarantee or otherwise become directly or indirectly liable for the payment of (collectively, "Incur") any Indebtedness (including any Acquired Indebtedness), other than Permitted Indebtedness, or issue any Disqualified Stock, unless (1) at the time of such event and after giving effect thereto and the receipt and application of the funds therefrom, the Company's Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters immediately preceding such event, taken as one period, would have been at least equal to 3.00 to 1.00, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom) as if such additional Indebtedness had been Incurred, or such Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period, (2) no Default or Event of Default shall have occurred and be continuing at the time such Indebtedness is Incurred or such Disqualified Stock is issued or would occur as a consequence of the Incurrence of such Indebtedness or the issuance of such Disqualified Stock and (3) with respect to any such Restricted Subsidiary, it is then a Subsidiary Guarantor and its Subsidiary Guarantee then constitutes a legal, valid and binding obligation of such Subsidiary Guarantor. The amount of any Guarantees by the Company or any Restricted Subsidiary of any Indebtedness of the Company or one or more Restricted Subsidiaries will not be deemed to be Outstanding or Incurred for purposes of this Section 9.11 in addition to the amount of Indebtedness which it Guarantees. 91 Other than to the extent provided in the Intercreditor Agreement, neither the Company nor any Restricted Subsidiary will be permitted to Incur any Indebtedness or other obligation, including Permitted Indebtedness, that is contractually subordinated in right of payment or security (other than Permitted Liens) to any other Indebtedness of the Company or that Restricted Subsidiary, as applicable, unless such Indebtedness is also expressly contractually subordinated in right of payment and security (other than Permitted Liens) to the Notes or the Subsidiary Guarantee of that Restricted Subsidiary, as applicable, on substantially identical terms; provided, however, that no Indebtedness of the Company or any Restricted Subsidiary will be deemed to be contractually subordinated in right of payment or security to any other Indebtedness of the Company or that Restricted Subsidiary solely by virtue of being unsecured, and the provisions of this Section 9.11 shall not prohibit tranches of Indebtedness under the Revolving Credit Facility being subordinated to other tranches of Indebtedness thereunder. 9.12 LIMITATION ON GUARANTEES OF INDEBTEDNESS BY SUBSIDIARIES and other affiliates (a) The Company will not permit any Subsidiary of the Company that is not a Subsidiary Guarantor to Guarantee the payment of any Indebtedness of the Company or any of the Restricted Subsidiaries other than the Notes unless: (1) such Subsidiary simultaneously (A) executes and delivers to the Trustee a supplemental indenture to this Indenture and, if the Registration Rights Agreement is then in effect, a joinder agreement to the Registration Rights Agreement, each in form and substance reasonably satisfactory to the Trustee, providing for such Subsidiary to become a Subsidiary Guarantor under this Indenture and a party to the Registration Rights Agreement and (B) delivers to the Trustee an opinion of counsel, in form and substance reasonably satisfactory to the Trustee, to the effect that such supplemental indenture and joinder agreement have been duly authorized, executed and delivered by such Subsidiary and constitute legal, valid and binding obligations of such Subsidiary; (2) if such Subsidiary is a Restricted Subsidiary, all properties and assets of the kind constituting Collateral then owned by such Subsidiary shall be subject to a valid, enforceable perfected first priority security interest (subject to Permitted Prior Liens) in favor of the Collateral Agent as security for the Note Obligations; and (3) such Subsidiary waives and agrees not to claim or take the benefit or advantage of, in any manner whatsoever, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any Restricted Subsidiary as a result of any payment by such Subsidiary under its Subsidiary Guarantee until such time as the obligations Guaranteed thereby are paid in full; provided that this paragraph shall not be applicable to any Guarantee by any Subsidiary of the Company that (x) existed at the time such Person became a Subsidiary of the Company and (y) was not Incurred in connection with, or in contemplation of, such Person becoming a Subsidiary of the Company. Any Subsidiary Guarantee entered into by a Subsidiary of the Company will be deemed released upon the release or discharge of each Guarantee that resulted in the creation of such Subsidiary Guarantee of the Notes, except a discharge or release by or as a result of payment under any such Guarantee. (b) The Company will not permit any of its other Affiliates to Guarantee the payment of any Indebtedness of the Company or the Restricted Subsidiaries other than the Notes unless: (1) such Affiliate simultaneously (A) executes and delivers to the Trustee a supplemental indenture to this Indenture and, if the Registration Rights Agreement is then in effect, a joinder agreement to the Registration Rights Agreement, each in form and substance reasonably 92 satisfactory to the Trustee, providing for such Affiliate to become a guarantor of the Notes under this Indenture and a party to the Registration Rights Agreement and (B) delivers to the Trustee an opinion of counsel, in form and substance reasonably satisfactory to the Trustee, to the effect that such supplemental indenture and joinder agreement have been duly authorized, executed and delivered by such Affiliate and constitute legal, valid and binding obligation of such Affiliate; and (2) such Affiliate waives and agrees not to claim or take the benefit or advantage of, in any manner whatsoever, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any Restricted Subsidiary as a result of any payment by such Affiliate under its Guarantee until such time as the obligations Guaranteed thereby are paid in full. (c) Notwithstanding clauses (a) and (b) above and the other provisions of this Indenture, any Subsidiary Guarantee Incurred by a Restricted Subsidiary pursuant to this Section 9.12 will provide by its terms that it will be automatically and unconditionally released and discharged upon the terms and conditions set forth in Section 13.3 hereof. 9.13 LIMITATION ON ISSUANCE, SALE AND OWNERSHIP OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The Company (i) will not permit any Restricted Subsidiary to issue any Capital Stock (other than to the Company or a Wholly Owned Restricted Subsidiary) and (ii) will not permit any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to own any Capital Stock of any Restricted Subsidiary, except, in each case, for (a) directors' qualifying shares, (b) Capital Stock of a Restricted Subsidiary organized in a jurisdiction other than in the United States required as a legal matter to be issued to, or owned by, the government of such foreign jurisdiction or individual or corporate citizens of such foreign jurisdiction in order for such Restricted Subsidiary to transact business in such foreign jurisdiction, (c) a sale of Capital Stock of a Restricted Subsidiary effected in accordance with Sections 9.10, 9.11 and 9.16 hereof and only if, immediately after giving effect to such sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect to such sale would have been permitted under Sections 9.10, 9.11 and 9.16 hereof, (d) the issuance of Capital Stock by a Restricted Subsidiary to a Person other than the Company or a Wholly Owned Restricted Subsidiary, which issuance was made in accordance with Sections 9.10, 9.11 and 9.16 hereof and only if, immediately after giving effect to such issuance, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect to such issuance would have been permitted under Sections 9.10 and 9.16 hereof, (e) the ownership of shares of Capital Stock of a Restricted Subsidiary owned by a Person at the time such Restricted Subsidiary became a Restricted Subsidiary or acquired by such Person in connection with the formation of the Restricted Subsidiary; provided, however, that any Capital Stock retained by the Company or a Restricted Subsidiary in the case of clause (c), (d) or (e) will be treated as an Investment for purposes of Section 9.10, if the amount of such shares of Capital Stock represents less than a majority of the Voting Stock of such Restricted Subsidiary. 9.14 LIMITATION ON LIENS. The Company will not and will not permit any Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, or become effective, any Lien of any kind whatsoever, except for Permitted Liens, upon any of their respective 93 Properties, whether owned prior to or acquired after the date of this Indenture, or any income or profits therefrom to secure any Indebtedness. 9.15 PURCHASE OF SECURITIES UPON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes, pursuant to the offer described in Section 9.15(b) hereof (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any (the "Change of Control Purchase Price"), to the date of purchase (the "Change of Control Payment Date"). The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the an offer to the Holders of the Notes to purchase the Notes at the same or a higher purchase price, at the same times and otherwise in substantial compliance with the requirements applicable to a Change of Control Offer made by the Company and purchases all Notes validly tendered and not withdrawn. (b) Within 30 calendar days after the date of any Change of Control, the Company or the Trustee, at the request and the expense of the Company, will send to each Holder, in the manner provided in Section 14.5, a notice (the "Change of Control Notice") prepared by the Company describing the transaction or transactions that constitute the Change of Control and stating: (i) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this Section 9.15, and that all Notes that are timely tendered and not withdrawn will be accepted for payment; (ii) the Change of Control Purchase Price and the Change of Control Payment Date, which date will be a Business Day no earlier than 30 calendar days nor later than 60 calendar days subsequent to the date such notice is mailed; (iii) that any Notes or portions thereof not tendered or accepted for payment will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the Change of Control Purchase Price with respect thereto, all Notes or portions thereof accepted for payment pursuant to the Change of Control Offer will cease to accrue interest from and after the Change of Control Payment Date; (v) that any holder electing to have any Notes or portions thereof purchased pursuant to a Change of Control Offer will be required to surrender such Notes, with the form to elect purchase by the Company pursuant to this Section 9.15 completed, to the Paying Agent at the address specified in the notice, prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (vi) that any holder will be entitled to withdraw such election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a facsimile transmission or letter, setting forth the name of the holder, the principal 94 amount of Notes delivered for purchase and a statement that such holder is withdrawing such holder's election to have such Notes or portions thereof purchased pursuant to the Change of Control Offer; (vii) that any holder electing to have Notes purchased pursuant to the Change of Control Offer must specify the principal amount that is being tendered for purchase, which principal amount must be $1,000 or an integral multiple thereof; (viii) if Definitive Notes have been issued pursuant to Section 2.5, that any holder of Definitive Notes whose Definitive Notes are being purchased only in part will be issued new Definitive Notes equal in principal amount to the unpurchased portion of the Definitive Notes surrendered, which unpurchased portion will be equal in principal amount to $1,000 or an integral multiple thereof; and (ix) any other information necessary to enable any holder to tender Notes and to have such Notes purchased pursuant to this Section 9.15. (c) On the Change of Control Payment Date, the Company will, to the extent lawful: (i) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer; (ii) irrevocably deposit with the Paying Agent, by 11:00 a.m. Eastern Time, on such date, in immediately available funds, an amount equal to the Change of Control Purchase Price in respect of all Notes or portions thereof so accepted; and (iii) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail, in the manner provided in Section 14.5, to each holder of Notes or portions thereof so accepted the Change of Control Purchase Price for such Notes or portions thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. For purposes of this Section 9.15, the Trustee will act as the Paying Agent. (d) Upon surrender and cancellation of a Definitive Note that is purchased in part pursuant to the Change of Control Offer, the Company will promptly issue and the Trustee will authenticate and mail (or cause to be transferred by book entry) to the surrendering Holder of such Definitive Note a new Definitive Note equal in principal amount to any unpurchased portion of the surrendered Definitive Note, if any; provided that each such new Definitive Note will be in a principal amount of $1,000 or an integral multiple thereof. (e) The Company shall comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with a change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 9.15, the Company shall comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Indenture by virtue thereof. (f) The Company shall not and shall not permit any Restricted Subsidiary to, create any restriction that materially impairs the ability of the Company or such Restricted Subsidiary to make a Change of Control Offer or to pay the Change of Control Price to holders of the Notes, other than the restrictions 95 contained in the Intercreditor Agreement, the Revolving Credit Facility and the Bridge Loan. If a Change of Control occurs at a time when the Company is contractually prohibited from purchasing Notes, and it were unable to eliminate this prohibition, it would not be permitted to purchase Notes In such case, the Company's failure to purchase tendered Notes would constitute an Event of Default under this Indenture that would, in turn, constitute a default under the Revolving Credit Facility and the Bridge Loan. 9.16 LIMITATION OF ASSET SALES. (a) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless: (i) the Company or such Restricted Subsidiary, as the case may be, receives aggregate consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets or Capital Stock sold or otherwise disposed of pursuant to the Asset Sale (as determined in good faith by the Board of Directors of the Company and evidenced by a Board Resolution delivered to the Trustee or, solely with respect to Asset Sales in an amount not exceeding $1,000,000, as determined in good faith by the Chief Executive Officer of the Company and evidenced by an Officers' Certificate delivered to the Trustee); (ii) at least 80% of the fair market value of the consideration received by the Company or the Restricted Subsidiary, as the case may be, in respect of such Asset Sale (as determined in good faith by the Board of Directors of the Company and evidenced by a Board Resolution delivered to the Trustee or, solely with respect to Asset Sales in an amount not exceeding $1,000,000, as determined in good faith by the Chief Executive Officer of the Company and evidenced by an Officers' Certificate delivered to the Trustee) consists of cash, Cash Equivalents or properties used in the Oil and Gas Business of the Company or its Restricted Subsidiaries; (iii) in the case of a Sale of Collateral, the Collateral Agent is immediately granted a perfected first priority security interest (subject to Permitted Prior Liens) in the Net Cash Proceeds and other consideration therefor received by the Company or the Restricted Subsidiary, as the case may be, as additional Collateral under the Collateral Documents to secure the Secured Obligations, and, in the case of Net Cash Proceeds, such Net Cash Proceeds must, except as otherwise provided in the Intercreditor Agreement, be deposited into an Asset Sale Proceeds Account, all on terms and pursuant to arrangements reasonably satisfactory to the Collateral Agent in its reasonable determination (which may include, at the Collateral Agent's reasonable request, customary Officers' Certificates and legal opinions), and the Intercreditor Agreement and other Collateral Documents include release provisions requiring the Collateral Agent to release deposits in an Asset Sale Proceeds Account as necessary to permit the Company or its Restricted Subsidiaries to apply such Net Cash Proceeds in the set forth in paragraph (b) of this Section 9.16, unless the Collateral Agent shall have received written notice that a Default or Event of Default has occurred and is continuing; (iv) if the Board of Directors of the Company determines in accordance with either clause (i) or (ii) of this paragraph (a) that the Fair Market Value of the assets or Capital Stock, as the case may be, to be sold or otherwise disposed of pursuant to the Asset Sale or the Fair Market Value of the aggregate consideration to be received by the Company and the Restricted Subsidiaries in respect of the Asset Sale exceeds $5,000,000, the Company shall have delivered to the Trustee an opinion or appraisal with respect to such determination issued by an independent accounting or investment banking firm which is nationally recognized in the United States, or a reputable independent appraisal or petroleum engineering firm which is reasonably satisfactory to the Trustee, as appropriate under the circumstances; and (v) the Company shall have delivered to the Trustee an Officers' Certificate certifying 96 that such Asset Sale complies with clauses (i), (ii), (iii) and (iv) of this Section 9.16(a); provided, that (a) any Asset Sale pursuant to a condemnation, appropriation or other similar taking, including by deed in lieu of condemnation, or pursuant to the foreclosure or other enforcement of a Lien incurred not in violation of this Indenture or exercise by the related lienholder of rights with respect thereto, including by deed or assignment in lieu of foreclosure, will not be required to satisfy the conditions set forth in clauses (i), (ii) and (iv) of this paragraph (and the Officers' Certificate described in clause (v) of this paragraph will not be required to certify as to compliance with such clauses (i), (ii) and (iv)); and (b) any Asset Sale undertaken by the Company or a Restricted Subsidiary at the direction of the Bridge Loan Administrative Agent in accordance with the terms of paragraph (c) of this Section 9.16 shall not be required to satisfy any of the conditions of this paragraph (a), but shall instead be required to fulfill the conditions of such paragraph (c). The amount (without duplication) of any Unsubordinated Indebtedness of the Company or any Restricted Subsidiary that is expressly assumed by the transferee in an Asset Sale and with respect to which the Company or such Restricted Subsidiary, as the case may be, is unconditionally discharged by the holder of such Unsubordinated Indebtedness, will be deemed to be Cash Equivalents for purposes of clause (ii) of this paragraph (a) and shall also be deemed to constitute a repayment of, and a permanent reduction in, the amount of such Unsubordinated Indebtedness for purposes of paragraph (b) of this Section 9.16. (b) If the Company or any Restricted Subsidiary consummates an Asset Sale (other than (i) any Asset Sale undertaken at the direction of the Bridge Loan Administrative Agent or (ii) any Asset Sale with respect to Capital Stock of Grey Wolf, which, so long as any of the Bridge Loan Obligations remain outstanding, will be exclusively applied to repay such outstanding Bridge Loan Obligations pursuant to the terms of the Bridge Loan) or (iii) there is any Event of Loss, the Company or such Restricted Subsidiary may at its option either: (i) no more than 365 days after such Asset Sale, or date upon which any Net Loss Proceeds are received by the Company or a Restricted Subsidiary in respect of such Event of Loss, as the case may be, apply all or any portion of the Net Cash Proceeds or Net Loss Proceeds, as applicable, therefrom to repay Indebtedness outstanding under the Revolving Credit Facility (but not, unless the Company elects to permanently reduce the commitment thereunder; provided, that, the Company will be required to deliver an Officer's Certificate to the Trustee, within 45 days after the end of any fiscal quarter in which any such Net Cash Proceeds or Net Loss Proceeds, as applicable, are so applied, stating for each such application the amount of Indebtedness repaid and the date of such repayment); (ii) no more than 365 days before or after such Asset Sale, or date upon which any Net Loss Proceeds are received by the Company or a Restricted Subsidiary in respect of such Event of Loss, as the case may be, use all or any part of the Net Cash Proceeds or Net Loss Proceeds, respectively, therefrom to make capital expenditures or acquire properties that will be used in the Oil and Gas Business of the Company or its Restricted Subsidiaries, as the case may be, provided, however, that, if any such Capital Expenditure is made or property is acquired prior to the occurrence of such Asset Sale or date upon which any Net Loss Proceeds are received, to the extent amounts were drawn under the Revolving Credit Facility to pay for such acquisition, contemporaneously with the consummation of the Asset Sale or receipt of such Net Loss Proceeds, as the case may be, the Company shall be required to use the Net Cash Proceeds of such Asset Sale or the Net Loss Proceeds of such Event of Loss, as the case may be, to 97 repay (but not, unless the Company elects, permanently reduce) the Revolving Credit Facility to the extent of the amount borrowed; or (iii) no more than 365 days after such Asset Sale or date upon which any Net Loss Proceeds are received by the Company or a Restricted Subsidiary in respect of such Event of Loss, as the case may be, and at such time when no Bridge Loan Obligations are outstanding and there is a ratio of the Company's consolidated PV-10 to Consolidated Indebtedness of at least 1.25 to 1.00, use all or any part of the Net Cash Proceeds or Net Loss Proceeds, respectively, therefrom to, on one Interest Payment Date (but not more than one Interest Payment Date), pay interest on the Notes up to the amount of the semi-annual interest scheduled to be paid on such Interest Payment Date (without regard to any overdue or default interest that may owing as of such Interest Payment Date). Notwithstanding the foregoing, the Net Cash Proceeds received by the Company or any Restricted Subsidiary in respect of any disposition by it of any Capital Stock of Grey Wolf, whether or not such disposition constitutes an Asset Sale, will be required to be applied first to the repayment of any Obligations then outstanding under the Bridge Loan and then, if any Net Cash Proceeds remain after such application, such excess Net Cash Proceeds (to the extent resulting from an Asset Sale) will be subject to the terms described in this paragraph. The amount of such Net Cash Proceeds and Net Loss Proceeds not applied or invested as provided in this paragraph (after the period specified in this paragraph) shall constitute "Excess Proceeds". The Revolving Credit Facility will provide that if the Net Proceeds from an Asset Sale or the Net Loss Proceeds from an Event of Loss are applied to repay Indebtedness outstanding under the Revolving Credit Facility in accordance with clause (i) of the immediately preceding paragraph and the amount of such Indebtedness is not, within 365 days of such application, redrawn under the Revolving Credit Facility to make capital expenditures or acquire properties that will be used in the Oil and Gas Business of the Company or its Restricted Subsidiaries (as certified in an Officers' Certificate delivered to the Trustee prior to the end of such 365 day period), then, at the end of such 365 day period, the lenders' commitment under the Revolving Credit Facility will be permanently reduced on a dollar-for-dollar basis by the amount of such Net Cash Proceeds or Net Loss Proceeds, as the case may be, which were not so redrawn under the Revolving Credit Facility and if the aggregate amount of the Net Cash Proceeds from all other previous Asset Sales, together with the aggregate amount of all Net Loss Proceeds from all other previous Events of Loss, which were similarly applied in accordance with clause (i) of the immediately preceding paragraph and not so redrawn under the Revolving Credit Facility within 365 days of such application equals or exceeds $10,000,000. If as a result of any such reduction in the lenders' commitment under the Revolving Credit Facility there is then any Indebtedness outstanding thereunder in excess of such commitment, the amount of such excess Indebtedness will become immediately due and payable under the Revolving Credit Facility. (c) When the aggregate amount of Excess Proceeds equals or exceeds $5,000,000 (the "Trigger Date"), the Company will be required to make an offer to purchase, from all Holders of the Notes, an aggregate principal amount of Notes equal to such Excess Proceeds as follows: 98 (i) Not later than the 30th day following the Trigger Date, the Company shall give to the Trustee in the manner provided in Section 14.4 hereof, and the Company or the Trustee, at the request and at the expense of the Company, shall give each Holder of the Notes in the manner provided in Section 14.5 hereof, a notice (a "Purchase Notice") offering to purchase (a "Net Proceeds Offer") from all Holders of the Notes the maximum principal amount (expressed as a multiple of $1,000) of Notes that may be purchased using an amount (the "Payment Amount") equal to such Excess Proceeds (subject to proration in the event such Payment Amount is less than the aggregate Offered Price (as hereinafter defined) of all Notes tendered. (ii) The offer price for the Notes will be payable in cash in an amount equal to 100% of the aggregate principal amount of the Notes tendered pursuant to a Net Proceeds Offer, plus accrued and unpaid interest and Liquidated Damages thereon to the date such Net Proceeds Offer is consummated (the "Offered Price"), in accordance with paragraph (iv) of this Section. To the extent that the aggregate Offered Price of the Notes tendered pursuant to a Net Proceeds Offer is less than the Payment Amount relating thereto (such shortfall constituting a "Net Proceeds Deficiency"), the Company may use such Net Proceeds Deficiency, or a portion thereof, for general corporate purposes, subject to the limitations of Section 9.10 hereof. (iii) If the aggregate Offered Price of Notes validly tendered and not withdrawn by Holders thereof exceeds the Payment Amount, Notes to be purchased will be selected on a pro rata basis (with adjustments as appropriate so that only Notes in denominations of $1,000 or multiples thereof will be purchased) by the Trustee based on the aggregate principal amount of Notes so tendered. Upon completion of a Net Proceeds Offer, the amount of Excess Proceeds will be reset to zero. (iv) The Purchase Notice will set forth a purchase date (the "Net Proceeds Payment Date"), which will be on a Business Day no earlier than 30 days nor later than 60 days from the Trigger Date. The Purchase Notice will also state (1) that a Trigger Date with respect to one or more Asset Sales has occurred, that a Net Proceeds Offer is being made and that such Holder has the right to require the Company to repurchase such Holder's Notes at the Offered Price subject to the limitations described in the foregoing paragraph (iii), (2) any information regarding such Net Proceeds Offer required to be furnished pursuant to Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder, (3) that any Note, or portion thereof, not tendered or accepted for payment will continue to accrue interest, (4) that, unless the Company defaults in depositing money with the Paying Agent in accordance with the last paragraph of clause (iv) of this Section 9.16, or payment is otherwise prevented, any Note, or portion thereof, accepted for payment pursuant to the Net Proceeds Offer will cease to accrue interest from and after the Net Proceeds Payment Date, and (5) the instructions a Holder must follow in order to have his Notes repurchased in accordance with paragraph (iv) of this Section. (d) Holders electing to have Notes or portions thereof purchased pursuant to the Net Proceeds Offer will be required to surrender such Notes to the Paying Agent at the address specified in the Purchase Notice prior to the close of business on the third Business Day the Net Proceeds Payment Date. Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day the Net Proceeds Payment Date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Notes delivered for purchase by the Holder as to 99 which his election is to be withdrawn and a statement that such Holder is withdrawing his election to have such Notes or portions thereof purchased pursuant to the Net Proceeds Offer. Holders of Definitive Notes whose Notes are purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion will be equal to $1,000 or an integral multiple thereof. On the Net Proceeds Payment Date, the Company will, to the extent lawful, (1) accept for payment all Notes or portions thereof validly tendered pursuant to the Net Proceeds Offer in an aggregate principal amount equal to the Payment Amount or such lesser amount of Notes as has been tendered, (2) irrevocably deposit with the Paying Agent by 11:00 a.m. Eastern Time, immediately available funds sufficient to pay the Purchase Price of all Notes or portions thereof so tendered in an aggregate principal amount equal to the Payment Amount or such lesser amount and (3) deliver or cause to be delivered to the Trustee the Notes so accepted. The Paying Agent will promptly send, in the manner provided in Section 14.5, to Holders of the Notes so accepted payment in an amount equal to the Net Proceeds Offer Purchase Price, and the Company will execute and the Trustee will authenticate and mail or make available for delivery to such Holders a new Note equal in principal amount to any unpurchased portion of the Note which any such Holder did not surrender for purchase. Any Notes not so accepted will be promptly mailed or delivered to the Holder thereof. The Company will announce the results of a Net Proceeds Offer on or as soon as practicable after the Net Proceeds Payment Date. For purposes of this Section 9.16, the Trustee will act as the Paying Agent. (e) Except for the Intercreditor Agreement, the Revolving Credit Facility, and the Bridge Loan, the Company will not, and will not permit any Restricted Subsidiary to, enter into or suffer to exist any agreement that would place any restriction of any kind (other than pursuant to law or regulation) on the right of the Company to make a Net Proceeds Offer following any Asset Sale. The Company will be required to comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder, if applicable, in the event that an Asset Sale occurs and the Company is required to purchase Notes as described in this Section 9.16. To the extent that the provisions of any securities laws or regulations conflict with the provisions relating to the Net Proceeds Offer, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Section 9.16 by virtue thereof. 9.17 LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of Property or services) with any Affiliate of the Company (other than the Company or a Restricted Subsidiary) unless: (i) such transaction or series of related transactions is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than would be available in a comparable transaction in arm's length dealings with a Person that is not an Affiliate of the Company or such Restricted Subsidiary, (ii) with respect to a transaction or series of related transactions involving payments in excess of $500,000 in the aggregate, the Company shall deliver an Officers' Certificate to the Trustee certifying that such transaction or series of transactions complies with clause (i) above, (iii) without limiting clause (ii) above with respect to a transaction or series of 100 related transactions involving payments in excess of $1,000,000 in the aggregate, such transaction or series of related transactions shall have been approved by the Board of Directors of the Company and at least two-thirds of the independent directors of the Company then in office and evidenced by a Board Resolution delivered to the Trustee; and (iv) without limiting clause (ii) or (iii), with respect to a transaction or series of related transactions involving payments of $5,000,000 or more in the aggregate, (a) the Company shall have received the written opinion of an independent accounting or investment banking firm which is nationally recognized in the United States, or a reputable independent appraisal or petroleum engineering firm which is reasonably satisfactory to the Trustee, as appropriate under the circumstances, that such transaction or series of transactions is fair, from a financial point of view, to the Company or such Restricted Subsidiary; provided, however, that the foregoing restriction will not apply to: (1) transactions exclusively between or among the Company and/or any of its Restricted Subsidiaries, (2) transactions consummated pursuant to any agreement existing on the Closing Date (other than the corporate services agreement between the Company and Grey Wolf), including any amendment to, or replacement of, such existing agreement to the extent such amendment or replacement is not more disadvantageous to the holders of the Notes in any material respect than such existing agreement as in effect on the Closing Date, (3) for so long as Grey Wolf is a Subsidiary of the Company, transactions consummated pursuant to the corporate services agreement between the Company and Grey Wolf, including any amendment to, or replacement of, such agreement to the extent such amendment or replacement is not more disadvantageous to the holders of the Notes in any material respect than such agreement as in effect on the Closing Date, (4) the payment of reasonable and customary regular fees to directors of the Company or any of its Restricted Subsidiaries who are not employees of the Company or any Affiliate thereof as determined in good faith by the Board of Directors of the Company, (5) payments made under the terms of the employment agreements and employee compensation and other benefit arrangements of the Company or any Restricted Subsidiary in the ordinary course of business, (6) indemnities of officers and directors of the Company or any Subsidiary thereof consistent with such Person's charter, bylaws or other constituent documents and applicable statutory provisions, (7) Restricted Payments and Permitted Investments, in each case, permitted by the provisions of this Indenture, (8) any Guarantee or assumption by the Company or any of its Restricted Subsidiaries of Indebtedness of the Company or any of its Restricted Subsidiaries Incurred in accordance with the terms of this Indenture; or (9) the issuance of Qualified Capital Stock of the Company. 9.18 LIMITATION ON SALE-LEASEBACK TRANSACTIONS The Company will not, and will not permit any Restricted Subsidiary to, enter into any Sale-Leaseback Transaction involving any of its Properties whether now owned or hereafter acquired, unless: (i) the Company or such Restricted Subsidiary, as applicable, would be entitled to (a) Incur Indebtedness in an amount equal to the Attributable Indebtedness relating to such Sale Leaseback Transaction under the Consolidated Fixed Charge Coverage Ratio test in Section 9.11 and (b) create a Lien on the properties and assets that are the subject of such Sale Leaseback Transaction to secure such Attributable Indebtedness pursuant to Section 9.14; 101 (ii) the gross proceeds of such Sale-Leaseback Transaction are at least equal to the Fair Market Value of the Properties that are the subject of such Sale-Leaseback Transaction (as determined in good faith by the Board of Directors and evidenced by a Board Resolution delivered to the Trustee or, solely with respect to a Sale-Leaseback Transaction in an amount not to exceed $1,000,000, determined in good faith by the Chief Executive Officer of the Company and evidenced by an Officers' Certificate delivered to the Trustee); (iii) if the Fair Market Value of the Properties subject to such Sale-Leaseback Transaction is determined in accordance with clause (ii) above to be in excess of $5,000,000, the Company shall deliver to the Trustee an opinion or appraisal with respect to such determination issued by an independent accounting or investment banking firm which is nationally recognized in the United States, or a reputable independent appraisal or petroleum engineering firm which is reasonably satisfactory to the Trustee, as appropriate under the circumstances; and (iv) the transfer of such properties and assets in such Sale-Leaseback Transaction is permitted by, and the Company or such Restricted Subsidiary, as the case may be, applies the proceeds of such Sale-Leaseback Transaction in compliance with the covenant described under Section 9.16. 9.19 LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to: (i) pay dividends, in cash or otherwise, or make any other distribution on or in respect of its Capital Stock to the Company or any other Restricted Subsidiary; (ii) make loans or advances to the Company or any other Restricted Subsidiary to pay any Indebtedness owed to the Company or any other Restricted Subsidiary; (iii) make an investment in the Company or any other Restricted Subsidiary; or (iv) transfer any of its Properties to the Company or any other Restricted Subsidiary, except in each instance for such encumbrances or restrictions pursuant to: (a) applicable law, (b) this Indenture, the Notes, the Collateral Documents, the Revolving Credit Facility or the Bridge Loan, (c) agreements in effect as of the Closing Date to the extent and in the manner such encumbrances or restrictions are in effect on such date, (d) any agreement or other instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any other Person, or the properties or assets of any other Person, other than the Person, or the property or assets of the Person, so acquired, (e) customary non-assignment restrictions in leases and licenses relating solely to the property covered thereby and entered into in the ordinary course of business, (f) any agreement for the sale or other disposition of a Restricted Subsidiary or its assets not otherwise prohibited by this Indenture that restricts transactions by the Restricted Subsidiary solely with respect to shares of Capital Stock of the Restricted Subsidiary or such assets pending such sale or other disposition, provided that any encumbrance or restriction pursuant to such agreement by its terms lapses no later than 180 days after the date of such agreement, (g) customary non-assignment restrictions in joint venture agreements, Permitted Farmout Agreements or other similar agreements not otherwise prohibited by this Indenture relating solely to the equity interests in the joint venture or similar entity, or solely to the Farmout Property in the case of a Permitted Farmout Agreement, and in each case entered into in the ordinary course of 102 business, (h) provisions in an agreement or instrument to governing a Permitted Lien that limit the ability of the Company or any Restricted Subsidiary to dispose of assets subject to that Permitted Lien, or (i) any agreement governing Refinancing Indebtedness that extends, renews, refinances or replaces Indebtedness issued, assumed or incurred pursuant to any of the agreements referred to in the foregoing clauses (b) through (h); provided that the provisions relating to such encumbrance or restriction contained in such agreement governing Refinancing Indebtedness are no less favorable to the holders of the Notes as determined by the Board of Directors of the Company in its reasonable and good faith judgment than those under or pursuant to the applicable agreement referred to in the foregoing clauses (b) through (h). 9.20 WAIVER OF CERTAIN COVENANTS. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 9.5 - 9.12, 9.14, 9.15, 9.17, 9.18, and 9.19 hereof if, before or after the time for such compliance, the Holders of at least a majority in aggregate principal amount of the Outstanding Notes and the Subsidiary Guarantors, by Act of such Holders and written agreement of the Subsidiary Guarantors, waive such compliance in such instance with such term, provision or condition, but no such waiver will extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver will become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition will remain in full force and effect. 9.21 LIMITATION ON RESTRICTIVE COVENANTS. Notwithstanding any other provision of this Indenture, the restrictive covenants set forth herein, including, without limitation, those described under Section 9.10 hereof, shall be and shall be deemed limited to the extent necessary so that the creation, existence and effectiveness of such restrictive covenants shall not result in a breach of Section 9.19 of the this Indenture, which limits dividend and other payment restrictions affecting certain Subsidiaries of the Company. ARTICLE 10 REDEMPTION OF SECURITIES 10.1 RIGHT OF REDEMPTION. The Notes may be redeemed, at the election of the Company, as a whole or from time to time in part, at any time after April 28, 2007, upon not less than 30 nor more than 60 days' notice to each Holder of Notes to be redeemed, subject to the conditions and at the Redemption Prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest and Liquidated Damages, if any, to the applicable Redemption Date. Year Percentage ---- ---------- From April 29, 2007 to April 28, 2008...... 104.00% From April 29, 2008 to April 28, 2009...... 102.00% After April 28, 2009....................... 100.00% 103 Notwithstanding the foregoing, at any time prior to April 29, 2007, the Company may, at its option and subject to any restriction or other provisions relating thereto contained in the Revolving Credit Facility, on any one or more occasions redeem up to 35% of the original aggregate principal amount of the Notes with the Net Cash Proceeds of one or more Qualified Equity Offerings at a redemption price equal to the product of (x) the principal amount of the Notes being so redeemed and (y) a redemption price factor of 1.00 plus the per annum interest rate on the Notes (expressed as a decimal) on the applicable redemption date, plus accrued and unpaid interest to the applicable redemption date, provided that (i) at least 65% of the original aggregate principal amount of the Notes remains Outstanding after each such redemption; and (ii) any such redemption occurs within 90 days after the closing of such Qualified Equity Offering. 10.2 PPLICABILITY OF ARTICLE. Redemption of Notes at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, will be made in accordance with such provision and, the extent applicable, this Article 10. 10.3 ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Company to redeem any Notes pursuant to Section 10.1 hereof will be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company will, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice will be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Notes to be redeemed and will deliver to the Trustee such documentation and records as will enable the Trustee to select the Notes to be redeemed pursuant to Section 10.4 hereof. Any election to redeem Notes will be revocable until the Company gives a notice of redemption pursuant to Section 10.5 hereof to the Holders of Notes to be redeemed. 10.4 SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED. If less than all the Notes are to be redeemed, the particular Notes to be redeemed will be selected not less than 30 days nor more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Notes not previously called for redemption, pro rata or by any other method that the Trustee deems fair and appropriate and which may provide for the selection for redemption of portions of the principal of Notes; provided, however, that any such partial redemption will be in integral multiples of $1,000. The Trustee will promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes will relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the principal amount of such Note which has been or is to be redeemed. 10.5 NOTICE OF REDEMPTION. 104 Notice of redemption will be given in the manner provided for in Section 14.5 hereof not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Notes to be redeemed. All notices of redemption will state: (a) the Redemption Date; (b) the Redemption Price; (c) if less than all Outstanding Notes are to be redeemed, the identification (and, in the case of a partial redemption, the principal amounts) of the particular securities to be redeemed; (d) that on the Redemption Date the Redemption Price (together with accrued and unpaid interest and Liquidated Damages, if any, to the Redemption Date payable as provided in Section 10.7 hereof) will become due and payable upon each such Note, or the portion thereof, to be redeemed, and that, unless the Company defaults in the payment of the Redemption Price and any applicable accrued interest, interest thereon will cease to accrue on and after said date; (e) the place or places where such Notes are to be surrendered for payment of the Redemption Price; and (f) the CUSIP number, if any. Notice of redemption of Notes to be redeemed at the election of the Company will be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. Failure to give such notice by mailing to any Holder of Notes or any defect therein will not affect the validity of any proceedings for the redemption of other Notes. 10.6 DEPOSIT OF REDEMPTION PRICE. On or before 11:00 a.m. Eastern Time, on any Redemption Date, the Company will deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.3 hereof) an amount of money sufficient to pay the Redemption Price of, and accrued and unpaid interest on, all the Notes which are to be redeemed on such Redemption Date. 10.7 NOTES PAYABLE ON REDEMPTION DATE. Notice of redemption having been given as aforesaid, the Notes so to be redeemed will, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued and unpaid interest, if any, to the Redemption Date), and from and after such date (unless the Company will default in the payment of the Redemption Price and accrued and unpaid interest) such Notes will cease to bear interest. Upon surrender of any such Note for redemption in accordance with said notice, such Note will be paid by the Company at the Redemption Price, together with accrued and unpaid interest, if any, to the Redemption Date; provided, however, that installments of interest whose 105 Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Notes, or one or more Predecessor Notes, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions hereof. If any Note called for redemption will not be so paid upon surrender thereof for redemption, the principal (and premium, if any) will, until paid, bear interest from the Redemption Date at the rate borne by the Notes. 10.8 NOTES REDEEMED IN PART. Any Note which is to be redeemed only in part will be surrendered at the office or agency of the Company maintained for such purpose pursuant to Section 10.2 hereof (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company will execute, and the Trustee will authenticate and deliver to the Holder of such Note without service charge, a new Note or Notes of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal amount of the Note so surrendered. ARTICLE 11 COLLATERAL AND COLLATERAL DOCUMENTS 11.1 Collateral Documents. (a) As general and continuing collateral security for the due satisfaction of all Obligations of the Company and its Restricted Subsidiaries under this Indenture, the Notes and the Guarantees and the due performance by the Company and its Restricted Subsidiaries of their other Obligations hereunder and thereunder, the Company and the Restricted Subsidiaries are granting Liens (subject to no Liens, other than Permitted Prior Liens) on the Collateral pursuant to the Intercreditor Agreement and the other Collateral Documents. (b) The Company covenants and agrees that it and its Restricted Subsidiaries shall at all times have, full right, power and lawful authority to grant, bargain, sell, release, convey, hypothecate, assign, mortgage, pledge, transfer and confirm the Property constituting the Collateral pursuant to the Intercreditor Agreement and the other Collateral Documents to which such Persons are party, free and clear of all Liens (other than Permitted Prior Liens), and that (i) it will forever warrant and defend the title to the same against the claims of all Persons (except as to Permitted Liens), (ii) it and such of its Restricted Subsidiaries, as applicable, will execute, acknowledge and deliver to the Trustee such further assignments, transfers, assurances or other instruments as the Trustee may reasonably require and (iii) it and such of its Restricted Subsidiaries, as applicable, will do or cause to be done all such acts as may be reasonably required by the Trustee, to confirm to the Trustee such Lien on the Collateral, or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of the Intercreditor Agreement and the other Collateral Documents, this Indenture and the Notes. The Company further covenants and agrees that the Intercreditor Agreement and each of the Collateral Documents, as applicable, creates or will create (when delivered) a shared first priority perfected security interest (to the extent 106 attainable by filing, recordation or possession, and subject to Permitted Prior Liens) in the Collateral subject thereto to secure the Note Obligations. The provisions of this Article 11 shall all be subject to the terms of the Intercreditor Agreement to the extent applicable. (c) In the event that the Company or any Restricted Subsidiary at any time acquires or otherwise owns any Property of the kind included in the Collateral that is not subject to a valid and enforceable first priority perfected security interest (subject to Permitted Prior Liens) in favor of the Collateral Agent as security for the Note Obligations, then the Company shall, or shall cause that Restricted Subsidiary to, as soon as practicable, but in any event within 15 days with respect to clauses (1) and (2) below, and within 30 days with respect to clauses (3) and (4) below, of the earlier of such acquisition or of the day an officer of the Company or a Restricted Subsidiary has knowledge or should have reasonably known of any such deficiency with respect to any such property or asset: (1) execute and deliver to the Collateral Agent one or more joinder agreements to the applicable Collateral Documents and any other security agreement, pledge agreement, stock power or other instrument requested by the Collateral Agent, each in form and substance reasonably satisfactory to the Collateral Agent, required to grant a security interest in such Collateral in favor of the Collateral Agent for the benefit of the holders of the Note Obligations; (2) deliver to the Collateral Agent and the Trustee one or more Opinions of Counsel reasonably satisfactory to the Collateral Agent and the Trustee with respect to the matters set forth in clause (1) above; (3) cause the Liens granted in each Collateral Document to be duly perfected first priority security interests (subject to Permitted Prior Liens) in favor of the Collateral Agent, including by pledging any Capital Stock constituting such Collateral as appropriate, and cause each other Lien upon such Collateral to be (a) released, unless it is a Permitted Prior Lien, or (b) subordinated, whether by agreement or operation of law, to the Collateral Agent's Liens for the benefit of holders of the Note Obligations if it is a Permitted Lien but not a Permitted Prior Lien; and (4) deliver to the Collateral Agent and the Trustee one or more Opinions of Counsel reasonably satisfactory to the Collateral Agent and the Trustee with respect to lien perfection matters set forth in clause (3) above. 11.2 Recording. Subject to the terms of the Intercreditor Agreement, the Company shall cause, at the Company's expense, each Collateral Document, and all amendments or supplements thereto, to be registered, recorded and filed and/or re-recorded and/or re-filed and/or renewed in such manner and in such place or places, if any, as may be reasonably required by the Trustee in order to preserve, protect and maintain the perfected Liens (subject to no Liens, other than Permitted Liens) created by the Collateral Documents on the Collateral. The Company shall pay all mortgage, mortgage recording, stamp, intangible or other similar taxes, charges or fees required to be paid by any Authority under applicable Legal 107 Requirements in connection with the execution, delivery, recordation, filing, perfection or enforcement of any of the Collateral Documents. 11.3 Possession of the Collateral. (a) Except after the occurrence and during the continuation of an Event of Default, the Company or the relevant Restricted Subsidiary may possess, manage, operate and enjoy, as applicable, the Collateral in accordance with the terms of this Indenture, the Notes, the Guarantees and the Collateral Documents. (b) Notwithstanding the foregoing, all amounts received by the Trustee, if any, as proceeds of any part of the Collateral (including Net Cash Proceeds in the case of an Asset Sale and Net Loss Proceeds in the case of an Event of Loss) and all amounts of money, securities, letters of credit and other evidences of Indebtedness deposited with or held by the Trustee in accordance with this Indenture and any Collateral Document shall be held by the Trustee, if any, as security for the Obligations of the Company and the Subsidiary Guarantors, if any, under this Indenture, the Notes, any Guarantees and the Collateral Documents until applied in accordance with the terms of this Indenture and the Intercreditor Agreement. 11.4 Suits to Protect the Collateral. Subject to the provisions of the Intercreditor Agreement, the Trustee shall have power to institute in its name and to maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts which may be unlawful or in violation of this Indenture or any of the Collateral Documents, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral and in the principal, interest, issues, profits, rents, revenues and other income arising therefrom, including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid, if the enforcement of, or compliance with, such enactment, rule or order would impair the security under any of the Collateral Documents, or be prejudicial to the interests of the Holders or the Trustee. 11.5 Release of Collateral. (a) The Trustee shall not at any time release, or authorize the Collateral Agent or any other Person to release, Collateral from the Liens created by the Collateral Documents unless such release is in accordance with the provisions of this Indenture and the Collateral Documents. (b) The release of any Collateral from the Lien of the Collateral Documents shall not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to this Indenture and the Collateral Documents. To the extent applicable, the Company shall comply with Section 314(d) of the TIA relating to the release of property from the Lien of the Collateral Documents and relating to the substitution therefor of any property to be subjected to the Lien of the Collateral Documents. Any certificate or opinion required by Section 314(d) of the TIA may be made by an Officer of the Company, except in cases where Section 314(d) of the TIA requires that such certificate or opinion be made by an 108 independent person, which person shall be an independent engineer, appraiser or other expert selected by the Company. 11.6 Specified Releases of Collateral. (a) Satisfaction and Discharge; Defeasance. The Company and the Restricted Subsidiaries shall be entitled to obtain a full release of the Collateral from the Liens of the Collateral Documents with respect to the Note Obligations upon payment in full of all principal, premium, if any, interest on the Notes and of all other Obligations for the payment of money due and owing to the Trustee or the Holders under this Indenture, the Notes, the Guarantees and the Collateral Documents, or upon compliance with the conditions precedent set forth in Article 12 hereof for Legal Defeasance or Covenant Defeasance. Upon such payment or upon delivery by the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel, each to the effect that such conditions precedent have been complied with (and which may be the same Officers' Certificate and Opinion of Counsel required by Article 12), together with such documentation, if any, as may be required by the TIA (including, without limitation, Section 314(d) of the TIA) or reasonably required by the Trustee prior to the release of such Collateral, the Trustee shall forthwith take all action that is necessary or reasonably requested by the Company (in each case at the expense of the Company) to release and reconvey to the Company without recourse all of the Collateral, and shall deliver such Collateral in its possession to the Company and shall execute and deliver to the Company releases and satisfactions, in recordable form, to the extent reasonably requested by the Company. (b) Releases of Collateral in Connection with Asset Sales. The Company and the Restricted Subsidiaries shall be entitled to obtain a release of, and the Trustee shall release, items of Collateral (including property and assets owned by a Restricted Subsidiary of which the Capital Stock is being sold in compliance with the terms of this Indenture and which following such sale will not be a Restricted Subsidiary), other than certain Trust Monies, that are subject to an Asset Sale or other disposition as provided under Section 11.7 hereof (the "Released Collateral") upon compliance with the conditions precedent that the Company shall have delivered to the Collateral Agent, with a copy to the Trustee, the following: (i) a notice from the Company requesting release of Released Collateral (a "Company Notice") which (A) specifically describes the proposed Released Collateral; (B) specifies the fair market value of such Released Collateral (which, in the case of a sale of Capital Stock of a Restricted Subsidiary resulting in it no longer being a Restricted Subsidiary, means the fair market value of such Capital Stock) as of a date within 60 days of such notice (as determined in good faith by the Board of Directors of the Company and evidenced by a Board Resolution delivered to the Collateral Agent and the Trustee or, solely with respect to the Released Collateral in an amount not exceeding $1.0 million, as determined in good faith by the Chief Executive Officer of the Company and evidenced by an Officers' Certificate delivered to the Collateral Agent and the Trustee); 109 (C) states (i) that the consideration to be received in respect of such Released Collateral is at least equal to the fair market value of such Released Collateral (which, in the case of a sale of Capital Stock of a Restricted Subsidiary resulting in it no longer being a Restricted Subsidiary, means the fair market value of such Capital Stock) or (ii) with respect to an interest in Farmout Property to be conveyed to a farmee under a Farmout Agreement, that such Farmout Agreement is a Permitted Farmout Agreement; (D) states that the release of such Released Collateral shall not materially and adversely impair the value of the remaining Collateral, taken as a whole, or interfere with the Collateral Agent's ability to realize such value and will not impair the maintenance and operation of the remaining Collateral, taken as a whole; (E) confirms the sale or other disposition of, or an agreement to sell or otherwise dispose of, such Released Collateral in a bona fide sale to a person that is not an Affiliate of the Company or, in the event that such sale or other disposition is to a person that is an Affiliate of the Company, confirming that such sale or other disposition is made in compliance with Section 9.17; (F) certifies that such Asset Sale or other disposition of the Released Collateral complies with the terms and conditions of this Indenture and the Intercreditor Agreement, including, without limitation, Section 9.16 hereof; and (G) in the event that there is to be a substitution of property for such Collateral subject to the Asset Sale or other disposition, specifies the property intended to be substituted for the Collateral to be sold or disposed of and that such property will be subject to the Liens under the Collateral Documents. (ii) a certificate certifying that (A) such sale or other disposition covers only Collateral requested to be released or other property which is not Collateral; (B) all Net Cash Proceeds, if any, from the sale or other disposition of any of such Released Collateral will be applied pursuant to the provisions of this Indenture and the Intercreditor Agreement and other Collateral Documents in respect of Asset Sales and other dispositions of Collateral to the extent applicable thereto; (C) there is no Default or Event of Default under this Indenture (and no "default" or "event of default" under the Revolving Credit Facility or the Bridge Loan) in effect on the date thereof; (D) the release of the proposed Released Collateral will not result in a Default or Event of Default under this Indenture (or a "default" or "event of default" under the Revolving Credit Facility or the Bridge Loan); 110 (E) the release of the proposed Released Collateral complies with the TIA; and (F) all conditions precedent in this Indenture and the Intercreditor Agreement and other Collateral Documents relating to the release of the proposed Released Collateral have been complied with. (iii) if the fair market value of such Released Collateral (which, in the case of a sale of Capital Stock of a Restricted Subsidiary resulting in it no longer being a Restricted Subsidiary, means the fair market value of such Capital Stock) exceeds $1,000,000 (as specified in the notice to be provided pursuant to clause (i)(B) above), an opinion of counsel, in form and substance reasonably satisfactory to the Collateral Agent and the Trustee, stating that such release is permitted under and complies with the terms of this Indenture and the Intercreditor Agreement and other Collateral Documents and all conditions precedent thereunder to such release have been complied with; (iv) if the fair market value of such Released Collateral (which, in the case of a sale of Capital Stock of a Restricted Subsidiary resulting in it no longer being a Restricted Subsidiary, means the fair market value of such Capital Stock) exceeds $5,000,000 million (as specified in the notice to be provided pursuant to clause (i)(B) above), an opinion or appraisal with respect to the determination of such fair market value issued by an independent accounting or investment banking firm which is nationally recognized in the United States, or a reputable independent appraisal or petroleum engineering firm which is reasonably satisfactory to the Collateral Agent and the Trustee, as appropriate under the circumstances; (v) if such Released Collateral is an interest in Farmout Property to be conveyed to a farmee under a Permitted Farmout Agreement, such certificates and board resolutions, if any, required by the definitions of Farmout Property Value and Permitted Farmout Agreement; and (vi) all documentation required by the TIA, if any, prior to the release by the Collateral Agent of the Released Collateral, and, in the event there is to be a substitution of property for such Collateral, all documentation required by the TIA to effect the substitution of such new Collateral and to subject such new Collateral to valid and enforceable first priority perfected security interests (subject to Permitted Prior Liens) granted by the relevant Collateral Documents, and all documents required by Section 11.1 hereof with respect to such new Collateral. Upon compliance by the Company with the conditions precedent set forth above, the Trustee shall cause to be released and reconveyed to the Company without recourse, the Released Collateral and shall deliver any such Released Collateral in its possession to the Company and shall execute and deliver to the Company at the Company's expense releases and satisfactions, in recordable form, to the extent reasonably requested by the Company. (c) Releases of Collateral in Connection with Events of Loss. The Company and the Restricted Subsidiaries shall be entitled to obtain a release of, and the Trustee shall release, items of Collateral subject to an Event of Loss (other than Trust Monies constituting Net Loss Proceeds from an Event of Loss with respect to Collateral, which Trust Monies are subject to release from the 111 Lien of the Collateral Documents as provided under Article 12 hereof) upon compliance with the conditions precedent that the Company shall have delivered to the Collateral Agent, with a copy to the Trustee, the following: (i) a certificate of the Company certifying that (A) such Collateral is the subject of an Event of Loss and the amount of the Net Loss Proceeds received in connection therewith; (B) if applicable, that such property has been taken by Condemnation; (C) in the case of a taking by Condemnation, that the award for the property so taken has become final and that an appeal from such award is not advisable in the interests of the Company or the Holders; and (D) that all conditions precedent herein and in the Collateral Documents provided for relating to such release have been complied with; (ii) the Net Loss Proceeds to be held as Trust Monies subject to the disposition thereof pursuant to Article 12 hereof; and (iii) all documentation required by the TIA (including, without limitation, Section 314(d) of the TIA), if any, prior to the release of Collateral by the Trustee. In any proceedings for the Condemnation of any Collateral, the Trustee may be represented by counsel who may be counsel for the Company. Upon compliance by the Company with the conditions precedent set forth above, the Trustee shall cause to be released and reconveyed without recourse to the Company the Collateral which is the subject of such Event of Loss, and shall deliver such Collateral in its possession to the Company and shall execute and deliver to the Company at the Company's expense releases and satisfactions, in recordable form, to the extent reasonably requested by the Company. 11.7 Disposition of Collateral Without Release. Notwithstanding the provisions of Sections 11.5 and Section 11.6 hereof, the Intercreditor Agreement, and the Collateral Documents and subject to Sections 11.8 and Section 14.10 hereof, so long as no Event of Default under this Indenture (or "event of default" under each of the Revolving Credit Facility and the Bridge Loan) exists or no Default or Event of Default under this Indenture (or "default" or "event of default" under each of the Revolving Credit Facility and the Bridge Loan), would result therefrom and so long as such transaction would not violate the Intercreditor Agreement and other Collateral Documents, the Company and its Restricted Subsidiaries may, to the extent permitted by applicable law, without any prior release or consent by the Trustee: (1) dispose of equipment and other assets included in the Collateral that has become worn out, defective or obsolete or not used or useful in the business of the Company or any Restricted Subsidiary and which is, to the extent required 112 by the Intercreditor Agreement or other Collateral Documents, replaced by property of substantially equivalent or greater value which becomes subject to the Lien of any of the Collateral Documents; (2) sell, lease or abandon any undeveloped oil and gas property subject to the Lien of any of the Collateral Documents or any other oil and gas property subject to the Lien of any of the Collateral Documents that is not capable of production in economic quantities; (3) terminate, cancel, amend or otherwise modify any contract subject to the Lien of any of the Collateral Documents; (4) surrender or modify any license or permit subject to the Lien of any of the Collateral Documents; (5) alter, repair, replace, change the location and position of and add to the structures, equipment, fixtures and appurtenances on any property subject to the Lien of any of the Collateral Documents; or (6) sell hydrocarbons or other mineral products for value. The Company shall execute and deliver to the Collateral Agent, within 30 calendar days following the end of each six-month period beginning on December 1, 2004, a certificate to the effect that all releases and withdrawals during the preceding six-month period with respect to which no release or consent of the Collateral Agent was obtained were in the ordinary course of the business of the Company and the Restricted Subsidiaries and were permitted by this Indenture, the Intercreditor Agreement and other Collateral Documents or the TIA. Nothing in this Article 11 shall limit the right of each of the Company and the Restricted Subsidiaries to sell, lease or otherwise deal in or dispose of its property or assets that do not constitute Collateral, subject only to the provisions of Article 6 hereof. 11.8 Sufficiency of Release. All purchasers and grantees of any property or rights purporting to be released shall be entitled to rely upon any release executed by the Trustee hereunder as sufficient for the purpose of this Indenture and as constituting a good and valid release of the property therein described from the Lien of this Indenture and of the Collateral Documents. 11.9 Actions by the Trustee. Subject to the provisions of the Collateral Documents and Article 12, the Trustee may in its sole discretion and without the consent of the Holders take all actions it deems necessary or appropriate in order to (i) enforce any of the terms of the Collateral Documents and (ii) to collect and receive all amounts payable in respect of the obligations of the Company and any Guarantors under the Collateral Documents and this Indenture. The Trustee shall have the power to institute and maintain such suits and proceedings as it may deem expedient in order to prevent any impairment of the Collateral by any act that may be unlawful or in violation of this Indenture or the Collateral Documents, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and those of the Holders in the Collateral. No duty beyond that set forth in Section 5.1 is imposed on the Trustee pursuant to this Section 11.9. ARTICLE 12 DEFEASANCE AND DISCHARGE 12.1 COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. 113 The Company may, at its option by Board Resolution, at any time, after (1) the penultimate Interest Reset Date preceding the final Stated Maturity of the Notes or (2) if applicable, the penultimate Interest Reset Date preceding the redemption date upon which all of the outstanding Notes have been called for redemption in accordance with the terms of this Indenture, elect to have either Section 12.2 or Section 12.3 hereof be applied to all Outstanding Notes, upon compliance with the conditions set forth below in this Article 12. 12.2 DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 12.1 hereof of the option applicable to this Section 12.2, the Company and the Subsidiary Guarantors will be deemed to have been discharged from their respective obligations with respect to all Outstanding Notes on the date the conditions set forth in Section 12.4 hereof are satisfied (hereinafter, "Legal Defeasance"). For this purpose, such Legal Defeasance means that the Company and the Subsidiary Guarantors will be deemed (i) to have paid and discharged their respective obligations under the Outstanding Notes and the Subsidiary Guarantees; provided, however, that the Notes will continue to be deemed to be "Outstanding" for purposes of Section 12.5 hereof and the other Sections of this Indenture referred to in clauses (a) and (b) below, and (ii) to have satisfied all their other obligations under such Notes and such Subsidiary Guarantees and this Indenture insofar as such Notes are concerned (and the Trustee, at the expense and direction of the Company, will execute proper instruments acknowledging the same), except for the following which will survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Outstanding Notes to receive, solely from the trust fund described in Section 12.4 hereof and as more fully set forth in such Section, payments in respect of the principal of (and premium if any, on), interest and Liquidated Damages, if any, on such Notes when such payments are due (or at such time as the Notes would be subject to redemption at the option of the Company in accordance with this Indenture), (b) the respective obligations of the Company and the Subsidiary Guarantors under Sections 2.3, 2.5, 2.6, 2.9, 2.13, 4.8, 4.14, 5.6, 5.9, 5.10, 9.2, 9.3, 12.1 (to the extent it relates to the foregoing Sections and this Article 12), 13.4 and 13.5 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder, and (d) the obligations of the Company and the Subsidiary Guarantors under this Article 12. Subject to compliance with this Article 12, the Company may exercise its option under this Section 12.2 notwithstanding the prior exercise of its option under Section 12.3 hereof with respect to the Notes. 12.3 COVENANT DEFEASANCE. Upon the Company's exercise under Section 12.1 hereof of the option applicable to this Section 12.3, the Company and each Subsidiary Guarantor will be released from their respective obligations under any covenant contained in Article 9, in Sections 9.5 - 9.20 and in Section 13.2 hereof with respect to the Outstanding Notes on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes will thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but will continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such Covenant Defeasance means that, with respect to the Outstanding Notes, the Company and each Subsidiary Guarantor may omit to comply with and will have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to 114 any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply will not constitute a Default or an Event of Default under Sections 4.1(c), 4.1(d), 4.1(e), 4.1(g) hereof, but, except as specified above, the remainder of this Indenture and such Notes will be unaffected thereby. 12.4 CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following will be the conditions to application of either Section 12.2 or 12.3 hereof to the Outstanding Notes: (a) Subject to the terms of Article 3, the Company or any Subsidiary Guarantor must irrevocably deposit or cause to be deposited with the Trustee (or another trustee satisfying the requirements of Section 5.7 hereof who will agree to comply with the provisions of this Article 12 applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (A) cash in U.S. Dollars in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which will be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of, premium, if any, and interest and Liquidated Damages, if any, on the Outstanding Notes on their final Stated Maturity thereof (or Redemption Date, if applicable), provided that the Trustee will have been irrevocably instructed in writing by the Company to apply such money or the proceeds of such U.S. Government Obligations to said payment with respect to the Notes. Before such a deposit, the Company may give to the Trustee, in accordance with Section 2.3 hereof, a notice of its election to redeem all of the Outstanding Notes at a future date in accordance with Article 13 hereof, which notice will be irrevocable. The Company shall specify whether the Notes are being defeased to maturity or to a particular Redemption Date. Such irrevocable redemption notice, if given, will be given effect in applying the foregoing. For this purpose, "U.S. Government Obligations" means securities that are (1) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (2) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and will also include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the amount of the holder of such depositary receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depositary receipt. 115 (b) No Event of Default with respect to the Notes will have occurred and be continuing on the date of such deposit or, insofar as Sections 4.1(j) and 4.1(k) are concerned, at any time during the period ending on the 91st day after the date of such deposit. (c) The Company must deliver to the Trustee an Opinion of Counsel, in form and substance reasonably satisfactory to the Trustee, to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally. (d) The Company must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of hindering, delaying or defrauding, or making preferential payments to the holders of Notes in lieu of payments to, creditors of the Company or its Subsidiaries. (e) Such Legal Defeasance or Covenant Defeasance will not cause the Trustee to have a conflicting interest under this Indenture or the Trust Indenture Act with respect to any securities of the Company or any Subsidiary Guarantor. (f) Such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound, as evidenced to the Trustee in an Officers' Certificate delivered to the Trustee concurrently with such deposit. (g) In the case of an election under Section 12.2 hereof the Company will have delivered to the Trustee an Opinion of Counsel, in form and substance reasonably satisfactory to the Trustee, stating that (a) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (b) since the date of this Indenture there has been a change in the applicable federal income tax laws, in either case providing that the Holders of the Outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred (it being understood that (1) such Opinion of Counsel will also state that such ruling or applicable law is consistent with the conclusions reached in such Opinion of Counsel and (2) the Trustee will be under no obligation to investigate the basis of correctness of such ruling). (h) In the case of an election under Section 12.3 hereof, the Company will have delivered to the Trustee an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee, to the effect that the Holders or the Outstanding Notes will not recognize income or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred (in the case of Legal Defeasance, such opinion must refer to and be based upon a published ruling of the Internal Revenue Service or a change in applicable United States federal income tax laws). (i) The Company will have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee, each stating that all conditions precedent provided for relating to 116 either the Legal Defeasance under Section 12.2 hereof or the Covenant Defeasance under Section 12.3 (as the case may be) have been satisfied. 12.5 DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to the provisions of the last paragraph of Section 9.3 hereof, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee--collectively for purposes of this Section 12.5, the "Trustee") pursuant to Section 12.4 hereof in respect of the Outstanding Notes will be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company will pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Governmental Obligations deposited pursuant to Section 12.4 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Notes. Anything in this Article 12 to the contrary notwithstanding, the Trustee will deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 12.4 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance, as applicable, in accordance with this Article 12. 12.6 REINSTATEMENT. If the Trustee or any Paying Agent is unable to apply any money in accordance with Section 12.5 hereof by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's and the Subsidiary Guarantors' obligations under this Indenture and the Notes will be revived and reinstated as though no deposit had occurred pursuant to Section 12.2 or 12.3 hereof, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 12.5 hereof; provided, however, that if the Company or any Subsidiary Guarantor makes any payment of principal of (or premium if any, on), interest or Liquidated Damages, if any, on any Note following the reinstatement of its obligations, the Company or such Subsidiary Guarantor will be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 13 SUBSIDIARY GUARANTEES 13.1 UNCONDITIONAL GUARANTEE. 117 Each Subsidiary Guarantor hereby unconditionally, jointly and severally, guarantees (each such guarantee being referred to herein as this "Subsidiary Guarantee," with all such guarantees being referred to herein as the "Subsidiary Guarantees") to each Holder of Notes authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, the full and prompt performance of the Company's obligations under this Indenture and the Notes and that: (1) the principal of (and premium, if any, on), interest and Liquidated Damages, if any, on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Notes, if any, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (2) in case of any extension of time of payment or renewal of any Notes or of any such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity by acceleration or otherwise; subject however to the limitations set forth in Section 13.4 hereof. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Subsidiary Guarantors will be jointly and severally obligated to pay the same immediately. Each Subsidiary Guarantor hereby agrees that its obligations hereunder will, to the extent permitted by law be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Subsidiary Guarantor hereby waives, to the extent permitted by law, diligence, presentment, demand of payment, filing of claim with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that its Subsidiary Guarantee will not be discharged except by complete performance of the obligations contained in the Notes, this Indenture and in this Subsidiary Guarantee. If any Holder or the Trustee is required by any court or otherwise to return to the Company, any Subsidiary Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to the Company or any Subsidiary Guarantor, any amount paid by the Company or any Subsidiary Guarantor to the Trustee or such Holder, this Subsidiary Guarantee, to the extent theretofore discharged, will be reinstated in full force and effect. Each Subsidiary Guarantor agrees it will not be entitled to enforce any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. Each Subsidiary Guarantor further agrees that, as between each Subsidiary Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (a) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 7 hereof for the purposes of this Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (b) in the event of any acceleration of such obligations as provided in Article 7 hereof, such obligations (whether or not due and payable) will forthwith become due and 118 payable by each Subsidiary Guarantor for the purpose of this Subsidiary Guarantee. 13.2 SUBSIDIARY GUARANTOR MAY CONSOLIDATE, ETC., ON CERTAIN TERMS. (a) Except as set forth in Article 8 hereof, nothing contained in this Indenture or in any of the Notes will prevent any consolidation or merger of a Subsidiary Guarantor with or into the Company or another Subsidiary Guarantor or will prevent any sale, conveyance or other disposition of all or substantially all the Properties of a Subsidiary Guarantor to the Company or another Subsidiary Guarantor. (b) Except as set forth in Article 8 hereof, nothing contained in this Indenture or in any of the Notes will prevent any consolidation or merger of a Subsidiary Guarantor with or into a Person other than the Company or another Subsidiary Guarantor (whether or not Affiliated with the Subsidiary Guarantor), or successive consolidations or mergers in which a Subsidiary Guarantor or its successor or successors will be a party or parties, or will prevent any sale, conveyance or other disposition of all or substantially all the Properties of a Subsidiary Guarantor to a Person other than the Company or another Subsidiary Guarantor (whether or not Affiliated with the Subsidiary Guarantor) authorized to acquire and operate the same; provided, however, that (a) immediately after such transaction, and giving effect thereto, no Default or Event of Default will have occurred as a result of such transaction and be continuing, (b) such transaction will not violate any of the covenants of Sections 9.1 - 9.20 hereof and (c) each Subsidiary Guarantor hereby covenants and agrees that, upon any such consolidation, merger, sale, conveyance or other disposition, such Subsidiary Guarantor's Subsidiary Guarantee set forth in this Article 13 and in a notation to the Notes, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by such Subsidiary Guarantor, will be expressly assumed (in the event that the Subsidiary Guarantor is not the surviving corporation in a merger), by supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee, by such Person formed by such consolidation, or into which the Subsidiary Guarantor will have merged, or by the Person that will have acquired such Property (except to the extent the following Section 13.3 would result in the release of such Subsidiary Guarantee, in which case such surviving Person or transferee of such Property will not have to execute any such supplemental indenture and will not have to assume such Subsidiary Guarantor's Subsidiary Guarantee). In the case of any such consolidation, merger, sale, conveyance or other disposition and upon the assumption by the successor Person, by supplemental indenture executed and delivered to the Trustee and satisfactory in form, to the Trustee of the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Subsidiary Guarantor, such successor Person will succeed to and be substituted for the Subsidiary Guarantor with the same effect as if it had been named herein as the initial Subsidiary Guarantor. 13.3 RELEASE OF SUBSIDIARY GUARANTORS. Upon the sale or disposition (by merger or otherwise) of a Subsidiary Guarantor (or of all or substantially all of its Properties) to a Person other than the Company or another Subsidiary Guarantor and pursuant to a transaction that is otherwise in compliance with the terms of this Indenture, including but 119 not limited to the provisions of Section 13.2 hereof or pursuant to Article 8 hereof, such Subsidiary Guarantor will be deemed released from its Subsidiary Guarantee and all related obligations under this Indenture; provided, however, that any such termination will occur only to the extent that all obligations of such Subsidiary Guarantor under all of its Guarantees of, and under all of its pledges of assets or other security interests which secure, other Indebtedness of the Company or any other Restricted Subsidiary will also terminate upon such sale or other disposition. The Trustee will deliver an appropriate instrument evidencing such release upon receipt of a Company Request accompanied by an Officers' Certificate and an Opinion of Counsel certifying that such sale or other disposition was made by the Company in accordance with the provisions of this Indenture. Each Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in accordance with the provisions of this Indenture will be released from its Subsidiary Guarantee and all related obligations under this Indenture for so long as it remains an Unrestricted Subsidiary. The Trustee will deliver an appropriate instrument evidencing such release upon its receipt of the Board Resolution designating such Subsidiary Guarantor as an Unrestricted Subsidiary. Notwithstanding any other provision of this Indenture, each Subsidiary Guarantor will be deemed released from its respective Subsidiary Guarantee and all related obligations under this Indenture in the event that all obligations of such Subsidiary Guarantor under the guarantee which resulted in the creation of such Subsidiary Guarantee will also terminate, except a termination, discharge or release of such guarantee by or as a result of, payment under such guarantee. The Trustee will deliver an appropriate instrument evidencing such release upon receipt of a Company Request accompanied by an Officer's Certificate and Opinion of Counsel certifying that all such obligations of such Subsidiary Guarantee have terminated. Any Subsidiary Guarantor not released in accordance with this Section 13.3 will remain liable for the full amount of principal of (and premium, if any, on) and interest on the Notes as provided in this Article 13. 13.4 LIMITATION OF SUBSIDIARY GUARANTORS' LIABILITY. Each Subsidiary Guarantor, and by its acceptance hereof each Holder, hereby confirm that it is the intention of all such parties that the guarantee by such Subsidiary Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Federal Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law. To effectuate the foregoing intention, the Holders and each Subsidiary Guarantor hereby irrevocably agree that the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to Section 13.5 hereof, result in the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee not constituting such a fraudulent conveyance or fraudulent transfer. This Section 13.4 is for the benefit of the creditors of each Subsidiary Guarantor. 120 13.5 CONTRIBUTION. In order to provide for just and equitable contribution among the Subsidiary Guarantors, the Subsidiary Guarantors agree, inter se, that in the event any payment or distribution is made by any Subsidiary Guarantor (a "Funding Guarantor") under its Subsidiary Guarantee, such Funding Guarantor will be entitled to a contribution from each other Subsidiary Guarantor (if any) in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor (including the Funding Guarantor) for all payments, damages and expenses incurred by that Funding Guarantor in discharging the Company's obligations with respect to the Notes or any other Subsidiary Guarantor's obligations with respect to its Subsidiary Guarantee. 13.6 EXECUTION AND DELIVERY OF NOTATIONS OF SUBSIDIARY GUARANTEES. To evidence its Subsidiary Guarantee set forth in Section 13.1 hereof, each Subsidiary Guarantor hereby agrees to execute the notations of Subsidiary Guarantees in substantially the form set forth in Exhibit A hereto to be endorsed on all Notes ordered to be authenticated and delivered by the Trustee and each Subsidiary Guarantor agrees that this Indenture will be executed on behalf of such Subsidiary Guarantor by its President or one of its Vice Presidents. Each Subsidiary Guarantor hereby agrees that its Subsidiary Guarantee set forth in Section 13.1 hereof will remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Subsidiary Guarantee. Each such notation of Subsidiary Guarantee will be signed on behalf of each Subsidiary Guarantor by its President or one of its Vice Presidents (each of whom will, in each case, have been duly authorized by all requisite corporate action) prior to the authentication of the Note on which it is endorsed, and the delivery of such Note by the Trustee, after the authentication thereof hereunder, will constitute due delivery of the Subsidiary Guarantee set forth in this Indenture on behalf of such Subsidiary Guarantor. Such signatures upon the notation of Subsidiary Guarantee may be by manual or facsimile signature of such officers and may be imprinted or otherwise reproduced on the Subsidiary Guarantee, and in case any such officer who will have signed the notation of Subsidiary Guarantee will cease to be such officer before the Note on which such notation of Subsidiary Guarantee is endorsed will have been authenticated and delivered by the Trustee or disposed of by the Company, such Note nevertheless may be authenticated and delivered or disposed of as though the Person who signed the notation of Subsidiary Guarantee had not ceased to be such officer of the Subsidiary Guarantor. 13.7 SEVERABILITY. In case any provision of this Subsidiary Guarantee will be invalid, illegal or unenforceable, that portion of such provision that is not invalid, illegal or unenforceable will remain in effect, and the validity, legality, and enforceability of the remaining provisions will not in any way be affected or impaired thereby. 13.8 ARTICLE 13 NOT TO PREVENT EVENTS OF DEFAULT. 121 The failure to make a payment on account of the Subsidiary Guarantees by reason of any provision in this Article 13 will not be construed as preventing the occurrence of an Event of Default under this Indenture. 13.9 PAYMENT. For purposes of this Article 13, a payment with respect to any Subsidiary Guarantor or with respect to principal of or interest on the Note or any Subsidiary Guarantee will include, without limitation, payment of principal of and interest on any Note, any payment on account of any repurchase or redemption of any Note and any payment or recovery on any claim (whether for rescission or damages and whether based on contract, tort, duty imposed by law, or any other theory of liability) relating to or arising out of the offer, sale or purchase of any Note. ARTICLE 14 MISCELLANEOUS 14.1 COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Company or any Subsidiary Guarantor to the Trustee to take any action under any provision of this Indenture, the Company or such Subsidiary Guarantor, as the case may be, will furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act or this Indenture. Each such certificate and each such opinion will be in the form of an Officers' Certificate or an Opinion of Counsel, as applicable, and will comply with the requirements of this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture will include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions, contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. The certificates and opinions provided pursuant to this Section 14.1 and the statements required by this Section 14.1 will comply in all respects with TIA Sections 314(c) and (e). 14.2 FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such 122 Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate, or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any Opinion of Counsel may be based, insofar as it relates to factual matters, upon an Officer's Certificate, unless such counsel knows that the certificate with respect to such matters is erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. 14.3 ACTS OF HOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action will become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent will be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit will also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The ownership, principal amount and serial numbers of Notes held by any Person, and the date of holding the same, will be proved by the Note Register. (d) If the Company will solicit from the Holders of Notes any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the 123 Company will have no obligation to do so. Notwithstanding Section 316(c) of the TIA, such record date will be the record date specified in or pursuant to such Board Resolution, which will be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date will be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Notes have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Notes will be computed as of such record date, provided that no such authorization, agreement or consent by the Holders on such record date will be deemed effective unless it will become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Note will bind every future Holder of the same Note and the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Note. 14.4 NOTICES, ETC. TO TRUSTEE, COMPANY AND SUBSIDIARY GUARANTORS. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to or filed with (a) the Trustee by any Holder or by the Company or any Subsidiary Guarantor will be sufficient for every purpose hereunder if made, given, furnished or filed in writing (in the English language) and delivered in person or mailed by certified or registered mail (return receipt requested) to the Trustee at its Corporate Trust Office; or (b) the Company or any Subsidiary Guarantor by the Trustee or by any Holder will be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing (in the English language) and delivered in person or mailed by certified or registered mail (return receipt requested) to the Company or such Subsidiary Guarantor, as applicable, addressed to it at the Company's principal office located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232, or at any other address otherwise furnished in writing to the Trustee by the Company. 14.5 NOTICE TO HOLDERS; WAIVER. Where this Indenture provides for notice of any event to Holders by the Company, the Trustee or any Paying Agent, such notice will be sufficiently given (unless otherwise herein expressly provided) if in writing (in the English language) and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Note Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, 124 neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder will affect the sufficiency of such notice with respect to other Holders. Any notice mailed to a Holder in the manner herein prescribed will be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either herein or after the event, and such waiver will be the equivalent of such notice. Waivers of notice by Holders will be filed with the Trustee, but such filing will not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of or irregularities in regular mail service or by reason of any other cause, it will be impracticable to mail notice of any event to Holders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as will be satisfactory to the Trustee will be deemed to be a sufficient giving of such notice for every purpose hereunder. 14.6 EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and will not affect the construction hereof. 14.7 SUCCESSORS AND ASSIGNS. All caveats and agreements in this Indenture by the Company and the Subsidiary Guarantors will bind their respective successors and assigns, whether so expressed or not. All agreements of the Trustee in this Indenture will bind its successor. 14.8 SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Notes or the Subsidiary Guarantees will be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions will not in any way be affected or impaired thereby, and a Holder will have no claim therefor against any party hereto. 14.9 BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes, express or implied, will give to any Person (other than the parties hereto, any Paying Agent, any Notes Registrar and their successors hereunder, the Holders and, to the extent set forth in Section 13.4 hereof, creditors of Subsidiary Guarantors) any benefit or any legal or equitable right, remedy or claim under this Indenture. 14.10 GOVERNING LAW; TRUST INDENTURE ACT CONTROLS. (a) THIS INDENTURE, THE SUBSIDIARY GUARANTEES AND THE SECURITIES WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. THE COMPANY AND EACH SUBSIDIARY GUARANTOR IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN, THE CITY OF NEW YORK IN ANY ACTION OR 125 PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE, THE SECURITIES OR THE SUBSIDIARY GUARANTEES, AND THE COMPANY AND EACH SUBSIDIARY GUARANTOR IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED BY ANY SUCH COURT. (b) This Indenture is subject to the provisions of the Trust Indenture Act that are required to be part of this Indenture and will, to the extent applicable, be governed by such provisions. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by operation of Section 318(c) of the TIA, or conflicts with any provision (an "incorporated provision") required by or deemed to be included in this Indenture by operation of such Trust Indenture Act section, such imposed duties or incorporated provision will control. 14.11 LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date, or Stated Maturity or Maturity of any Note will not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes or the Subsidiary Guarantee) payment of interest or principal (and premium, if any) need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date or at the Stated Maturity or Maturity; provided, however, that no interest will accrue for the period from and after such Interest Payment Date, Redemption Date, Stated Maturity or Maturity, as the case may be. 14.12 NO RECOURSE AGAINST OTHERS. A director, officer, employee, stockholder, incorporator or Affiliate, as such, past, present or future, of the Company or any Subsidiary Guarantor will not have any personal liability under the Notes or this Indenture by reason of his or its status as a director, officer, employee, stockholder, incorporator or Affiliate or any liability for any obligations of the Company or any Subsidiary Guarantor under the Notes or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder, by accepting any of the Notes, waives and releases all such liability to the extent permitted by applicable law. 14.13 DUPLICATE ORIGINALS. The parties may sign any number of copies or counterparts of this Indenture. Each signed copy will be an original, but all of them together represent the same agreement. 14.14 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. 126 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. ISSUER: ABRAXAS PETROLEUM CORPORATION By -------------------------------------------- Name: Title: SUBSIDIARY GUARANTORS: EASTSIDE COAL COMPANY, INC. By -------------------------------------------- Name: Title: SANDIA OIL & GAS CORPORATION By ---------------------------------------------- Name: Title: SANDIA OPERATING CORP. By -------------------------------------------- Name: Title: WAMSUTTER HOLDINGS, INC. By -------------------------------------------- Name: Title: WESTERN ASSOCIATED ENERGY CORPORATION By -------------------------------------------- Name: Title: TRUSTEE: U.S. BANK NATIONAL ASSOCIATION By: -------------------------------------------- Name: Title: EXHIBIT A-1 FORM OF RULE 144A GLOBAL NOTE THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.6 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.5(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.10 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES, TO OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR NOTES), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a) UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF $100,000 OF NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND Exhibit A-1 THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. THE INDEBTEDNESS EVIDENCED BY THIS DOCUMENT IS SUBJECT TO THE PROVISIONS OF THE INTERCREDITOR, SECURITY AND COLLATERAL AGENCY AGREEMENT, DATED AS OF OCTOBER 28, 2004, AMONG ABRAXAS PETROLEUM CORPORATION (THE "COMPANY"), THE SUBSIDIARIES OF THE COMPANY LISTED ON SCHEDULE I THERETO, WELLS FARGO FOOTHILL, INC., IN ITS CAPACITY AS AGENT FOR THE LENDERS WHO ARE FROM TIME TO TIME PARTIES TO A LOAN AGREEMENT DATED AS OF OCTOBER 28, 2004, U.S. BANK NATIONAL ASSOCIATION, IN ITS CAPACITIES AS TRUSTEE FOR THE HOLDERS OF THE COMPANY'S FLOATING RATE SENIOR SECURED NOTES DUE 2009 ISSUED UNDER AN INDENTURE DATED AS OF OCTOBER 28, 2004, AND AS COLLATERAL AGENT, AND GUGGENHEIM CORPORATE FUNDING, LLC, IN ITS CAPACITY AS AGENT FOR THE LENDERS WHO ARE FROM TIME TO TIME PARTIES TO A LOAN AGREEMENT DATED AS OF OCTOBER 28, 2004. Exhibit A-1 ABRAXAS PETROLEUM CORPORATION Floating Rate Senior Secured Note due 2009 No. 144A-__ $__ CUSIP No. 003830 AH 9 Abraxas Petroleum Corporation, a Nevada corporation (herein called the "Company" which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO. or registered assignee the principal sum of ? Dollars ($?) on December 1, 2009 at the office or agency of the Company referred to below, and to pay interest thereon, commencing on June 1, 2005 and continuing semiannually thereafter, on June 1 and December 1 in each year (each, an Interest Payment Date), from October 28, 2004 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at a per annum floating rate of Six-Month LIBOR (as defined below) plus 7.5%, until the principal hereof is paid or duly provided for, and (to the extent lawful) to pay on demand interest on any overdue interest at the rate borne by the Notes from the date on which such overdue interest becomes payable to the date on which payment of such interest has been made or duly provided for. The Company also hereby promises to pay the Liquidated Damages, if any, payable pursuant to Section 3 of the Registration Rights Agreement on the same dates on which interest is payable as provided herein. The interest and Liquidated Damages, if any, so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in said Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered on the Note Register at the close of business on the Regular Record Date for such interest, whether or not a Business Day (as defined below), next preceding such Interest Payment Date. Any such interest or Liquidated Damages not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date, and such Defaulted Interest, Liquidated Damages and (to the extent lawful) interest on such Defaulted Interest and Liquidated Damages at the rate borne by the Notes, may be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered on the Note Register at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof will be given to Holders of Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any, on) and interest and Liquidated Damages, if any, on this Note will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest and Liquidated Damages, if any, may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address will appear on the Note Register. Exhibit A-1 Interest on the Note will accrue from and including the most recent date on which interest has been paid or, if no interest has been paid, from and including the date of issuance, until but excluding the date upon which the principal thereof is paid or duly provided for in accordance with the Indenture. The interest rate will be reset semi-annually on each June 1 and December 1, commencing on June 1, 2005 (each such date, an "Interest Reset Date"). Interest on the Note will be payable semiannually in arrears on June 1 and December 1 of each year, commencing on June 1, 2005; provided, that, if any such day is not a Business Day, such interest payment date will be the next succeeding Business Day. "Business Day" means any day other than a Saturday or Sunday, or a day on which banking institutions in The City of New York are authorized or required by law, regulation or executive order to remain closed and that is also a London Business Day (as defined below). "Six-Month LIBOR" means the rate determined in accordance with the following provisions: (1) On the second London Business Day preceding each Interest Reset Date (each such date, an "Interest Determination Date"), a calculation agent, initially U.S. Bank National Association or a duly appointed successor (the "Calculation Agent"), as agent for the Company, will determine the Six-Month LIBOR rate, which shall be the rate for deposits in the London interbank market in U.S. dollars having a six-month maturity commencing on the succeeding Interest Reset Date immediately following such Interest Determination Date which appears on the Designated LIBOR Page as of 11:00 a.m., London time, on such Interest Determination Date. "Designated LIBOR Page" means the display on the Moneyline service (or such other service or services as may be nominated by the British Bankers' Association) for the purpose of displaying London interbank rates of major banks for U.S. dollar deposits. If no such rate appears on an Interest Determination Date, the Six-Month LIBOR rate on such Interest Determination Date will be determined as described in clause (2) of the definition of "Six-Month LIBOR." "London Business Day" means any day on which dealings in U.S. dollars generally are transacted in the London interbank market. (2) With respect to an Interest Determination Date for which no such rate appears, the Calculation Agent will request the principal London offices of each of four major reference banks in the London interbank market, as selected by the Calculation Agent (after consultation with the Company), to provide the Calculation Agent with its offered quotation for deposits in U.S. dollars having a six-month maturity commencing on the Interest Reset Date immediately following such Interest Determination Date to prime banks in the London interbank market at approximately 11:00 a.m., London time, on such Interest Determination Date and in a principal amount not less than $1,000,000 that is representative for a single transaction in U.S. dollars in such market at such time. If at least two such quotations are provided, the Six-Month LIBOR rate on such Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two quotations are provided, the Six-Month LIBOR rate determined on such Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 a.m., New York City time, on such Interest Determination Date by three major banks in The City of New York selected by the Calculation Exhibit A-1 2 Agent (after consultation with the Company) for loans in U.S. dollars to leading European banks, having a six-month maturity and in a principal amount not less than $1,000,000 that is representative for a single transaction in U.S. dollars in such market at such time. However, if the banks so selected by the Calculation Agent are not quoting as mentioned above, the Six-Month LIBOR rate with respect to such Interest Determination Date will be the Six-Month LIBOR rate in effect immediately prior to such Interest Determination Date. All percentages resulting from any calculation on the Note will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point with five one-millionths of a percentage point rounded upward and all U.S. dollar amounts used in or resulting from such calculation on the Note will be rounded to the nearest cent (with one-half cent being rounded upward). Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions will for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Note will not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. [signature page follows] Exhibit A-1 3 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed in its corporate name by the signature of its officer thereunto duly authorized. ABRAXAS PETROLEUM CORPORATION By: -------------------------------------------- Name: Title: Attested By: ----------------------------------- Name: Title: Exhibit A-1 4 Reverse of Note This Note is one of a duly authorized issue of securities of the Company designated as its Floating Rate Senior Secured Notes due 2009 (herein called the "Notes"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $125,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of October 28, 2004 among the Company, the initial Subsidiary Guarantors named therein and U.S. Bank National Association (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitation of rights, duties, obligations and immunities thereunder of the Company, the Subsidiary Guarantors, the Trustee and the Holders of the Notes, and of the terms upon which the Notes are, and are to be, authenticated and delivered. Optional Redemption The Notes may be redeemed, in whole or from time to time in part, at the option of the Company at any time after April 28, 2007 upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below together with accrued and unpaid interest and Liquidated Damages, if any, to the applicable redemption date during the periods indicated below: Year Percentage ---- ---------- From April 29, 2007 to April 28, 2008........ 104.00% From April 29, 2008 to April 28, 2009........ 102.00% After April 28, 2009......................... 100.00% Notwithstanding the foregoing, at any time prior to April 29, 2007, the Company may, at its option and subject to the restrictions and other provisions relating thereto, if any, contained in the Revolving Credit Facility, on any one or more occasions redeem up to 35% of the original aggregate principal amount of the Notes (i.e., $43,750,000) with the Net Cash Proceeds of one or more Qualified Equity Offerings at a redemption price equal to the product of (x) the principal amount of the Notes being so redeemed and (y) a redemption price factor of 1.00 plus the per annum interest rate on the Notes (expressed as a decimal) on the applicable redemption date, plus accrued and unpaid interest to the applicable redemption date, provided, that (1) at least 65% of the original aggregate principal amount of the Notes (i.e., $81,250,000) remains outstanding after each such redemption; and (2) any such redemption occurs within 90 days after the closing of the Qualified Equity Offering to which such Net Cash Proceeds relate. If less than all the Notes are to be redeemed at any time, the particular Notes to be redeemed will be selected not fewer than 30 days nor more than 60 days prior to the Redemption Date by the Trustee from the Outstanding Notes not previously called for redemption pro rata or by any other method that the Trustee deems fair and appropriate, provided that no Notes of $1,000 or less will be redeemed in part. Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note will Exhibit A-1 5 state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon surrender of the original Note. On and after the Redemption Date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the applicable Redemption Price, together with accrued and unpaid interest and Liquidated Damages, if any, to the Redemption Date. If a Redemption Date is on or after a Regular Record Date and on or before the related Interest Payment Date, the accrued and unpaid interest and Liquidated Damages, if any, on each Note being redeemed will be paid to the person in whose name such Note is registered at the close of business on such Regular Record Date, and no other interest or Liquidated Damages will be payable to any other Person who may become a Holder of such Note after such time. The Notes do not have the benefit of any sinking fund obligations. In the event of a Change of Control of the Company, and subject to certain conditions and limitations provided in the Indenture, the Company will be obligated to make an offer to purchase within 30 calendar days following the occurrence of a Change of Control of the Company, all of the then Outstanding Notes at a purchase price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest and Liquidated Damages, if any, to the Change of Control Payment Date, all as provided in the Indenture. In the event of Asset Sales, under certain circumstances, the Company will be obligated to make a Net Proceeds Offer to purchase all or a specified portion of each Holder's Notes at a purchase price equal to 100% of the aggregate principal amount of the Notes, together with accrued and unpaid interest and Liquidated Damages, if any, to the date such Net Proceeds Offer is consummated in accordance with the procedures set forth in the Indenture. As more particularly set forth in the Indenture, an Event of Default is generally (1) default in the payment when due of the principal of or premium on any Note, whether such payment is due at Stated Maturity, upon redemption, upon repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, upon declaration of acceleration or otherwise; (2) default in the payment when due of any installment of interest on, or Liquidated Damages with respect to, any Note, and the continuance of such Default for a period of 30 days; (3) default in the performance or breach of the provisions relating to mergers, consolidations and sales of all or substantially all assets or the failure to make or consummate a Change of Control Offer or a Net Proceeds Offer; (4) failure by the Company or any Restricted Subsidiary to comply with any other term, covenant or agreement contained in the Notes, any Subsidiary Guarantee, any Collateral Document or the Indenture (other than a default specified in clause (1), (2) or (3) above) for a period of 60 days after delivery to the Company or such Restricted Subsidiary, as the case may be, of written notice of such failure stating that it is a "notice of default" under this Indenture; (5) the occurrence and continuation beyond any applicable grace period of any default in the payment when due of the principal of, or premium or interest on, any Indebtedness for borrowed money of the Company (other than the Notes) or any Restricted Subsidiary or any other default resulting in acceleration of any Indebtedness for borrowed money of the Company or any Restricted Subsidiary, but only in the event that the aggregate Exhibit A-1 6 principal amount of such Indebtedness shall exceed $2,000,000; (6) without limiting clause (5) above, the occurrence and continuation of an "event of default" under either the Revolving Credit Facility or the Bridge Loan; (7) any Subsidiary Guarantee shall for any reason cease to be, or be asserted by the Company, any Subsidiary Guarantor, any of their respective Affiliates or any Person acting on behalf of any of the foregoing not to be, in full force and effect and enforceable in any material respect in accordance with its terms (except pursuant to the release or termination of any such Subsidiary Guarantee in accordance with this Indenture); (8) any Collateral Document shall for any reason cease to be, or be asserted by the Company, any Restricted Subsidiary, any of their respective Affiliates or any Person acting on behalf of any of the foregoing not to be, in full force and effect and enforceable in any material respect in accordance with its terms or to not otherwise grant a duly perfected first priority security interest in the Collateral in favor of the holders of the Note Obligations (subject to Permitted Prior Liens and except pursuant to a release or termination thereof consummated in accordance with this Indenture and the Intercreditor Agreement and other Collateral Documents) for a period of 30 days after delivery of written notice thereof stating that it is a "notice of default" under this Indenture and requiring the Company or the respective Restricted Subsidiary, as the case may be, to remedy the same; (9) final judgments or orders rendered against the Company or any Restricted Subsidiary that are unsatisfied and that require the payment in money, either individually or in an aggregate amount, that is more than $2,000,000 over the coverage under applicable insurance policies and either (a) commencement by any creditor of an enforcement proceeding upon such judgment (other than a judgment that is stayed by reason of pending appeal or otherwise) or (b) the occurrence of a 60-day period during which a stay of such judgment or order, by reason of pending appeal or otherwise, was not in effect; and (10) certain evens of bankruptcy, insolvency or reorganization of the Company or any Subsidiary, as the case may be. If any Event of Default has occurred and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes may declare the principal of, premium, if any, accrued and unpaid interest and Liquidated Damages, if any, on the Notes to be due and payable immediately, except that (i) in the case of an Event of Default arising from certain evens of bankruptcy, insolvency or reorganization of the Company or any Subsidiary, the principal of, premium, if any, accrued and unpaid interest and Liquidated Damages, if any, on the Notes will become due and payable immediately without further action or notice. The Indenture contains provisions for (i) defeasance at any time of the entire indebtedness of the Company on this Note and (ii) discharge from certain restrictive covenants and the related Defaults and Events of Default, upon compliance by the Company and certain conditions set forth therein, which provisions apply to this Note. Subject to the terms of the Intercreditor Agreement, the Indenture permits, with certain exceptions as therein provided, the amendment therefore and the modification of the rights and obligations of the Company and the Subsidiary Guarantors and the rights of the Holders under the Indenture at any time by the Company, the Subsidiary Guarantors and the Trustee and the consent of the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note will be conclusive and binding upon such Exhibit A-1 7 Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof for or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. Without the consent of any Holder, the Company, the Subsidiary Guarantors and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to add or release any Subsidiary Guarantor pursuant to the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes and to make certain other specified changes and other changes that do not adversely affect the interests of any Holder in any material respect. No reference herein to the Indenture and no provision of this Note or of the Indenture will alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any, on) and interest and Liquidated Damages on this Note at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Note is registerable on the Note Register of the Company, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Note Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. No service charge will be made for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. No director, officer, employee, incorporator, stockholder or Affiliate of the Company or any Subsidiary Guarantor, as such, past, present or future, will have any personal liability under this Note or the Indenture by reason of his, her or its status as such director, officer, employee, incorporator, stockholder or Affiliate, or any liability for any obligations of the Company or any Subsidiary Guarantor under the Notes or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder, by accepting this Note with the notation of Subsidiary Guarantee endorsed hereon, waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of this Note with the notation of Subsidiary Guarantee endorsed hereon. Prior to the time of due presentment of this Note of registration of transfer, the Company, the Subsidiary Guarantors, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note is overdue, and neither the Company, the Subsidiary Guarantors, the Trustee nor any agent will be affected by notice to the contrary. Exhibit A-1 8 All terms used in this Note which are defined in the Indenture and which are not otherwise defined herein shall have the meanings assigned to them in the Indenture. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to the Company at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes as a convenience to the Holders thereof. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identifying information printed hereon. Interest on this Note will be computed on the basis of a 360-day year. This Note will be governed by and construed in accordance with the laws of the State of New York. Exhibit A-1 9 SUBSIDIARY GUARANTEES Subject to the limitations set forth in the Indenture, the initial Subsidiary Guarantors and, if any, all additional Subsidiary Guarantors (as defined in the Indenture referred to in the Note upon which this notation is endorsed and each being hereinafter referred to as a "Subsidiary Guarantor," which term includes any additional or successor Subsidiary Guarantor under the Indenture) have, jointly and severally, unconditionally guaranteed (a) the due and punctual payment of the principal of (and premium, if any) and interest, and Liquidated Damages, if any, on the Notes, whether at maturity, acceleration, redemption or otherwise, (b) the due and punctual payment of interest on the overdue principal of and interest, and Liquidated Damages on the Notes, if any, to the extent lawful, (c) the due and punctual performance of all other obligations of the Company to the Holders or the Trustee, all in accordance with the terms set forth in the Indenture, and (d) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise. The obligations of each Subsidiary Guarantor are limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor that makes a payment or distribution under a Subsidiary Guarantee will be entitled to a contribution from each other Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor. No member, partner, stockholder, officer, director, manager, employee, incorporator or Affiliate as such, past, present or future, of any Subsidiary Guarantor will have any personal liability under its Subsidiary Guarantee by reason of his, her or its status as such member, partner, stockholder, officer, director, manager, employee, incorporator or Affiliate, or any liability for any obligations of any Subsidiary Guarantor under the Notes or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Any Subsidiary Guarantor may be released from its Subsidiary Guarantee upon the terms and subject to the conditions provided in the Indenture. All terms used in this notation of Subsidiary Guarantee which are defined in the Indenture referred to in this Note upon which this notation of Subsidiary Guarantees is endorsed will have the meanings assigned to them in such Indenture. The Subsidiary Guarantees will be binding upon the Subsidiary Guarantors and will inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee respecting the Note upon which the foregoing Subsidiary Guarantees are noted, the rights and privileges herein conferred upon that party will automatically extend to and Exhibit A-1 10 be vested in such transferee or assignee, all subject to the terms and conditions hereof and in the Indenture. The Subsidiary Guarantees will not be valid obligations for any purpose until the certificate of authentication on the Note upon which the foregoing Subsidiary Guarantees are noted will have been executed by the Trustee under the Indenture by the manual signature of one of its authorized signatories. [signature page follows] Exhibit A-1 11 IN WITNESS WHEREOF, each Subsidiary Guarantor has caused this instrument to be duly executed in its corporate name by the signature of its officer thereunto duly authorized. EASTSIDE COAL COMPANY, INC. By: ------------------------------------------- Name: Title: SANDIA OIL & GAS CORPORATION By: ------------------------------------------- Name: Title: SANDIA OPERATING CORP. By: ------------------------------------------- Name: Title: WAMSUTTER HOLDINGS, INC. By: ------------------------------------------- Name: Title: WESTERN ASSOCIATED ENERGY CORPORATION By: ------------------------------------------- Name: Title: Exhibit A-1 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the within mentioned Indenture. Dated: October 28, 2004 U.S. BANK NATIONAL ASSOCIATION as Trustee By: ------------------------------------------- Authorized Signatory Exhibit A-1 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint_____________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: ------------------------------ Your signature: ------------------------- (Sign exactly as your name appears on the face of this Note) Tax Identification No.: ---------------- SIGNATURE GUARANTEE: __________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Exhibit A-1 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 9.15 or 9.16 of the Indenture, check the box below: [ ] Section 9.15 [ ] Section 9.16 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 9.15 or Section 9.16 of the Indenture, state the amount you elect to have purchased: $_______ Date: -------------------------- Your signature: ------------------------------ (Sign exactly as your name appears on the face of this Note) Tax Identification No.: --------- SIGNATURE GUARANTEE: _________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Exhibirt A-1 SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE The following exchanges of a part of this Global Note for an interest in another Global Note or for a Definitive Note, or exchanges of a part of another Global Note or Definitive Note for an interest in this Global Note, have been made:
Principal Amount of this Global Note Signature of Amount of decrease Amount of increase in following such authorized officer in Principal Amount Principal Amount of decrease (or of Trustee or Date of Exchange of this Global Note this Global Note increase) custodian - -------------------------------------------------------------------------------------------------------------------
Exhibit A-1 EXHIBIT A-2 FORM OF REGULATION S GLOBAL NOTE THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.6 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.5(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.10 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY. THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE. NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON. PRIOR TO EXPIRATION OF THE 40-DAY DISTRIBUTION COMPLIANCE PERIOD (AS DEFINED IN REGULATION S ("REGULATION S") UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")), THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES (AS DEFINED IN REGULATION S) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, A U.S. PERSON (AS DEFINED IN REGULATION S), EXCEPT TO A PERSON REASONABLY BELIEVED TO BE A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A ("RULE 144A") UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A AND THE INDENTURE REFERRED TO HEREIN OR AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE NOTES OF $100,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. Exhibit A-2 THE HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES, TO OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR NOTES), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a) UNDER THE SECURITIES ACT THAT IS AN ACCREDITED INVESTOR ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF $100,000 OF NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. THE INDEBTEDNESS EVIDENCED BY THIS DOCUMENT IS SUBJECT TO THE PROVISIONS OF THE INTERCREDITOR, SECURITY AND COLLATERAL AGENCY AGREEMENT, DATED AS OF OCTOBER 28, 2004, AMONG ABRAXAS PETROLEUM CORPORATION (THE "COMPANY"), THE SUBSIDIARIES OF THE COMPANY LISTED ON SCHEDULE I THERETO, WELLS FARGO FOOTHILL, INC., IN ITS CAPACITY AS AGENT FOR THE LENDERS WHO ARE FROM TIME TO TIME PARTIES TO A LOAN AGREEMENT DATED AS OF OCTOBER 28, 2004, U.S. BANK NATIONAL ASSOCIATION, IN ITS CAPACITIES AS TRUSTEE FOR THE HOLDERS OF THE COMPANY'S FLOATING RATE SENIOR SECURED NOTES DUE 2009 ISSUED UNDER AN INDENTURE DATED AS OF OCTOBER 28, 2004, AND AS COLLATERAL AGENT, AND GUGGENHEIM CORPORATE FUNDING, LLC, IN ITS CAPACITY AS AGENT FOR THE LENDERS WHO ARE FROM TIME TO TIME PARTIES TO A LOAN AGREEMENT DATED AS OF OCTOBER 28, 2004. Exhibit A-2 ABRAXAS PETROLEUM CORPORATION Floating Rate Senior Secured Note due 2009 No.Regulation S-__ $__? CUSIP No. C00380 AA 0 Abraxas Petroleum Corporation, a Nevada corporation (herein called the "Company" which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO. or registered assignee the principal sum of ? Dollars ($?) on December 1, 2009 at the office or agency of the Company referred to below, and to pay interest thereon, commencing on June 1, 2005 and continuing semiannually thereafter, on June 1 and December 1 in each year (each, an Interest Payment Date), from October 28, 2004 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at a per annum floating rate of Six-Month LIBOR (as defined below) plus 7.5%, until the principal hereof is paid or duly provided for, and (to the extent lawful) to pay on demand interest on any overdue interest at the rate borne by the Notes from the date on which such overdue interest becomes payable to the date on which payment of such interest has been made or duly provided for. The Company also hereby promises to pay the Liquidated Damages, if any, payable pursuant to Section 3 of the Registration Rights Agreement on the same dates on which interest is payable as provided herein. The interest and Liquidated Damages, if any, so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in said Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered on the Note Register at the close of business on the Regular Record Date for such interest, whether or not a Business Day (as defined below), next preceding such Interest Payment Date. Any such interest or Liquidated Damages not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date, and such Defaulted Interest, Liquidated Damages and (to the extent lawful) interest on such Defaulted Interest and Liquidated Damages at the rate borne by the Notes, may be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered on the Note Register at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof will be given to Holders of Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any, on) and interest and Liquidated Damages, if any, on this Note will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest and Liquidated Damages, if any, may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address will appear on the Note Register. Exhibit A-2 Interest on the Note will accrue from and including the most recent date on which interest has been paid or, if no interest has been paid, from and including the date of issuance, until but excluding the date upon which the principal thereof is paid or duly provided for in accordance with the Indenture. The interest rate will be reset semi-annually on each June 1 and December 1, commencing on June 1, 2005 (each such date, an "Interest Reset Date"). Interest on the Note will be payable semiannually in arrears on June 1 and December 1 of each year, commencing on June 1, 2005; provided, that, if any such day is not a Business Day, such interest payment date will be the next succeeding Business Day. "Business Day" means any day other than a Saturday or Sunday, or a day on which banking institutions in The City of New York are authorized or required by law, regulation or executive order to remain closed and that is also a London Business Day (as defined below). "Six-Month LIBOR" means the rate determined in accordance with the following provisions: (1) On the second London Business Day preceding each Interest Reset Date (each such date, an "Interest Determination Date"), a calculation agent, initially U.S. Bank National Association or a duly appointed successor (the "Calculation Agent"), as agent for the Company, will determine the Six-Month LIBOR rate, which shall be the rate for deposits in the London interbank market in U.S. dollars having a six-month maturity commencing on the succeeding Interest Reset Date immediately following such Interest Determination Date which appears on the Designated LIBOR Page as of 11:00 a.m., London time, on such Interest Determination Date. "Designated LIBOR Page" means the display on the Moneyline service (or such other service or services as may be nominated by the British Bankers' Association) for the purpose of displaying London interbank rates of major banks for U.S. dollar deposits. If no such rate appears on an Interest Determination Date, the Six-Month LIBOR rate on such Interest Determination Date will be determined as described in clause (2) of the definition of "Six-Month LIBOR." "London Business Day" means any day on which dealings in U.S. dollars generally are transacted in the London interbank market. (2) With respect to an Interest Determination Date for which no such rate appears, the Calculation Agent will request the principal London offices of each of four major reference banks in the London interbank market, as selected by the Calculation Agent (after consultation with the Company), to provide the Calculation Agent with its offered quotation for deposits in U.S. dollars having a six-month maturity commencing on the Interest Reset Date immediately following such Interest Determination Date to prime banks in the London interbank market at approximately 11:00 a.m., London time, on such Interest Determination Date and in a principal amount not less than $1,000,000 that is representative for a single transaction in U.S. dollars in such market at such time. If at least two such quotations are provided, the Six-Month LIBOR rate on such Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two quotations are provided, the Six-Month LIBOR rate determined on such Interest Determination Date will be the arithmetic mean of the rates quoted at Exhibit A-2 2 approximately 11:00 a.m., New York City time, on such Interest Determination Date by three major banks in The City of New York selected by the Calculation Agent (after consultation with the Company) for loans in U.S. dollars to leading European banks, having a six-month maturity and in a principal amount not less than $1,000,000 that is representative for a single transaction in U.S. dollars in such market at such time. However, if the banks so selected by the Calculation Agent are not quoting as mentioned above, the Six-Month LIBOR rate with respect to such Interest Determination Date will be the Six-Month LIBOR rate in effect immediately prior to such Interest Determination Date. All percentages resulting from any calculation on the Note will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point with five one-millionths of a percentage point rounded upward and all U.S. dollar amounts used in or resulting from such calculation on the Note will be rounded to the nearest cent (with one-half cent being rounded upward). Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions will for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Note will not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. [signature page follows] Exhibit A-2 3 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed in its corporate name by the signature of its officer thereunto duly authorized. ABRAXAS PETROLEUM CORPORATION By: --------------------------------------- Name: Title: Attested By: --------------------------------------- Name: Title: Exhibit A-2 Reverse of Note This Note is one of a duly authorized issue of securities of the Company designated as its Floating Rate Senior Secured Notes due 2009 (herein called the "Notes"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $125,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of October 28, 2004 among the Company, the initial Subsidiary Guarantors named therein and U.S. Bank National Association (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitation of rights, duties, obligations and immunities thereunder of the Company, the Subsidiary Guarantors, the Trustee and the Holders of the Notes, and of the terms upon which the Notes are, and are to be, authenticated and delivered. Optional Redemption The Notes may be redeemed, in whole or from time to time in part, at the option of the Company at any time after April 28, 2007 upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below together with accrued and unpaid interest and Liquidated Damages, if any, to the applicable redemption date during the periods indicated below: Year Percentage ---- ---------- From April 29, 2007 to April 28, 2008.... 104.00% From April 29, 2008 to April 28, 2009.... 102.00% After April 28, 2009..................... 100.00% Notwithstanding the foregoing, at any time prior to April 29, 2007, the Company may, at its option and subject to the restrictions and other provisions relating thereto, if any, contained in the Revolving Credit Facility, on any one or more occasions redeem up to 35% of the original aggregate principal amount of the Notes (i.e., $43,750,000) with the Net Cash Proceeds of one or more Qualified Equity Offerings at a redemption price equal to the product of (x) the principal amount of the Notes being so redeemed and (y) a redemption price factor of 1.00 plus the per annum interest rate on the Notes (expressed as a decimal) on the applicable redemption date, plus accrued and unpaid interest to the applicable redemption date, provided, that (1) at least 65% of the original aggregate principal amount of the Notes (i.e., $81,250,000) remains outstanding after each such redemption; and (2) any such redemption occurs within 90 days after the closing of the Qualified Equity Offering to which such Net Cash Proceeds relate. If less than all the Notes are to be redeemed at any time, the particular Notes to be redeemed will be selected not fewer than 30 days nor more than 60 days prior to the Redemption Date by the Trustee from the Outstanding Notes not previously called for redemption pro rata or by any other method that the Trustee deems fair and appropriate, provided that no Notes of $1,000 or less will be redeemed in part. Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note will Exhibit A-2 5 state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon surrender of the original Note. On and after the Redemption Date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the applicable Redemption Price, together with accrued and unpaid interest and Liquidated Damages, if any, to the Redemption Date. If a Redemption Date is on or after a Regular Record Date and on or before the related Interest Payment Date, the accrued and unpaid interest and Liquidated Damages, if any, on each Note being redeemed will be paid to the person in whose name such Note is registered at the close of business on such Regular Record Date, and no other interest or Liquidated Damages will be payable to any other Person who may become a Holder of such Note after such time. The Notes do not have the benefit of any sinking fund obligations. In the event of a Change of Control of the Company, and subject to certain conditions and limitations provided in the Indenture, the Company will be obligated to make an offer to purchase within 30 calendar days following the occurrence of a Change of Control of the Company, all of the then Outstanding Notes at a purchase price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest and Liquidated Damages, if any, to the Change of Control Payment Date, all as provided in the Indenture. In the event of Asset Sales, under certain circumstances, the Company will be obligated to make a Net Proceeds Offer to purchase all or a specified portion of each Holder's Notes at a purchase price equal to 100% of the aggregate principal amount of the Notes, together with accrued and unpaid interest and Liquidated Damages, if any, to the date such Net Proceeds Offer is consummated in accordance with the procedures set forth in the Indenture. As more particularly set forth in the Indenture, an Event of Default is generally (1) default in the payment when due of the principal of or premium on any Note, whether such payment is due at Stated Maturity, upon redemption, upon repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, upon declaration of acceleration or otherwise; (2) default in the payment when due of any installment of interest on, or Liquidated Damages with respect to, any Note, and the continuance of such Default for a period of 30 days; (3) default in the performance or breach of the provisions relating to mergers, consolidations and sales of all or substantially all assets or the failure to make or consummate a Change of Control Offer or a Net Proceeds Offer; (4) failure by the Company or any Restricted Subsidiary to comply with any other term, covenant or agreement contained in the Notes, any Subsidiary Guarantee, any Collateral Document or the Indenture (other than a default specified in clause (1), (2) or (3) above) for a period of 60 days after delivery to the Company or such Restricted Subsidiary, as the case may be, of written notice of such failure stating that it is a "notice of default" under this Indenture; (5) the occurrence and continuation beyond any applicable grace period of any default in the payment when due of the principal of, or premium or interest on, any Indebtedness for borrowed money of the Company (other than the Notes) or any Restricted Subsidiary or any other default resulting in acceleration of any Indebtedness for borrowed money of the Company or any Restricted Subsidiary, but only in the event that the aggregate Exhibit A-2 6 principal amount of such Indebtedness shall exceed $2,000,000; (6) without limiting clause (5) above, the occurrence and continuation of an "event of default" under either the Revolving Credit Facility or the Bridge Loan; (7) any Subsidiary Guarantee shall for any reason cease to be, or be asserted by the Company, any Subsidiary Guarantor, any of their respective Affiliates or any Person acting on behalf of any of the foregoing not to be, in full force and effect and enforceable in any material respect in accordance with its terms (except pursuant to the release or termination of any such Subsidiary Guarantee in accordance with this Indenture); (8) any Collateral Document shall for any reason cease to be, or be asserted by the Company, any Restricted Subsidiary, any of their respective Affiliates or any Person acting on behalf of any of the foregoing not to be, in full force and effect and enforceable in any material respect in accordance with its terms or to not otherwise grant a duly perfected first priority security interest in the Collateral in favor of the holders of the Note Obligations (subject to Permitted Prior Liens and except pursuant to a release or termination thereof consummated in accordance with this Indenture and the Intercreditor Agreement and other Collateral Documents) for a period of 30 days after delivery of written notice thereof stating that it is a "notice of default" under this Indenture and requiring the Company or the respective Restricted Subsidiary, as the case may be, to remedy the same; (9) final judgments or orders rendered against the Company or any Restricted Subsidiary that are unsatisfied and that require the payment in money, either individually or in an aggregate amount, that is more than $2,000,000 over the coverage under applicable insurance policies and either (a) commencement by any creditor of an enforcement proceeding upon such judgment (other than a judgment that is stayed by reason of pending appeal or otherwise) or (b) the occurrence of a 60-day period during which a stay of such judgment or order, by reason of pending appeal or otherwise, was not in effect; and (10) certain evens of bankruptcy, insolvency or reorganization of the Company or any Subsidiary, as the case may be. If any Event of Default has occurred and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes may declare the principal of, premium, if any, accrued and unpaid interest and Liquidated Damages, if any, on the Notes to be due and payable immediately, except that (i) in the case of an Event of Default arising from certain evens of bankruptcy, insolvency or reorganization of the Company or any Subsidiary, the principal of, premium, if any, accrued and unpaid interest and Liquidated Damages, if any, on the Notes will become due and payable immediately without further action or notice. The Indenture contains provisions for (i) defeasance at any time of the entire indebtedness of the Company on this Note and (ii) discharge from certain restrictive covenants and the related Defaults and Events of Default, upon compliance by the Company and certain conditions set forth therein, which provisions apply to this Note. Subject to the terms of the Intercreditor Agreement, the Indenture permits, with certain exceptions as therein provided, the amendment therefore and the modification of the rights and obligations of the Company and the Subsidiary Guarantors and the rights of the Holders under the Indenture at any time by the Company, the Subsidiary Guarantors and the Trustee and the consent of the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note will be conclusive and binding upon such Exhibit A-2 7 Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof for or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. Without the consent of any Holder, the Company, the Subsidiary Guarantors and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to add or release any Subsidiary Guarantor pursuant to the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes and to make certain other specified changes and other changes that do not adversely affect the interests of any Holder in any material respect. No reference herein to the Indenture and no provision of this Note or of the Indenture will alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any, on) and interest and Liquidated Damages on this Note at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Note is registerable on the Note Register of the Company, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Note Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. No service charge will be made for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. No director, officer, employee, incorporator, stockholder or Affiliate of the Company or any Subsidiary Guarantor, as such, past, present or future, will have any personal liability under this Note or the Indenture by reason of his, her or its status as such director, officer, employee, incorporator, stockholder or Affiliate, or any liability for any obligations of the Company or any Subsidiary Guarantor under the Notes or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder, by accepting this Note with the notation of Subsidiary Guarantee endorsed hereon, waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of this Note with the notation of Subsidiary Guarantee endorsed hereon. Prior to the time of due presentment of this Note of registration of transfer, the Company, the Subsidiary Guarantors, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note is overdue, and neither the Company, the Subsidiary Guarantors, the Trustee nor any agent will be affected by notice to the contrary. Exhibit A-2 8 All terms used in this Note which are defined in the Indenture and which are not otherwise defined herein shall have the meanings assigned to them in the Indenture. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to the Company at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes as a convenience to the Holders thereof. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identifying information printed hereon. Interest on this Note will be computed on the basis of a 360-day year. This Note will be governed by and construed in accordance with the laws of the State of New York. Exhibit A-2 9 SUBSIDIARY GUARANTEES Subject to the limitations set forth in the Indenture, the initial Subsidiary Guarantors and, if any, all additional Subsidiary Guarantors (as defined in the Indenture referred to in the Note upon which this notation is endorsed and each being hereinafter referred to as a "Subsidiary Guarantor," which term includes any additional or successor Subsidiary Guarantor under the Indenture) have, jointly and severally, unconditionally guaranteed (a) the due and punctual payment of the principal of (and premium, if any) and interest, and Liquidated Damages, if any, on the Notes, whether at maturity, acceleration, redemption or otherwise, (b) the due and punctual payment of interest on the overdue principal of and interest, and Liquidated Damages on the Notes, if any, to the extent lawful, (c) the due and punctual performance of all other obligations of the Company to the Holders or the Trustee, all in accordance with the terms set forth in the Indenture, and (d) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise. The obligations of each Subsidiary Guarantor are limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor that makes a payment or distribution under a Subsidiary Guarantee will be entitled to a contribution from each other Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor. No member, partner, stockholder, officer, director, manager, employee, incorporator or Affiliate as such, past, present or future, of any Subsidiary Guarantor will have any personal liability under its Subsidiary Guarantee by reason of his, her or its status as such member, partner, stockholder, officer, director, manager, employee, incorporator or Affiliate, or any liability for any obligations of any Subsidiary Guarantor under the Notes or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Any Subsidiary Guarantor may be released from its Subsidiary Guarantee upon the terms and subject to the conditions provided in the Indenture. All terms used in this notation of Subsidiary Guarantee which are defined in the Indenture referred to in this Note upon which this notation of Subsidiary Guarantees is endorsed will have the meanings assigned to them in such Indenture. The Subsidiary Guarantees will be binding upon the Subsidiary Guarantors and will inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee respecting the Note upon which the foregoing Subsidiary Guarantees are noted, the rights Exhibit A-2 10 and privileges herein conferred upon that party will automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof and in the Indenture. The Subsidiary Guarantees will not be valid obligations for any purpose until the certificate of authentication on the Note upon which the foregoing Subsidiary Guarantees are noted will have been executed by the Trustee under the Indenture by the manual signature of one of its authorized signatories. [signature page follows] Exhibit A-2 11 IN WITNESS WHEREOF, each Subsidiary Guarantor has caused this instrument to be duly executed in its corporate name by the signature of its officer thereunto duly authorized. EASTSIDE COAL COMPANY, INC. By: ------------------------------------------- Name: Title: SANDIA OIL & GAS CORPORATION By: ------------------------------------------- Name: Title: SANDIA OPERATING CORP. By: ------------------------------------------- Name: Title: WAMSUTTER HOLDINGS, INC. By: ------------------------------------------- Name: Title: WESTERN ASSOCIATED ENERGY CORPORATION By: ------------------------------------------- Name: Title: Exhibit A-2 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the within mentioned Indenture. Dated: October 28, 2004 U.S. BANK NATIONAL ASSOCIATION as Trustee By: ----------------------------------------------- Authorized Signatory Exhibit A-2 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint_____________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: ------------------------------ Your signature: ------------------------- (Sign exactly as your name appears on the face of this Note) Tax Identification No.: ---------------- SIGNATURE GUARANTEE: __________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Exhibit A-2 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 9.15 or 9.16 of the Indenture, check the box below: [ ] Section 9.15 [ ] Section 9.16 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 9.15 or Section 9.16 of the Indenture, state the amount you elect to have purchased: $_______ Date: -------------------------- Your signature: ------------------------------ (Sign exactly as your name appears on the face of this Note) Tax Identification No.: --------- SIGNATURE GUARANTEE: _________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Exhibit A-2
Principal Amount of this Global Note Signature of Amount of decrease Amount of increase in following such authorized officer in Principal Amount Principal Amount of decrease (or of Trustee or Date of Exchange of this Global Note this Global Note increase) custodian - -------------------------------------------------------------------------------------------------------------------
EXHIBIT A-3 FORM OF ACCREDITED INVESTOR GLOBAL NOTE THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.6 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.5(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.10 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES, TO OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR NOTES), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a) UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF $100,000 OF NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. THE INDEBTEDNESS EVIDENCED BY THIS DOCUMENT IS SUBJECT TO THE PROVISIONS OF THE INTERCREDITOR, SECURITY AND COLLATERAL AGENCY AGREEMENT, DATED AS OF OCTOBER 28, 2004, AMONG ABRAXAS PETROLEUM CORPORATION (THE "COMPANY"), THE SUBSIDIARIES OF THE COMPANY LISTED ON SCHEDULE I THERETO, WELLS FARGO FOOTHILL, INC., IN ITS Exhibit A-3 CAPACITY AS AGENT FOR THE LENDERS WHO ARE FROM TIME TO TIME PARTIES TO A LOAN AGREEMENT DATED AS OF OCTOBER 28, 2004, U.S. BANK NATIONAL ASSOCIATION, IN ITS CAPACITIES AS TRUSTEE FOR THE HOLDERS OF THE COMPANY'S FLOATING RATE SENIOR SECURED NOTES DUE 2009 ISSUED UNDER AN INDENTURE DATED AS OF OCTOBER 28, 2004, AND AS COLLATERAL AGENT, AND GUGGENHEIM CORPORATE FUNDING, LLC, IN ITS CAPACITY AS AGENT FOR THE LENDERS WHO ARE FROM TIME TO TIME PARTIES TO A LOAN AGREEMENT DATED AS OF OCTOBER 28, 2004. Exhibit A-3 ABRAXAS PETROLEUM CORPORATION Floating Rate Senior Secured Note due 2009 No.AI-__ $__ CUSIP No. 003830 AJ 5 Abraxas Petroleum Corporation, a Nevada corporation (herein called the "Company" which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO. or registered assignee the principal sum of ? Dollars ($?) on December 1, 2009 at the office or agency of the Company referred to below, and to pay interest thereon, commencing on June 1, 2005 and continuing semiannually thereafter, on June 1 and December 1 in each year (each, an Interest Payment Date), from October 28, 2004 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at a per annum floating rate of Six-Month LIBOR (as defined below) plus 7.5%, until the principal hereof is paid or duly provided for, and (to the extent lawful) to pay on demand interest on any overdue interest at the rate borne by the Notes from the date on which such overdue interest becomes payable to the date on which payment of such interest has been made or duly provided for. The Company also hereby promises to pay the Liquidated Damages, if any, payable pursuant to Section 3 of the Registration Rights Agreement on the same dates on which interest is payable as provided herein. The interest and Liquidated Damages, if any, so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in said Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered on the Note Register at the close of business on the Regular Record Date for such interest, whether or not a Business Day (as defined below), next preceding such Interest Payment Date. Any such interest or Liquidated Damages not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date, and such Defaulted Interest, Liquidated Damages and (to the extent lawful) interest on such Defaulted Interest and Liquidated Damages at the rate borne by the Notes, may be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered on the Note Register at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof will be given to Holders of Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any, on) and interest and Liquidated Damages, if any, on this Note will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest and Liquidated Damages, if any, may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address will appear on the Note Register. Exhibit A-3 Interest on the Note will accrue from and including the most recent date on which interest has been paid or, if no interest has been paid, from and including the date of issuance, until but excluding the date upon which the principal thereof is paid or duly provided for in accordance with the Indenture. The interest rate will be reset semi-annually on each June 1 and December 1, commencing on June 1, 2005 (each such date, an "Interest Reset Date"). Interest on the Note will be payable semiannually in arrears on June 1 and December 1 of each year, commencing on June 1, 2005; provided, that, if any such day is not a Business Day, such interest payment date will be the next succeeding Business Day. "Business Day" means any day other than a Saturday or Sunday, or a day on which banking institutions in The City of New York are authorized or required by law, regulation or executive order to remain closed and that is also a London Business Day (as defined below). "Six-Month LIBOR" means the rate determined in accordance with the following provisions: (1) On the second London Business Day preceding each Interest Reset Date (each such date, an "Interest Determination Date"), a calculation agent, initially U.S. Bank National Association or a duly appointed successor (the "Calculation Agent"), as agent for the Company, will determine the Six-Month LIBOR rate, which shall be the rate for deposits in the London interbank market in U.S. dollars having a six-month maturity commencing on the succeeding Interest Reset Date immediately following such Interest Determination Date which appears on the Designated LIBOR Page as of 11:00 a.m., London time, on such Interest Determination Date. "Designated LIBOR Page" means the display on the Moneyline service (or such other service or services as may be nominated by the British Bankers' Association) for the purpose of displaying London interbank rates of major banks for U.S. dollar deposits. If no such rate appears on an Interest Determination Date, the Six-Month LIBOR rate on such Interest Determination Date will be determined as described in clause (2) of the definition of "Six-Month LIBOR." "London Business Day" means any day on which dealings in U.S. dollars generally are transacted in the London interbank market. (2) With respect to an Interest Determination Date for which no such rate appears, the Calculation Agent will request the principal London offices of each of four major reference banks in the London interbank market, as selected by the Calculation Agent (after consultation with the Company), to provide the Calculation Agent with its offered quotation for deposits in U.S. dollars having a six-month maturity commencing on the Interest Reset Date immediately following such Interest Determination Date to prime banks in the London interbank market at approximately 11:00 a.m., London time, on such Interest Determination Date and in a principal amount not less than $1,000,000 that is representative for a single transaction in U.S. dollars in such market at such time. If at least two such quotations are provided, the Six-Month LIBOR rate on such Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two quotations are provided, the Six-Month LIBOR rate determined on such Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 a.m., New York City time, on such Interest Determination Date by three major banks in The City of New York selected by the Calculation Exhibit A-3 Agent (after consultation with the Company) for loans in U.S. dollars to leading European banks, having a six-month maturity and in a principal amount not less than $1,000,000 that is representative for a single transaction in U.S. dollars in such market at such time. However, if the banks so selected by the Calculation Agent are not quoting as mentioned above, the Six-Month LIBOR rate with respect to such Interest Determination Date will be the Six-Month LIBOR rate in effect immediately prior to such Interest Determination Date. All percentages resulting from any calculation on the Note will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point with five one-millionths of a percentage point rounded upward and all U.S. dollar amounts used in or resulting from such calculation on the Note will be rounded to the nearest cent (with one-half cent being rounded upward). Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions will for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Note will not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. [signature page follows] Exhibit A-3 3 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed in its corporate name by the signature of its officer thereunto duly authorized. ABRAXAS PETROLEUM CORPORATION By: ----------------------------------------- Name: Title: Attested By: ----------------------------------------- Name: Title: Exhibit A-3 Reverse of Note This Note is one of a duly authorized issue of securities of the Company designated as its Floating Rate Senior Secured Notes due 2009 (herein called the "Notes"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $125,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of October 28, 2004 among the Company, the initial Subsidiary Guarantors named therein and U.S. Bank National Association (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitation of rights, duties, obligations and immunities thereunder of the Company, the Subsidiary Guarantors, the Trustee and the Holders of the Notes, and of the terms upon which the Notes are, and are to be, authenticated and delivered. Optional Redemption The Notes may be redeemed, in whole or from time to time in part, at the option of the Company at any time after April 28, 2007 upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below together with accrued and unpaid interest and Liquidated Damages, if any, to the applicable redemption date during the periods indicated below: Year Percentage ---- ---------- From April 29, 2007 to April 28, 2008........ 104.00% From April 29, 2008 to April 28, 2009........ 102.00% After April 28, 2009......................... 100.00% Notwithstanding the foregoing, at any time prior to April 29, 2007, the Company may, at its option and subject to the restrictions and other provisions relating thereto, if any, contained in the Revolving Credit Facility, on any one or more occasions redeem up to 35% of the original aggregate principal amount of the Notes (i.e., $43,750,000) with the Net Cash Proceeds of one or more Qualified Equity Offerings at a redemption price equal to the product of (x) the principal amount of the Notes being so redeemed and (y) a redemption price factor of 1.00 plus the per annum interest rate on the Notes (expressed as a decimal) on the applicable redemption date, plus accrued and unpaid interest to the applicable redemption date, provided, that (1) at least 65% of the original aggregate principal amount of the Notes (i.e., $81,250,000) remains outstanding after each such redemption; and (2) any such redemption occurs within 90 days after the closing of the Qualified Equity Offering to which such Net Cash Proceeds relate. If less than all the Notes are to be redeemed at any time, the particular Notes to be redeemed will be selected not fewer than 30 days nor more than 60 days prior to the Redemption Date by the Trustee from the Outstanding Notes not previously called for redemption pro rata or by any other method that the Trustee deems fair and appropriate, provided that no Notes of $1,000 or less will be redeemed in part. Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note will Exhibit A-3 5 state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon surrender of the original Note. On and after the Redemption Date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the applicable Redemption Price, together with accrued and unpaid interest and Liquidated Damages, if any, to the Redemption Date. If a Redemption Date is on or after a Regular Record Date and on or before the related Interest Payment Date, the accrued and unpaid interest and Liquidated Damages, if any, on each Note being redeemed will be paid to the person in whose name such Note is registered at the close of business on such Regular Record Date, and no other interest or Liquidated Damages will be payable to any other Person who may become a Holder of such Note after such time. The Notes do not have the benefit of any sinking fund obligations. In the event of a Change of Control of the Company, and subject to certain conditions and limitations provided in the Indenture, the Company will be obligated to make an offer to purchase within 30 calendar days following the occurrence of a Change of Control of the Company, all of the then Outstanding Notes at a purchase price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest and Liquidated Damages, if any, to the Change of Control Payment Date, all as provided in the Indenture. In the event of Asset Sales, under certain circumstances, the Company will be obligated to make a Net Proceeds Offer to purchase all or a specified portion of each Holder's Notes at a purchase price equal to 100% of the aggregate principal amount of the Notes, together with accrued and unpaid interest and Liquidated Damages, if any, to the date such Net Proceeds Offer is consummated in accordance with the procedures set forth in the Indenture. As more particularly set forth in the Indenture, an Event of Default is generally (1) default in the payment when due of the principal of or premium on any Note, whether such payment is due at Stated Maturity, upon redemption, upon repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, upon declaration of acceleration or otherwise; (2) default in the payment when due of any installment of interest on, or Liquidated Damages with respect to, any Note, and the continuance of such Default for a period of 30 days; (3) default in the performance or breach of the provisions relating to mergers, consolidations and sales of all or substantially all assets or the failure to make or consummate a Change of Control Offer or a Net Proceeds Offer; (4) failure by the Company or any Restricted Subsidiary to comply with any other term, covenant or agreement contained in the Notes, any Subsidiary Guarantee, any Collateral Document or the Indenture (other than a default specified in clause (1), (2) or (3) above) for a period of 60 days after delivery to the Company or such Restricted Subsidiary, as the case may be, of written notice of such failure stating that it is a "notice of default" under this Indenture; (5) the occurrence and continuation beyond any applicable grace period of any default in the payment when due of the principal of, or premium or interest on, any Indebtedness for borrowed money of the Company (other than the Notes) or any Restricted Subsidiary or any other default resulting in acceleration of any Indebtedness for borrowed money of the Exhibit A-3 6 Company or any Restricted Subsidiary, but only in the event that the aggregate principal amount of such Indebtedness shall exceed $2,000,000; (6) without limiting clause (5) above, the occurrence and continuation of an "event of default" under either the Revolving Credit Facility or the Bridge Loan; (7) any Subsidiary Guarantee shall for any reason cease to be, or be asserted by the Company, any Subsidiary Guarantor, any of their respective Affiliates or any Person acting on behalf of any of the foregoing not to be, in full force and effect and enforceable in any material respect in accordance with its terms (except pursuant to the release or termination of any such Subsidiary Guarantee in accordance with this Indenture); (8) any Collateral Document shall for any reason cease to be, or be asserted by the Company, any Restricted Subsidiary, any of their respective Affiliates or any Person acting on behalf of any of the foregoing not to be, in full force and effect and enforceable in any material respect in accordance with its terms or to not otherwise grant a duly perfected first priority security interest in the Collateral in favor of the holders of the Note Obligations (subject to Permitted Prior Liens and except pursuant to a release or termination thereof consummated in accordance with this Indenture and the Intercreditor Agreement and other Collateral Documents) for a period of 30 days after delivery of written notice thereof stating that it is a "notice of default" under this Indenture and requiring the Company or the respective Restricted Subsidiary, as the case may be, to remedy the same; (9) final judgments or orders rendered against the Company or any Restricted Subsidiary that are unsatisfied and that require the payment in money, either individually or in an aggregate amount, that is more than $2,000,000 over the coverage under applicable insurance policies and either (a) commencement by any creditor of an enforcement proceeding upon such judgment (other than a judgment that is stayed by reason of pending appeal or otherwise) or (b) the occurrence of a 60-day period during which a stay of such judgment or order, by reason of pending appeal or otherwise, was not in effect; and (10) certain evens of bankruptcy, insolvency or reorganization of the Company or any Subsidiary, as the case may be. If any Event of Default has occurred and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes may declare the principal of, premium, if any, accrued and unpaid interest and Liquidated Damages, if any, on the Notes to be due and payable immediately, except that (i) in the case of an Event of Default arising from certain evens of bankruptcy, insolvency or reorganization of the Company or any Subsidiary, the principal of, premium, if any, accrued and unpaid interest and Liquidated Damages, if any, on the Notes will become due and payable immediately without further action or notice. The Indenture contains provisions for (i) defeasance at any time of the entire indebtedness of the Company on this Note and (ii) discharge from certain restrictive covenants and the related Defaults and Events of Default, upon compliance by the Company and certain conditions set forth therein, which provisions apply to this Note. Subject to the terms of the Intercreditor Agreement, the Indenture permits, with certain exceptions as therein provided, the amendment therefore and the modification of the rights and obligations of the Company and the Subsidiary Guarantors and the rights of the Holders under the Indenture at any time by the Company, the Subsidiary Guarantors and the Trustee and the consent of the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note will be conclusive and binding upon such Exhibit A-3 7 Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof for or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. Without the consent of any Holder, the Company, the Subsidiary Guarantors and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to add or release any Subsidiary Guarantor pursuant to the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes and to make certain other specified changes and other changes that do not adversely affect the interests of any Holder in any material respect. No reference herein to the Indenture and no provision of this Note or of the Indenture will alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any, on) and interest and Liquidated Damages on this Note at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Note is registerable on the Note Register of the Company, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Note Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. No service charge will be made for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. No director, officer, employee, incorporator, stockholder or Affiliate of the Company or any Subsidiary Guarantor, as such, past, present or future, will have any personal liability under this Note or the Indenture by reason of his, her or its status as such director, officer, employee, incorporator, stockholder or Affiliate, or any liability for any obligations of the Company or any Subsidiary Guarantor under the Notes or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder, by accepting this Note with the notation of Subsidiary Guarantee endorsed hereon, waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of this Note with the notation of Subsidiary Guarantee endorsed hereon. Prior to the time of due presentment of this Note of registration of transfer, the Company, the Subsidiary Guarantors, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note is overdue, and neither the Company, the Subsidiary Guarantors, the Trustee nor any agent will be affected by notice to the contrary. Exhibit A-3 8 All terms used in this Note which are defined in the Indenture and which are not otherwise defined herein shall have the meanings assigned to them in the Indenture. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to the Company at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes as a convenience to the Holders thereof. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identifying information printed hereon. Interest on this Note will be computed on the basis of a 360-day year. This Note will be governed by and construed in accordance with the laws of the State of New York. Exhibit A-3 9 SUBSIDIARY GUARANTEES Subject to the limitations set forth in the Indenture, the initial Subsidiary Guarantors and, if any, all additional Subsidiary Guarantors (as defined in the Indenture referred to in the Note upon which this notation is endorsed and each being hereinafter referred to as a "Subsidiary Guarantor," which term includes any additional or successor Subsidiary Guarantor under the Indenture) have, jointly and severally, unconditionally guaranteed (a) the due and punctual payment of the principal of (and premium, if any) and interest, and Liquidated Damages, if any, on the Notes, whether at maturity, acceleration, redemption or otherwise, (b) the due and punctual payment of interest on the overdue principal of and interest, and Liquidated Damages on the Notes, if any, to the extent lawful, (c) the due and punctual performance of all other obligations of the Company to the Holders or the Trustee, all in accordance with the terms set forth in the Indenture, and (d) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise. The obligations of each Subsidiary Guarantor are limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor that makes a payment or distribution under a Subsidiary Guarantee will be entitled to a contribution from each other Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor. No member, partner, stockholder, officer, director, manager, employee, incorporator or Affiliate as such, past, present or future, of any Subsidiary Guarantor will have any personal liability under its Subsidiary Guarantee by reason of his, her or its status as such member, partner, stockholder, officer, director, manager, employee, incorporator or Affiliate, or any liability for any obligations of any Subsidiary Guarantor under the Notes or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Any Subsidiary Guarantor may be released from its Subsidiary Guarantee upon the terms and subject to the conditions provided in the Indenture. All terms used in this notation of Subsidiary Guarantee which are defined in the Indenture referred to in this Note upon which this notation of Subsidiary Guarantees is endorsed will have the meanings assigned to them in such Indenture. The Subsidiary Guarantees will be binding upon the Subsidiary Guarantors and will inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee respecting the Note upon which the foregoing Subsidiary Guarantees are noted, the rights and privileges herein conferred upon that party will automatically extend to and Exhibit A-3 10 be vested in such transferee or assignee, all subject to the terms and conditions hereof and in the Indenture. The Subsidiary Guarantees will not be valid obligations for any purpose until the certificate of authentication on the Note upon which the foregoing Subsidiary Guarantees are noted will have been executed by the Trustee under the Indenture by the manual signature of one of its authorized signatories. [signature page follows] Exhibit A-3 11 IN WITNESS WHEREOF, each Subsidiary Guarantor has caused this instrument to be duly executed in its corporate name by the signature of its officer thereunto duly authorized. EASTSIDE COAL COMPANY, INC. By: ------------------------------------------- Name: Title: SANDIA OIL & GAS CORPORATION By: ------------------------------------------- Name: Title: SANDIA OPERATING CORP. By: ------------------------------------------- Name: Title: WAMSUTTER HOLDINGS, INC. By: ------------------------------------------- Name: Title: WESTERN ASSOCIATED ENERGY CORPORATION By: ------------------------------------------- Name: Title: Exhibit A-3 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the within mentioned Indenture. Dated: October 28, 2004 U.S. BANK NATIONAL ASSOCIATION as Trustee By: ------------------------------------ Authorized Signatory Exhibit A-3 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint_____________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: ------------------------------ Your signature: ------------------------- (Sign exactly as your name appears on the face of this Note) Tax Identification No.: ---------------- SIGNATURE GUARANTEE: __________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Exhibit A-3 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 9.15 or 9.16 of the Indenture, check the box below: [ ] Section 9.15 [ ] Section 9.16 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 9.15 or Section 9.16 of the Indenture, state the amount you elect to have purchased: $_______ Date: -------------------------- Your signature: ------------------------------ (Sign exactly as your name appears on the face of this Note) Tax Identification No.: --------- SIGNATURE GUARANTEE: _________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Exhibit A-3
Principal Amount of this Global Note Signature of Amount of decrease Amount of increase in following such authorized officer in Principal Amount Principal Amount of decrease (or of Trustee or Date of Exchange of this Global Note this Global Note increase) custodian - -------------------------------------------------------------------------------------------------------------------
Exhibit A-3 EXHIBIT B FORM OF CERTIFICATE OF TRANSFER Abraxas Petroleum Corporation 500 North Loop 1604 East Suite 100 San Antonio, Texas 78232 U.S. Bank National Association 60 Livingston Avenue St. Paul, Minnesota 55107 Attention: Corporate Trust Administration Re: Floating Rate Senior Secured Notes due 2009 Reference is hereby made to the Indenture, dated as of October __, 2004 (the "Indenture"), among Abraxas Petroleum Corporation (the "Company"), the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. _______________ (the "Transferor") owns and proposes to transfer the Securities or interest in such Securities specified in Annex A hereto, in the principal amount of $________ in such Securities or interests (the "Transfer"), to _______________ (the "Transferee"), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that: [CHECK ALL THAT APPLY] 1. |_| Check if Transferee will take delivery of a beneficial interest in the 144A Global Note or a Definitive Security Pursuant to Rule 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Definitive Security is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Definitive Security for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Security will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the 144A Global Note and/or the Definitive Security and in the Indenture and the Securities Act. 2. |_| Check if Transferee will take delivery of a beneficial interest in the Temporary Regulation S Global Note, the Regulation S Global Note or a Definitive Exhibit B Security pursuant to Regulation S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Restricted Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Security will be subject to the restrictions on Transfer enumerated in the Private Placement Legend printed on the Regulation S Global Note, the Temporary Regulation S Global Note and/or the Definitive Security and in the Indenture and the Securities Act. 3. |_| Check and complete if Transferee will take delivery of a beneficial interest in the IAI Certificated Note or a Definitive Security pursuant to any provision of the Securities Act other than Rule 144A or Regulation S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Notes and Restricted Definitive Securities and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one): (a) |_| such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or (b) |_| such Transfer is being effected to the Company or a subsidiary thereof, or (c) |_| such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act; or (d) |_| such Transfer is being effected to an Institutional Accredited Investor and pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor hereby further certifies that it has not engaged in any general solicitation within the meaning of Regulation D under the Securities Act and the Transfer complies with the transfer restrictions applicable to beneficial interests in a Restricted Global Note or Restricted Definitive Securities and the requirements Exhibit B 2 of the exemption claimed, which certification is supported by (1) a certificate executed by the Transferee and (2) if such Transfer is in respect of a principal amount of Notes at the time of transfer of less than $250,000, an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that such Transfer is in compliance with the Securities Act. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Security will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the IAI Certificated Note and/or the Definitive Securities and in the Indenture and the Securities Act. 4. |_| Check if Transferee will take delivery of a beneficial interest in an Unrestricted Global Note or of an Unrestricted Definitive Security. (a) |_| Check if Transfer is Pursuant to Rule 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Security will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Securities and in the Indenture. (b) |_| Check if Transfer is Pursuant to Regulation S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Security will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Securities and in the Indenture. (c) |_| Check if Transfer is Pursuant to Other Exemption. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Security will not be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes or Restricted Definitive Securities and in the Indenture. Exhibit A-3 3 This certificate and the statements contained herein are made for your benefit and the benefit of the Company. [Insert Name of Transferor] By: ---------------------------- Name: Title: Dated: _________, ___ Exhibit B 4 Exhibit B 5 NY1 5586099v7 ANNEX A TO CERTIFICATE OF TRANSFER 1. The Transferor owns and proposes to transfer the following: [CHECK ONE OF (a) OR (b)] (a) |_| a beneficial interest in the: (i) |_| 144A Global Note (CUSIP ______), or (ii) |_| Regulation S Global Note (CUSIP ______), or (iii) |_| IAI Certificated Note (CUSIP ______); or (b) |_| a Restricted Definitive Security. 2. After the Transfer the Transferee will hold: [CHECK ONE] (a) |_| a beneficial interest in the: (i) |_| 144A Global Note (CUSIP ______), or (ii) |_| Regulation S Global Note (CUSIP ______), or (iii) |_| IAI Certificated Note (CUSIP ______), or (iv) |_| Unrestricted Global Note (CUSIP ______); or (b) |_| a Restricted Definitive Security; or (c) |_| an Unrestricted Definitive Security, in accordance with the terms of the Indenture. Exhibit B 5 EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE Abraxas Petroleum Corporation 500 North Loop 1604 East Suite 100 San Antonio, Texas 78232 U.S. Bank National Association 60 Livingston Avenue St. Paul, Minnesota 55107 Attention: Corporate Trust Administration Re: Floating Rate Senior Secured Notes due 2009 (CUSIP _______________) Reference is hereby made to the Indenture, dated as of October 28, 2004 (the "Indenture"), among Abraxas Petroleum Corporation (the "Company"), the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. _______________ (the "Owner") owns and proposes to exchange the Securities or interest in such Securities specified herein, in the principal amount of $______________ in such Securities or interests (the "Exchange"). In connection with the Exchange, the Owner hereby certifies that: 1. Exchange of Restricted Definitive Securities or Beneficial Interests in a Restricted Global Note for Unrestricted Definitive Securities or Beneficial Interests in an Unrestricted Global Note (a) |_| Check if Exchange is from beneficial interest in a Restricted Global Note to beneficial interest in an Unrestricted Global Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the United States Securities Act of 1933, as amended (the "Securities Act"), (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (b) |_| Check if Exchange is from beneficial interest in a Restricted Global Note to Unrestricted Definitive Security. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for an Unrestricted Definitive Security, the Owner hereby certifies (i) the Definitive Exhibit C Security is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Definitive Security is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (c) |_| Check if Exchange is from Restricted Definitive Security to beneficial interest in an Unrestricted Global Security. In connection with the Owner's Exchange of a Restricted Definitive Security for a beneficial interest in an Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Securities and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (d) |_| Check if Exchange is from Restricted Definitive Security to Unrestricted Definitive Security. In connection with the Owner's Exchange of a Restricted Definitive Security for an Unrestricted Definitive Security, the Owner hereby certifies (i) the Unrestricted Definitive Security is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Securities and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Definitive Security is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. 2. Exchange of Restricted Definitive Securities or Beneficial Interests in Restricted Global Notes for Restricted Definitive Securities or Beneficial Interests in Restricted Global Notes (a) |_| Check if Exchange is from beneficial interest in a Restricted Global Note to Restricted Definitive Security. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a Restricted Definitive Security with an equal principal amount, the Owner hereby certifies that the Restricted Definitive Security is being acquired for the Owner's own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Definitive Security issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Security and in the Indenture and the Securities Act. (b) |_| Check if Exchange is from Restricted Definitive Security to beneficial interest in a Restricted Global Note. In connection with the Exchange of the Owner's Restricted Definitive Security for a beneficial interest in the [CHECK ONE] |_| 144A Global Note, |_| Regulation S Global Note, |_| IAI Global Note with an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without Exhibit C 2 transfer and (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture the beneficial interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Note and in the Indenture and the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. [Insert Name of Owner] By: Name: Title: Dated: _______, ___ Exhibit C 3 EX-10 3 revolver.txt LOAN AGREEMENT - REVOLVER EXHIBIT 10.2 LOAN AGREEMENT by and among ABRAXAS PETROLEUM CORPORATION as Borrower, THE SUBSIDIARIES OF BORROWER THAT ARE SIGNATORIES HERETO as Guarantors, THE LENDERS THAT ARE SIGNATORIES HERETO as the Lenders, and WELLS FARGO FOOTHILL, INC. as the Arranger and Administrative Agent Dated as of October 28, 2004 ================================================================================ LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement"), is entered into as of October 28, 2004, by and among, on the one hand, the lenders identified on the signature pages hereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders ("Agent"), and, on the other hand, ABRAXAS PETROLEUM CORPORATION, a Nevada corporation ("Borrower"), and the subsidiaries of Borrower that are signatories hereto ("Guarantors"). The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: ----------- "Acceptable Commodity Hedging Agreement" means a Commodity Hedging Agreement (i) with a counterparty rated A3 or better by Moody's and A- or better by Standard & Poor's, or the equivalent by a rating agency acceptable to Agent, (ii) pursuant to an agreement the terms of which are acceptable to Agent, and (iii) the arrangements of which are otherwise reasonably acceptable to Agent. "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, chattel paper, or a General Intangible. "Accounts" means all of Borrower's or any Guarantor's now owned or hereafter acquired right, title, and interest with respect to "accounts" (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "ACH Transactions" means any cash management or related services (including the Automated Clearing House processing of electronic funds transfers through the direct Federal Reserve Fedline system) provided by Wells Fargo or its Affiliates for the account of Borrower or its Subsidiaries. "Advances" has the meaning set forth in Section 2.1. "Affiliate" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; provided, however, that, for the purposes of Section 7.14 hereof: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture (other than joint ventures permitted under clause (d) of the definition of Permitted Investments) in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. "Agent" means Foothill, solely in its capacity as agent for the Lenders hereunder, and any successor thereto. "Agent Advances" has the meaning set forth in Section 2.3(e)(i). "Agent's Account" means an account identified on Schedule A-1. "Agent-Related Persons" means Agent together with its Affiliates, officers, directors, employees, and agents. "Agent Reserve" has the meaning set forth in Section 2.1(b). "Agreement" has the meaning set forth in the preamble hereto. "Applicable Prepayment Premium" means, as of any date of determination, an amount equal to (a) during the period of time from and after the date of the execution and delivery of this Agreement up to the date that is immediately prior to the first anniversary of the Closing Date, 1.5% times the aggregate amount of the Commitments (or, in the case of a partial reduction pursuant to Section 3.6(b), the amount of the Commitment so reduced), (b) during the period of time from and including the date that is the first anniversary of the Closing Date up to the date that is immediately prior to the second anniversary of the Closing Date, 1.0% times the aggregate amount of the Commitments (or, in the case of a partial reduction pursuant to Section 3.6(b), the amount of the Commitment so reduced), (c) during the period of time from and including the date that is the second anniversary of the Closing Date up to the date that is immediately prior to the third anniversary of the Closing Date, 0.5% times the aggregate amount of the Commitments (or, in the case of a partial reduction pursuant to Section 3.6(b), the amount of the Commitment so reduced) and (d) thereafter, zero. "Applicable Proceeds" means the Net Proceeds (as such term is defined in the Senior Notes Indenture) from an Asset Sale (as such term is defined in the Senior Notes Indenture) or the Net Loss Proceeds (as such term is defined in the Senior Notes Indenture) from an Event of Loss (as such term is defined in the Senior Notes Indenture) applied by Borrower to prepay the outstanding principal amount of the Advances. "Assignee" has the meaning set forth in Section 14.1. "Assignment and Acceptance" means an Assignment and Acceptance in the form of Exhibit A-1. "Authorized Person" means any officer or other employee of Borrower or any Guarantor. 2 "Availability" means, as of any date of determination, if such date is a Business Day, and determined at the close of business on the immediately preceding Business Day, if such date of determination is not a Business Day, the amount that Borrower is entitled to borrow as Advances under Section 2.1 (after giving effect to all then outstanding Obligations (other than Bank Products Obligations) and all sublimits and Agent Reserves applicable hereunder). "Bank Product Agreements" means those certain agreements entered into from time to time by Borrower or its Subsidiaries in connection with any of the Bank Products. "Bank Product Obligations" means all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by Borrower or its Subsidiaries to Wells Fargo or its Affiliates pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that Borrower is obligated to reimburse to Lender as a result of Lender purchasing participations or executing indemnities or reimbursement obligations with respect to the Bank Products provided to Borrower or its Subsidiaries pursuant to the Bank Product Agreements. "Bank Product Reserves" means, as of any date of determination, the amount of reserves that Agent has established (based upon Wells Fargo's or its Affiliate's reasonable determination of the credit exposure in respect of then extant Bank Products) for Bank Products then provided or outstanding; provided that the total amount of reserves that shall qualify as Bank Product Reserves at any time shall not exceed $2,000,000. "Bank Products" means any service or facility extended to Borrower or its Subsidiaries by Wells Fargo or any Affiliate of Wells Fargo including: (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH Transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) Hedging Agreements. "Bankruptcy Code" means (i) the United States Bankruptcy Code or (ii) any similar legislation in a relevant jurisdiction, in each case as in effect from time to time. "Base Rate" means the rate of interest announced within Wells Fargo at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "Base Rate Loan" means each portion of an Advance that bears interest at a rate determined by reference to the Base Rate. "Base Rate Margin" means 1.00 percentage point. "Basis Differential" means, in the case of any Oil and Gas Property, the difference between the NYMEX futures contract prices and the sales prices at the delivery point where the oil or gas, as the case may be, produced by such Oil and Gas Property, is sold. 3 "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower or any Subsidiary or ERISA Affiliate of Borrower has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Board of Directors" means the board of directors (or comparable managers) of any Loan Party. "Books" means Borrower's and each Guarantor's now owned or hereafter acquired books and records (including all of its Records indicating, summarizing, or evidencing its assets (including the Collateral) or liabilities), all of Borrower's and each Guarantor's Records relating to its or their business operations or financial condition, and all of its or their goods or General Intangibles related to such information). "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrowing" means a borrowing hereunder consisting of Advances made on the same day by the Lenders (or Agent on behalf thereof), or by Swing Lender in the case of a Swing Loan, or by Agent in the case of an Agent Advance. "Borrowing Base" has the meaning set forth in Section 2.1. "Bridge Loan Administrative Agent" means Guggenheim Corporate Funding, LLC, and any successor thereto. "Bridge Loan Agreement" means the Loan Agreement, dated as of October 28, 2004, by and among Borrower, the Bridge Loan Administrative Agent and the other lenders party thereto, as such may from time to time be amended, restated, supplemented, replaced, modified or otherwise changed in accordance with the terms of this Agreement. "Bridge Loan Dispositions" means (a) a Grey Wolf Stock Sale and (b) any sales, transfers or other dispositions of assets required or permitted under Section 6.19 of the Bridge Loan Agreement as in effect on the Closing Date and made in compliance with the terms thereof. "Bridge Loan Documents" means the Bridge Loan Agreement and each other agreement, instrument and document related thereto, as such may from time to time be amended, restated, supplemented, replaced, modified or otherwise changed in accordance with the terms of this Agreement. "Bridge Loan Obligations" means all obligations owing by Borrower or any of its Subsidiaries under the Bridge Loan Documents. "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close in New York City. "Capital Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. 4 "Capitalized Lease Obligation" means any Indebtedness represented by obligations under a Capital Lease. "Capital Restructuring" means (i) the repayment in full of all of the obligations of Borrower under the Existing Loan Agreement, (ii) the Existing Note Redemption, (iii) the issuance of the Senior Notes pursuant to the Senior Notes Documents, (iv) the consummation of the transactions contemplated by the Bridge Loan Documents and (v) the consummation of the transactions contemplated by the Grey Wolf Loan Documents. "Cash Equivalents" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 270 days from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank organized under the laws of the United States or any state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) certificates of deposit less than or equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation, and (e) to the extent not otherwise included in clauses (a) through (d) above, "Cash Equivalents" as such term is defined in the Senior Notes Indenture as in effect on the Closing Date. "Change of Control" means (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 35%, or more, of the Stock of Borrower having the right to vote for the election of members of the Board of Directors of Borrower, or (b) a majority of the members of the Board of Directors of Borrower do not constitute Continuing Directors, (c) a "Change of Control" (as defined in the Senior Notes Indenture) shall have occurred or (d) except in connection with a transaction described in clauses (k) or (l) of the definition of Permitted Disposition, Borrower ceases to directly own and control 100% of the outstanding capital Stock of each of its Restricted Subsidiaries extant as of the Closing Date. "Closing Date" means the date of the making of the initial Advance (or other extension of credit) hereunder. "Code" means the New York Uniform Commercial Code, as in effect from time to time. "Collateral" has the meaning set forth in the Intercreditor Agreement. "Collateral Agent " means U.S. Bank, N.A., a national banking association, or such successor collateral agent as may be appointed pursuant to the terms of the Intercreditor Agreement. 5 "Collateral Agent's Liens" means the Liens granted by Borrower or any Guarantor to the Collateral Agent for the benefit of the Agent and the Lender Group under or pursuant to the Intercreditor Agreement and the other Collateral Documents. "Collateral Coverage Ratio" means, as of any date of determination, the ratio of (i) the aggregate PV-10 of the Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves of Borrower; provided, that the aggregate amount attributable to the PV-10 of the Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves shall not exceed the aggregate PV-10 of the Proved Developed Producing Reserves multiplied by 1.2222 (so that for the purpose of such calculation the amount attributable to the PV-10 of the Proved Developed Producing Reserves shall be at least 45% of the aggregate amount attributable to this clause (i)) to (ii) the aggregate amount of Obligations then outstanding multiplied by 3. "Collateral Documents" means the security agreements, the pledge agreements, mortgages, UCC financing statements and each other agreement, document and instrument described on Schedule 1.1, duly executed or authorized from time to time by each applicable Loan Party, the form and substance of which is satisfactory to Agent. "Collections" means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) of Borrower or any Guarantor. "Commitment" means, with respect to each Lender, its Commitment, and with respect to all Lenders, all of their Commitments in each case as such dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1, as such Commitments are from time to time reduced pursuant to Section 3.6(b). "Commitment Fee Percentage" means a per annum rate equal to (a) prior to the Commitment Reduction Date, 0.625% and (b) on and after the Commitment Reduction Date, 1.875%. "Commitment Reduction Event" means (i) in the case of any Unused Applicable Proceeds, at any time that the aggregate amount of all Unused Applicable Proceeds since the Closing Date exceeds $10,000,000, and (ii) in the case of the proceeds from clause (b) of the definition of Bridge Loan Dispositions, at any time on and after the Closing Date. "Commitment Reduction Amount" means (i) the aggregate amount equal to the amount of Unused Applicable Proceeds after the occurrence of the Commitment Reduction Event, and (ii) the aggregate amount equal to the proceeds from clause (b) of the definition of Bridge Loan Dispositions applied to repay the Advances, provided, that, in the case of either clause (i) or (ii) above, the Commitment Reduction Amount, upon the permanent reductions in the Commitments pursuant to Section 3.06(b), shall be reduced in an amount equal to such permanent reductions in the Commitments. "Commitment Reduction Date" has the meaning set forth in Section 3.6(b). 6 "Commitment Termination Date" has the meaning set forth in Section 3.6(b). "Commitment Termination Notice" has the meaning set forth in Section 3.6(b). "Commodity Hedging Agreement" means a commodity hedging or purchase agreement or similar arrangement entered into with the intent of protecting against fluctuations in commodity prices or the exchange of notional commodity obligations, either generally or under specific contingencies. "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Borrower to Agent. "Continuing Director" means (a) any member of the Board of Directors who was a director (or comparable manager) of Borrower on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was recommended, appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Borrower (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof. "Contribution Agreement" means the Contribution Agreement made by the Guarantors in favor of the Lender Group. "Consolidated Net Interest Expense" means, with respect to Borrower and its Restricted Subsidiaries for any period, gross cash interest expense of Borrower and its Restricted Subsidiaries for such period determined on a consolidated basis and in accordance with GAAP (including, without limitation, interest expense paid to Affiliates of Borrower and its Restricted Subsidiaries), less (i) the sum of (A) cash interest income for such period and (B) cash gains for such period on Interest Rate Protection Agreements (to the extent not included in cash interest income above and to the extent not deducted in the calculation of gross cash interest expense), plus (ii) the sum of (A) cash losses for such period on Interest Rate Protection Agreements (to the extent not included in gross cash interest expense) and (B) the upfront cash costs or fees for such period associated with Interest Rate Protection Agreements (to the extent not included in gross cash interest expense), in each case, determined on a consolidated basis and in accordance with GAAP. "Currency Protection Agreement" means a currency swap, cap or collar agreement or similar arrangement entered into with the intent of protecting against fluctuations in currency values, either generally or under specific contingencies. "Daily Balance" means, with respect to each day during the term of this Agreement, the amount of an Obligation owed at the end of such day. "DDA" means any checking or other demand deposit account maintained by Borrower. 7 "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Defaulting Lender" means any Lender that fails to make any Advance (or other extension of credit) that it is required to make hereunder on the date that it is required to do so hereunder. "Defaulting Lender Rate" means (a) the Base Rate for the first 3 days from and after the date the relevant payment is due, and (b) thereafter, at the interest rate then applicable to Advances that are Base Rate Loans (inclusive of the Base Rate Margin applicable thereto). "Designated Account" means that certain DDA of Borrower identified on Schedule D-1. "Dollars" or "$" means United States dollars. "EBITDA" means, with respect to any fiscal period, Borrower's and its Restricted Subsidiaries' consolidated net earnings (or loss), minus extraordinary gains (including any gains related to the extinguishment or retirement of the Existing Notes), plus interest expense, income taxes, non-cash expenses incurred in connection with the payment of Stock compensation, non-cash expenses incurred in connection with the issuance of warrants or options to purchase the Stock of Borrower, and depletion depreciation and amortization for such period, as determined in accordance with GAAP. "Eligible Transferee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $250,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $250,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company, or other financial institution or fund that is engaged in making, purchasing, or otherwise investing in commercial loans or securities in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000, (d) any Affiliate (other than individuals) of a Lender that was party hereto as of the Closing Date including, without limitation, a fund or account managed by such Lender or an Affiliate of such Lender or its investment manager (a "Related Fund"), (e) so long as no Event of Default or Unmatured Default has occurred and is continuing, any other Person approved by Agent and Borrower, and (f) during the continuation of an Event of Default or Unmatured Default, any other Person approved by Agent. "Environmental Actions" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or Releases of Hazardous Materials from (a) any assets, properties, or businesses of any Loan Party or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by any Loan Party or any predecessor in interest. 8 "Environmental Law" means any applicable federal, state, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy, or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on any Loan Party, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USC ss. 1251 et seq.; the Toxic Substances Control Act, 15 USC ss. 2601 et seq.; the Clean Air Act, 42 USC ss. 7401 et seq.; the Safe Drinking Water Act, 42 USC ss. 3803 et seq.; the Oil Pollution Act of 1990, 33 USC ss. 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC ss. 11001 et seq.; the Hazardous Material Transportation Act, 49 USC ss. 1801 et seq.; and the Occupational Safety and Health Act, 29 USC ss. 651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); and any state and local or foreign counterparts or equivalents, in each case as amended from time to time. "Environmental Liabilities and Costs" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any Environmental Action. "Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "Equipment" means all of Borrower's and any Guarantor's now owned or hereafter acquired right, title, and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto. "ERISA Affiliate" means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of a Loan Party, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which 9 it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of a Loan Party, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the IRC by a Loan Party or its Subsidiaries or any of their ERISA Affiliates. "Event of Default" has the meaning set forth in Section 8. "Excess Availability" means the amount, as of the date any determination thereof is to be made, equal to Availability minus the aggregate amount, if any, of all trade payables of Borrower and its Restricted Subsidiaries aged in excess of historical levels with respect thereto and all book overdrafts in excess of historical practices with respect thereto, in each case as determined by Agent in its Permitted Discretion. "Exchange Act" means the Securities Exchange Act of 1934, as in effect from time to time. "Existing Loan Agreement" means that certain Loan and Security Agreement, dated as of January 22, 2003, by and among the Borrower, the Guarantors, the lenders party thereto and Agent, as amended by the First Amendment, Waiver, Consent and Partial Release, dated as of October 20, 2003, as further amended by Amendment No. 2, dated as of February 23, 2004, and as further amended by Amendment No. 3, dated as of June 4, 2004. "Existing Note Redemption" has the meaning set forth in Section 3.1(bb). "Existing Notes" means Borrower's 11-1/2% Secured Notes due 2007 issued by Borrower pursuant to that certain Indenture, dated as of January 23, 2003, among Borrower, the Subsidiaries of Borrower party thereto and U.S. Bank, N.A., as trustee for the holders of the Existing Notes. "Fee Letter" means that certain fee letter, dated as of even date herewith, between Borrower and Agent, in form and substance satisfactory to Agent. "FEIN" means Federal Employer Identification Number. "Flow of Funds Agreement" means the Flow of Funds Agreement, dated as of October 28, 2004, by and among Agent, the Lenders, Bridge Loan Administrative Agent, the lenders party to the Bridge Loan Agreement, the Senior Notes Trustee, on behalf of the holders of the Senior Notes, Grey Wolf, Grey Wolf Credit Facility Agent and the Loan Parties regarding the transfer of funds to occur on the Closing Date, the form and substance of which is satisfactory to Agent. 10 "Foothill" means Wells Fargo Foothill, Inc., a California corporation formerly known as Foothill Capital Corporation. "Funding Date" means the date on which a Borrowing occurs. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all of Borrower's and any Guarantor's now owned or hereafter acquired right, title, and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, judgments, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, designs, inventions, trade names, trade secrets, d/b/a's, Internet domain names, logos, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), and any and all supporting obligations in respect thereof, and any other personal property other than goods, Accounts, Investment Property, and Negotiable Collateral. "Governing Documents" means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational documents of such Person. "Governmental Authority" means any federal, state, local or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body. "Grey Wolf" means Grey Wolf Exploration, Inc., an Alberta company, and any successor thereto. "Grey Wolf Credit Facility" means the Credit Agreement, dated as of October 28, 2004, among Grey Wolf, the lenders party thereto and the Grey Wolf Credit Facility Agent, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed. "Grey Wolf Credit Facility Agent" means Guggenheim Corporate Funding, LLC, and any successor thereto. "Grey Wolf Stock Sale" means the public or private sale, transfer or other disposition by Borrower, Grey Wolf or a Restricted Subsidiary of Borrower of Stock of Grey Wolf. "Grey Wolf Loan Documents" means the Grey Wolf Credit Facility and each other agreement, instrument and document related thereto, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed. 11 "Guarantor" has the meaning set forth in the preamble to this Agreement and each other Person that executes a Guaranty. "Guaranty" means that certain general continuing guaranty executed and delivered by any Guarantor in favor of Agent, for the benefit of the Lender Group, in form and substance satisfactory to Agent. "Guaranteed Obligations" has the meaning set forth in Section 18.1. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity" under Environmental Laws, (b) Hydrocarbons, including, without limitation, oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Hedging Agreement" means any Currency Protection Agreement, Interest Rate Protection Agreement or Commodity Hedging Agreement. "Hydrocarbons" means oil, gas, coal seam gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, all products and byproducts refined, separated, settled and dehydrated therefrom and all products and byproducts refined therefrom, including, without limitation, kerosene, liquefied petroleum gas, refined lubricating oils, diesel fuel, drip gasoline, natural gasoline, helium, sulfur, geothermal steam, water, carbon dioxide, and all other minerals. "Hydrocarbon Interests" means all rights, titles, interests and estates now owned or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, oil, gas and casinghead gas leases, or other liquid or gaseous hydrocarbon leases, mineral fee or lease interests, farm-outs, overriding royalty and royalty interests, net profit interests, oil payments, production payment interests and similar mineral interests, including any reserved or residual interest of whatever nature. "Indebtedness" means (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of Borrower or its Restricted Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations for the deferred purchase price of assets, including trade debt (other than trade debt incurred in the ordinary course of business and paid in accordance with customary trade practices), and (f) any obligation guaranteeing 12 or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse) any obligation of any other Person. "Indenture Deficit" has the meaning set forth in Section 2.1(d). "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Initial Reserve Report" means the report of the Petroleum Engineers dated June 30, 2004 with respect to the Oil and Gas Properties of Borrower. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intercreditor Agreement" means the Intercreditor, Security and Collateral Agency Agreement, dated as of October 28, 2004, by and among the Agent, on behalf of the Lenders, the Senior Notes Trustee, on behalf of the holders of the Senior Notes, the Bridge Loan Administrative Agent, on behalf of the lenders party to the Bridge Loan Agreement, and the Collateral Agent, Borrower and each Guarantor, the form and substance of which shall be satisfactory to Agent, as such may from time to time be amended, restated, supplemented, modified or otherwise changed pursuant to the terms of the Intercreditor Agreement. "Interest Rate Protection Agreement" means an interest rate swap, cap or collar agreement or similar arrangement entered into with the intent of protecting against fluctuations in interest rates or the exchange of notional interest obligations, either generally or under specific contingencies. "Inventory" means all Borrower's and Guarantors' now owned or hereafter acquired right, title, and interest with respect to inventory (as defined in the Code), including extracted Hydrocarbons, and other goods held for sale or lease or to be furnished under a contract of service, goods that are leased by Borrower or any Guarantor as lessor, goods that are furnished by Borrower or any Guarantor under a contract of service, and raw materials, work in process, or materials used or consumed in Borrower's or any Guarantor's business. "Investment" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising in the ordinary course of business consistent with past practices), purchases, or other acquisitions for consideration, of Indebtedness or Stock, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. 13 "Investment Property" means all of Borrower's or any Guarantor's now owned or hereafter acquired right, title, and interest with respect to "investment property" as that term is defined in the Code, and any and all supporting obligations in respect thereof. "IRC" means the Internal Revenue Code of 1986, as in effect from time to time. "Issuing Lender" means Foothill or any other Lender that, at the request of Borrower and with the consent of Agent agrees, in such Lender's sole discretion, to become an Issuing Lender for the purpose of issuing L/Cs or L/C Undertakings pursuant to Section 2.12 (it being understood and agreed that the Issuing Lender shall be the Issuing Lender for the Rollover Letter of Credit). "L/C" has the meaning set forth in Section 2.12(a). "L/C Disbursement" means a payment made by the Issuing Lender pursuant to a Letter of Credit. "L/C Undertaking" has the meaning set forth in Section 2.12(a). "Lender" and "Lenders" have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1. "Lender Group" means, individually and collectively, each of the Lenders (including the Issuing Lender) and Agent. "Lender Group Expenses" means all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by any one or more members of the Lender Group, (b) reasonable fees and charges paid or incurred by any one or more members of the Lender Group in connection with any one or more members of the Lender Group's transactions with Borrower, including fees and charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien and judgment searches, and searches for liens under the Uniform Commercial Code and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals, business valuations or examinations of Borrower's or any Guarantors' Oil and Gas Properties to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement), and environmental audits, (c) costs and expenses incurred by any one or more members of the Lender Group in the disbursement of funds to Borrower (by wire transfer or otherwise), (d) reasonable charges paid or incurred by any one or more members of the Lender Group resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) reasonable audit fees and expenses of any one or more members of the Lender Group related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party 14 claims or any other suit paid or incurred by any one or more members of the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or any one or more members of the Lender Group's relationship with Borrower or any guarantor of the Obligations, (h) Agent's reasonable fees and expenses (including attorneys' fees and disbursements) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents, and (i) Agent's and each Lender's reasonable fees and expenses (including attorneys' fees and disbursements) incurred in terminating, enforcing (including attorneys' fees, disbursements and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or any of its Subsidiaries or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral. "Lender-Related Person" means, with respect to any Lender, such Lender, together with such Lender's Affiliates, and the officers, directors, employees, and agents of such Lender and such Affiliates. "Letter of Credit" means an L/C or an L/C Undertaking, as the context requires. "Letter of Credit Usage" means, as of any date of determination, the aggregate undrawn amount of all outstanding Letters of Credit plus 100% of the amount of outstanding time drafts accepted by an Underlying Issuer as a result of drawings under Underlying Letters of Credit. "Lien" means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including (a) the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including, purchase options, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting any Oil and Gas Properties or Real Property and (b) production or royalty payments or the like payable from Oil and Gas Properties. "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Bank Product Agreements, the Collateral Documents, the Contribution Agreement, the Flow of Funds Agreement, the Fee Letter, the Guaranties, the Intercreditor Agreement, the Letters of Credit, any note or notes executed by Borrower or any Guarantor in connection with this Agreement and payable to a member of the Lender Group, and any other agreement entered into, now or in the future, by Borrower or any Guarantor and the Lender Group in connection with this Agreement. "Loan Party" means the Borrower and any Guarantor. 15 "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, individually, or the Loan Parties taken as a whole, (b) a material impairment of Borrower's, individually, or the Loan Parties' taken as a whole, ability to perform its or their obligations under the Loan Documents to which it is or they are a party or of the Lender Group's ability to enforce the Obligations or of the Collateral Agent's ability to realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Collateral Agent's Liens with respect to the Collateral as a result of an action or failure to act on the part of Borrower or any Guarantor. "Material Contract" means, with respect to any Person, (i) each contract, agreement, note, indenture, mortgage, instrument, guaranty or other evidence of indebtedness to which such Person or any of its Subsidiaries is a party involving aggregate consideration payable to or by such Person or such Subsidiary of $250,000 or more (other than purchase orders in the ordinary course of the business of such Person or such Subsidiary and other than contracts that by their terms may be terminated by such Person or Subsidiary in the ordinary course of its business upon less than 60 days' notice without penalty or premium) and (ii) all other contracts, agreements, notes, indentures, mortgages, instruments, guaranties or evidences of indebtedness material to the business, operations, condition (financial or otherwise), performance, prospects or properties of such Person or such Subsidiary. "Maturity Date" has the meaning set forth in Section 3.4. "Moody's" means Moody's Investors Service, Inc. and any successor thereto. "Mortgages" means, individually and collectively, one or more mortgages, deeds of trust, debentures or deeds to secure debt, executed and delivered by Borrower or any Guarantor in favor of the Collateral Agent, for the benefit of Agent and the Lender Group, in form and substance satisfactory to the Collateral Agent and Agent, that encumber the Real Property Collateral, the Oil and Gas Properties and the related improvements thereto. "Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which a Loan Party, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "Negotiable Collateral" means all of Borrower's or any Guarantor's now owned and hereafter acquired right, title, and interest with respect to letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "Net Cash Interest Coverage Ratio" means, as of any date of determination, the ratio of (i) EBITDA for such period to (ii) the Consolidated Net Interest Expense for such period. "NYMEX" means the New York Mercantile Exchange or its successor entity. "NYMEX Strip Price" means the lower of (i) as of any date of determination the average of the 24 succeeding monthly futures contract prices, commencing with the month during which the determination date occurs, for each 16 of the appropriate crude oil and natural gas categories included in the most recent Reserve Report provided by Borrower to Agent pursuant to Section 6.2(e), as quoted on the NYMEX; provided, that if the NYMEX no longer provides futures contract price quotes or has ceased to operate, the future contract prices used shall be the comparable futures contract prices quoted on such other nationally recognized commodities exchange as Agent shall designate, and (ii) $27.43 per barrel of oil and $4.43 per MmBTU of natural gas produced from Oil and Gas Properties of Borrower, provided, that with respect to the volume of Borrower's Hydrocarbons for which prices are fixed under an Acceptable Commodity Hedging Agreement, the NYMEX Strip Price for such volume of Hydrocarbons, if greater than the price determined above, shall be the price fixed under such Acceptable Commodity Hedging Agreement then in effect. "Obligations" means (a) all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees (including the fees provided for in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description owing by any Loan Party to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Group Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise, and (b) all Bank Product Obligations. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals replacements, substitutions, and supplements, thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding. "Oil and Gas Business" means (a) the acquisition, exploration, exploitation, development, operation and disposition of interests in Oil and Gas Properties and Hydrocarbons, (b) the gathering, marketing, treating, processing, storage, selling and transporting of any production from such interests or properties, including, without limitation, the marketing of Hydrocarbons obtained from unrelated Persons, (c) any business relating to or arising from exploration for or development, production, treatment, processing, storage, transportation or marketing of oil, gas and other minerals and products produced in association therewith, (d) any business relating to oilfield sales and service, and (e) any activity that is ancillary or necessary or desirable to facilitate the activities described in clauses (a) through (d) of this definition. "Oil and Gas Properties" means all Hydrocarbon Interests; personal property and/or real property now or hereafter pooled or unitized with Hydrocarbon Interests; presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including without limitation all units created under orders, regulations and rules of any Governmental Authority having jurisdiction) which may affect all or any portion of the Hydrocarbon Interests; pipelines, gathering lines, compression facilities, tanks and processing plants; oil wells, gas wells, water well, injection wells, platforms, spars or other offshore facilities, casings, rods, tubing, pumping units and engines, Christmas trees, derricks, separators, gun barrels, flow lines, gas systems (for gathering, treating and compression), 17 and water systems (for treating, disposal and injection); interests held in royalty trusts whether presently existing or hereafter created; Hydrocarbons in and under and which may be produced, saved, processed or attributable to the Hydrocarbon Interests, the lands covered thereby and all Hydrocarbons in pipelines, gathering lines, tanks and processing plants and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests; tenements, hereditaments, appurtenances and personal property and/or real property in any way appertaining, belonging, affixed or incidental to the Hydrocarbon Interests, and all rights, titles, interests and estates described or referred to above, including any and all real property, now owned or hereafter acquired, used or held for use in connection with the operating, working or development of any of such Hydrocarbon Interests or personal property and/or Real Property and including any and all surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing; oil, gas and mineral leasehold, fee and term interests, overriding royalty interests, mineral interests, royalty interests, net profits interests, net revenue interests, oil payments, production payments, carried interests, leases, subleases, farm-outs and any and all other interests in Hydrocarbons; in each case whether now owned or hereafter acquired directly or indirectly. "Original Loan Agreement" has the meaning set forth in the recitals hereto. "Originating Lender" has the meaning set forth in Section 14.1(e). "Overadvance" has the meaning set forth in Section 2.5. "Participant" has the meaning set forth in Section 14.1(e). "Participant Register" has the meaning set forth in Section 14.1(i). "Pay-Off Letter" means a letter from Agent in respect of the amount necessary to repay in full all of the existing obligations of Borrower and its Subsidiaries under the Existing Loan Agreement and the documents related thereto. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permitted Discretion" means a determination made in good faith and in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment. "Permitted Dispositions" means (a) sales or other dispositions by Borrower or its Subsidiaries of Equipment that is substantially worn, damaged, no longer used, surplus, or obsolete in the ordinary course of Borrower's or its Subsidiaries' business, (b) sales by Borrower or its Subsidiaries of Inventory, including Hydrocarbons, to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents by Borrower or its Subsidiaries in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, (d) the licensing by Borrower or its Subsidiaries, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of Borrower's or its Subsidiaries' business, (e) releases or surrenders (in accordance with the terms of the applicable lease) and sales or other dispositions of leasehold interests in properties with no 18 Proved Reserves, (f) releases or surrenders (in accordance with the terms of the applicable lease) and sales or other dispositions of leasehold interests in properties with Proved Undeveloped Reserves to the extent Agent consents in its Permitted Discretion to such releases, surrenders, sales or dispositions, (g) Bridge Loan Dispositions, (h) Permitted PUD/PDNP Dispositions, (i) transfers or assignments of interests in Farmout Properties (as such term is defined in the Senior Notes Indenture) in accordance with the terms of Permitted Farmout Agreements (as such term is defined in the Senior Notes Indenture), (j) sales or other dispositions of properties or leasehold interests in properties with Proved Reserves, other than farmouts, with an aggregate PV-10 attributable to such reserves of less than $100,000, provided that the aggregate net cash proceeds received upon the consummation of such transaction pursuant to this clause (j) shall not exceed $500,000 in any 12 calendar month period, (k) the liquidation, winding up or dissolution of any Restricted Subsidiary of Borrower so long as Borrower does not and will not incur, directly or indirectly, any liabilities or other obligations (whether contingent or otherwise) for or in connection with any such liquidation, winding up or dissolution (other than reasonable and ordinary course ministerial costs, expenses, and attorneys' fees related thereto), (l) the merger or consolidation of any Restricted Subsidiary of Borrower into any other Restricted Subsidiary of Borrower, so long as there is no Default, Unmatured Default or Event of Default immediately before and immediately after such transaction and (m) such other sales or other dispositions as may be agreed to by Agent in its Permitted Discretion. "Permitted Investments" means (a) investments in Cash Equivalents, (b) investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, (d) investments made in the ordinary course of, and of a nature that is customary in, the Oil and Gas Business as a means of actively exploiting, exploring for, acquiring, developing, processing, gathering, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit one to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of the Oil and Gas Business jointly with third parties, including, without limitation, the entry into operating agreements, working interests, royalty interests, mineral leases, processing agreements, farm-out and farm-in agreements, division orders, contracts for the sale, transportation or exchange of oil or natural gas, unitization and pooling declarations and agreements and area of mutual interest agreements, production sharing agreements or other similar or customary agreements, transactions, properties, interests, and investments and expenditures in connection therewith; provided that for purposes of this clause (d), an investment in capital Stock, partnership or joint venture interests (other than interests arising from farm-outs, farm-ins or other similar operating agreements entered into in the ordinary course of the Oil and Gas Business), limited liability company interests or other similar equity interests in a Person shall not constitute a Permitted Investment, (e) Investments constituting intercompany Indebtedness to the extent permitted pursuant to Section 7.1(i), (f) Investments in the form of a guarantee by Borrower of Wamsutter Holdings, Inc.'s obligations as the general partner in Abraxas Wamsutter, L.P. so long as neither Wamsutter Holdings, Inc. nor Abraxas Wamsutter, L.P. conducts any business or operations, (g) after the consummation of the Grey Wolf Stock Sale, if Grey Wolf is no longer a Subsidiary of Borrower or any Restricted Subsidiary, the equity or ownership interest of Borrower in Grey Wolf, (h) other Investments by Borrower or any Restricted Subsidiary in any Person so long as the aggregate fair market value of all such Investments (determined in good faith by the chief financial officer of the Company and measured as of the date each such Investment is made and without 19 giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (h) (net of returns of capital, dividends and interest paid on Investments and sales, liquidations and redemptions of Investments), does not exceed $500,000 after the Closing Date and (i) other Investments as may be agreed to by Agent in its Permitted Discretion. "Permitted Liens" means (a) Liens held by the Collateral Agent for the benefit of Agent and the Lenders, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default or an Unmatured Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases, (e) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, performance bonds, regulatory compliance in connection with the Oil and Gas Business or leases incurred in the ordinary course of business and not in connection with the borrowing of money, (i) Liens granted as security for surety bonds, performance bonds or appeal bonds in connection with obtaining such bonds in the ordinary course of business, (j) Liens resulting from any judgment or award that is not an Event of Default or an Unmatured Default hereunder, (k) Liens with respect to the Real Property (not including Oil and Gas Properties) constituting easements, rights of way, zoning restrictions and other minor imperfections of title that do not materially interfere with or impair the use or operation thereof, (l) with respect to the Oil and Gas Properties, imperfections of title as described in title opinions delivered and which are acceptable to Agent, (m) Liens held by the Collateral Agent to secure the obligations evidenced by the Senior Notes Documents to the extent such Liens are subject to the Intercreditor Agreement and Liens held by the Collateral Agent to secure the Bridge Loan Obligations to the extent such Liens are subordinated to the Liens securing the Obligations and are subject to the terms of the Intercreditor Agreement; provided, that (x) the Liens in favor of the holders of the obligations evidenced by the Senior Note Documents are perfected in the same property and assets of Borrower and its Subsidiaries as the Liens in favor of the Collateral Agent for the benefit of Agent and Lenders, and (y) the Liens in favor of the holders of the Bridge Loan Obligations are perfected in the same property and assets (other than the Stock of Grey Wolf and the proceeds from the Grey Wolf Stock Sale) of Borrower and its Subsidiaries as the Liens in favor of the Collateral Agent for the benefit of Agent and Lenders, (n) Liens for royalties, overriding royalties, net profit interests, reversionary interests, operating agreements and other similar interests, properties, arrangements and agreements as they relate to Hydrocarbon Interests of Borrower, to the extent such Liens are customary in the Oil and Gas Business, are incurred in the ordinary course of business, do not secure Indebtedness for borrowed money and which secure sums which are not then required to be paid, (o) Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of Borrower or any Restricted Subsidiary on deposit with or in possession of such bank to the extent such Liens secure Indebtedness under clause (j) of Section 7.1, (p) Liens on cash and 20 Cash Equivalents securing the performance obligations of Borrower under Hedging Agreements so long as the aggregate amount of obligations secured by such Liens at any time outstanding does not exceed $250,000, (q) Liens in favor of Persons financing unpaid insurance premiums so long as such Liens are limited to insurance policies with respect to which such premiums are financed, (r) non-consensual statutory Liens on pipeline or pipeline facilities, Hydrocarbons or properties and assets of Borrower or any Restricted Subsidiary of Borrower which arise out of operation of law and are not in connection with the borrowing of money, (s) Liens pursuant to documents governing Permitted Farmout Agreements (as such term is defined in the Senior Notes Indenture), (t) Liens not otherwise permitted under this Agreement incurred in the ordinary course of business of Borrower or any Restricted Subsidiary of Borrower securing Indebtedness of Borrower or such Restricted Subsidiary in an aggregate principal amount at any time outstanding not to exceed $100,000 and (u) other Liens securing other obligations of the Loan Parties to the extent permitted by Agent in its Permitted Discretion. "Permitted Protest" means the right of Borrower or any of its Subsidiaries, as applicable, to protest any Lien (other than any such Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Borrower or any of its Subsidiaries, as applicable, in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Collateral Agent's Liens. "Permitted PUD/PDNP Dispositions" means releases, surrenders, sales or other dispositions of properties or leasehold interests in properties with Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves so long as (i) no Default, Unmatured Default or Event of Default shall have occurred and be continuing prior to and after giving effect to such release, surrender, sale or disposition, (ii) the ratio of (A) the net cash proceeds received by Borrower or its Restricted Subsidiaries on the date of the consummation of such transaction as consideration for any such release, surrender, sale or disposition to (B) the PV-10 of the applicable Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves subject to such release, surrender, sale or disposition, as shown on the most recent Reserve Report, equals or exceeds 1.25 to 1.00, and (iii) the aggregate net cash proceeds received in connection with such releases, surrenders, sales or other dispositions do not exceed $1,000,000 after the Closing Date. "Permitted Purchase Money Indebtedness" means, as of any date of determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate principal amount outstanding at any one time not in excess of $500,000 (or such greater amount as may be agreed to by Agent in its Permitted Discretion). "Person" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. 21 "Petroleum Engineers" means (i) DeGolyer & McNaughton, (ii) McDaniel & Associates Consultants Ltd. or (iii) such other petroleum engineers of recognized national standing as may be selected by Borrower with the prior consent of Agent. "Projections" means Borrower's and Guarantors' forecasted (a) balance sheets, (b) profit and loss statements, and (c) cash flow statements, all prepared on a basis consistent with Borrower's and Guarantors' historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Pro Rata Share" means: (a) with respect to a Lender's obligation to make Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (x) prior to the Commitment being terminated or reduced to zero, the percentage obtained by dividing (i) such Lender's Commitment, by (ii) the aggregate Commitments of all Lenders and (y) from and after the time the Commitment has been terminated or reduced to zero, the percentage obtained by dividing (i) the aggregate unpaid principal amount of such Lender's Advances by (ii) the aggregate unpaid principal amount of all Advances, (b) with respect to a Lender's obligation to participate in Letters of Credit, to reimburse the Issuing Lender, and to receive payments of fees with respect thereto, (x) prior to the Commitment being terminated or reduced to zero, the percentage obtained by dividing (i) such Lender's Commitment, by (ii) the aggregate Commitments of all Lenders and (y) from and after the time the Commitment has been terminated or reduced to zero, the percentage obtained by dividing (i) the aggregate unpaid principal amount of such Lender's Advances by (ii) the aggregate unpaid principal amount of all Advances, and (c) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) such Lender's Commitment by (ii) the aggregate amount of Commitments of all Lenders; provided, however, that in the event the Commitments have been terminated or reduced to zero, Pro Rata Share shall be the percentage obtained by dividing (A) the principal amount of such Lender's Advances by (B) the principal amount of all outstanding Advances. "Proved Developed Non-Producing Reserves" means those Oil and Gas Properties designated as "proved developed non-producing" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Proved Developed Producing Reserves" means those Oil and Gas Properties designated as "proved developed producing" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report and used in establishing the Borrowing Base. "Proved Reserves" means those Oil and Gas Properties designated as "proved" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. 22 "Proved Undeveloped Reserves" means those Oil and Gas Properties designated as "proved undeveloped" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "PV-10" means, as of any date of determination, the sum of the present values of the amounts of net revenues before income taxes expected to be received in each of the months following the date of determination on the basis of estimated production from Proved Reserves during such months determined as follows: (i) each such monthly net revenue amount shall be calculated (x) on the basis of the applicable NYMEX Strip Price for the appropriate category of oil or gas as of such date of determination, adjusting such price to reflect (A) the appropriate Basis Differential with respect to Hydrocarbons produced from specific Oil and Gas Properties of Borrower as set forth on Exhibit PV-10, as such Exhibit may from time to time be amended at the request of Borrower with the written consent of Agent, (B) the prices for fixed price contracts for such month and (C) Btu content, (y) assuming that production costs remain constant throughout the periods of the calculation of such monthly net revenues, and (z) otherwise applying the financial accounting and reporting standards prescribed by the SEC for application of the successful efforts method of accounting for such revenues under Rule 4-10 of Regulation S-X as promulgated by the SEC from time to time; and (ii) the present value of each such monthly net revenue amount shall be determined by discounting each such monthly net revenue amount from the month in which it is expected to be received, on a monthly basis, to such date of determination at a rate of 10% per annum. "Purchase Money Indebtedness" means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 20 days after (or such other period as may be agreed to by Agent in its Permitted Discretion), the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. "Qualified Capital" means (a) common Stock of Borrower or (b) other Stock of Borrower that is not (i) Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is mandatorily redeemable at the sole option of the holder thereof, in whole or in part, in either case, on or prior to 91 days after the payment in full in cash of all Obligations after the termination of the Commitments, or (ii) Stock that, by its terms, by the terms of any security into which it is convertible or exchangeable, by contract or otherwise, requires, or upon the happening of an event or passage of time would require, the payment of dividends (other than dividends paid (A) in Qualified Capital and/or (B) from a segregated reserve account funded solely from the amounts paid by the purchaser or purchasers of such Stock in connection with the issuance and sale thereof) on or prior to 91 days after the payment in full in cash of all Obligations after the termination of the Commitments. 23 "Real Property" means any estates or interests in real property now owned or hereafter acquired by Borrower or any Guarantor and the improvements thereto. "Real Property Collateral" means (i) the parcel or parcels of Real Property identified on Parts A and C of Schedule 5.22 and (ii) any Real Property hereafter (A) acquired by Borrower or any Guarantor in the case of Real Property constituting Oil and Gas Properties or (B) owned in fee in the case of Real Property not constituting Oil and Gas Properties. "Record" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "Register" has the meaning set forth in Section 14.1(h). "Registered Loan" has the meaning set forth in Section 2.14. "Registered Note" has the meaning set forth in Section 2.14. "Related Fund" has the meaning set forth in the definition of "Eligible Transferee". "Related Indebtedness" means (i) Indebtedness related to any fees and expenses incurred by Borrower or any of its Subsidiaries (including, but not limited to, those owed to any Person not an Affiliate of Borrower or any of its Subsidiaries) in connection with any amendment (including any amendment and restatement thereof), supplement, replacement, restatement or other modification from time to time, including any agreements (and related instruments and documents) extending the maturity of, refinancing, substituting, replacing or other restructuring of all or any portion of the Indebtedness under the Loan Documents (and related instruments and documents) or any successor or replacement agreements (and related instruments and documents) and (ii) any capitalized interest, fees, or other expenses incurred by Borrower or any of its Subsidiaries whether or not charged to the Loan Account or any similar account created under the Loan Documents. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, seeping, migrating, dumping or disposing of any Hazardous Material (including the abandonment or discarding of barrels, containers and other closed receptacles containing any Hazardous Material) into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through or in the ambient air, soil, surface or ground water, or property. "Remedial Action" means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC ss. 9601. "Report" has the meaning set forth in Section 16.17. 24 "Reportable Event" means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days' notice to the PBGC is waived under applicable regulations. "Required Availability" means Excess Availability in an amount of not less than $5,000,000. "Required Lenders" means, at any time, Lenders whose Pro Rata Shares aggregate at least 50.1% of the Commitments, or if the Commitments have been terminated irrevocably, 50.1% of the Obligations (other than Bank Product Obligations) then outstanding. "Reserve Report" means a report of the Petroleum Engineers in the form of the Initial Reserve Report, setting forth, as of June 30 or December 31 of any calendar year, and as of any other date on which a Reserve Report is required or permitted to be obtained pursuant to this Agreement, (i) the volumetric quantity (calculated using the same pricing assumptions as used in the calculation of PV-10) and the PV-10 (and, solely with respect to the Reserve Report dated December 31 of any year, the SEC Value), of the oil and gas reserves attributable to the Oil and Gas Properties of Borrower included in the calculation of the Borrowing Base, together with a projection of the rate of production and future net income, taxes, operating expenses and capital expenditures with respect thereto as of such date, and (ii) such other information as Agent may reasonably request, all in form and substance satisfactory to Agent. Any reference herein to a Reserve Report without reference to the date thereof shall, unless the context otherwise requires, refer to the most recent Reserve Report. "Reserve Report Delivery Date" means the date on which Agent receives from Borrower the most recent Reserve Report required to be delivered by Borrower in accordance with Section 6.2(e). "Restricted Subsidiary" means each Subsidiary of Borrower or Guarantor other than (x) Grey Wolf and (y) any other Subsidiary of Borrower or Guarantor agreed to in writing by Agent. "Revolver Usage" means, as of any date of determination, the sum of (a) the then extant amount of outstanding Advances, plus (b) the then extant amount of the Letter of Credit Usage. "Risk Participation Liability" means, as to each Letter of Credit, all reimbursement obligations of Borrower to the Issuing Lender with respect to an L/C Undertaking, consisting of (a) the amount available to be drawn or which may become available to be drawn, (b) all amounts that have been paid by the Issuing Lender to the Underlying Issuer to the extent not reimbursed by Borrower, whether by the making of an Advance or otherwise, and (c) all accrued and unpaid interest, fees, and expenses payable with respect thereto. "Rollover Letter of Credit" means that certain letter of credit outstanding on the Closing with a stated amount of $310,991.71, issued by Wells Fargo for the account of Borrower under the Existing Loan Agreement, and any renewal, extension or amendment or increase in any such letter of credit pursuant to the terms of this Agreement. 25 "SEC" means the United States Securities and Exchange Commission and any successor thereto. "SEC Value" means the future net revenues before income taxes from Proved Reserves, estimated utilizing the actual price for the appropriate category of oil or gas as of the date of determination and assuming that oil and natural gas prices and production costs thereafter remain constant, then discounted at the rate of 10% per year to obtain the present value, and otherwise applying the financial accounting and reporting standards prescribed by the SEC for application of the successful efforts method of accounting under Rule 4-10 and Regulation S-X as promulgated by the SEC from time to time. "Securities Account" means a "securities account" as that term is defined in the Code. "Senior Notes" means Borrower's Floating Rate Senior Secured Notes due 2009 issued by Borrower pursuant to the Senior Notes Indenture, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. "Senior Notes Indenture" means the Indenture, dated as of October 28, 2004, between Borrower and the Senior Notes Trustee, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. "Senior Notes Trustee" means U.S. Bank, N.A., as trustee to the holders of the Senior Notes and any successor thereto. "Senior Notes Documents" means the Senior Notes Indenture, the Senior Notes and each other agreement, instrument and document related thereto, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. "Settlement" has the meaning set forth in Section 2.3(f)(i). "Settlement Date" has the meaning set forth in Section 2.3(f)(i). "Solvent" means, with respect to any Person on a particular date, that such Person is not insolvent (as such term is defined in the Uniform Fraudulent Transfer Act). "Standard & Poor's" means Standard & Poor's Rating Services, a division of the McGraw-Hill Companies, Inc. and any successor thereto. "Stock" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). 26 "Subsidiary" means, with respect to any Person, a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Swing Lender" means Foothill or any other Lender that, at the request of Borrower and with the consent of Agent agrees, in such Lender's sole discretion, to become the Swing Lender hereunder. "Swing Loan" has the meaning set forth in Section 2.3(d)(i). "Tax Payments" has the meaning set forth in Section 6.6. "Taxes" has the meaning set forth in Section 16.11. "Underlying Issuer" means a third Person which is the beneficiary of an L/C Undertaking and which has issued a letter of credit at the request of the Issuing Lender for the benefit of Borrower. "Underlying Letter of Credit" means a letter of credit that has been issued by an Underlying Issuer. "Unmatured Default" means an event, condition or default under Sections 8.2 or 8.11 that, after giving of notice by Agent to Borrower, would be an Event of Default. "Unused Applicable Proceeds" means the aggregate amount of Applicable Proceeds that are not reborrowed by Borrower within 365 days of any Asset Sale (as such term is defined in the Indenture) or Event of Loss (as such term is defined in the Indenture) to acquire Oil and Gas Properties, Hydrocarbons or other properties and assets necessary or useful in Borrower's Oil and Gas Business or make capital expenditures (as certified in a certificate of the chief executive officer of Borrower delivered to the Senior Notes Trustee and Agent prior to the end of such 365 day period). "Voidable Transfer" has the meaning set forth in Section 17.7. "Wells Fargo" means Wells Fargo Bank, National Association, a national banking association. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrower and its Restricted Subsidiaries on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 27 1.4 Construction. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to any Person shall be construed to refer to and include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolver Advances. (a) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Commitment agrees (severally, not jointly or jointly and severally) to make advances ("Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the lesser of (i) the aggregate amount of the Commitments less the Letter of Credit Usage, and (ii) the Borrowing Base less the Letter of Credit Usage. For purposes of this Agreement, "Borrowing Base," as of any date of determination, shall mean the result of: (x) an amount equal to 65% of the PV-10 of the Proved Developed Producing Reserves of Borrower that are located in the continental United States and subject to a Mortgage and UCC financing statements, that in each case create a first priority perfected Lien in such Oil and Gas Properties in favor of the Collateral Agent for the benefit of Agent and the Lenders, minus (y) the sum of (i) the Bank Product Reserves, and (ii) the aggregate amount of Agent Reserves, if any, established by Agent under Section 2.1(b). 28 (b) Anything to the contrary in this Agreement notwithstanding, Agent may, and, at the request of the Required Lenders, shall, create reserves against the Borrowing Base (without declaring an Event of Default) as Agent determines, in its Permitted Discretion (in each case, an "Agent Reserve", and collectively, the "Agent Reserves"). Without limiting the generality of the foregoing, Agent Reserves may include (but are not limited to) reserves based upon, without duplication, (A) past due or accrued taxes or other charges by a Governmental Authority, including ad valorem, personal property and other taxes which may have priority over the Liens of Agent in the Collateral; (B) Liens (whether inchoate or otherwise) in favor of third Persons, including, without limitation, any Governmental Authority (whether or not such Liens are Permitted Liens); (C) estimates of present and future costs, expenses, deposits and liabilities related to the plugging and abandonment of the Oil and Gas Properties (net of the amount thereof which has been taken into account in the most recent Reserve Report or is fully secured by an escrow or surety arrangement acceptable to Agent in its Permitted Discretion); (D) without duplication of the foregoing, amounts owing by Borrower or any Guarantor to any Person, including, without limitation, any Governmental Authority, to the extent secured by a Lien (whether or not such Lien is a Permitted Lien) on, or trust (constructive or otherwise) over, any of the Collateral (including proceeds thereof or collections from the sale of Hydrocarbons which may from time to time come into the possession of any of the Lenders or their agents), which Lien or trust, in Agent's Permitted Discretion has a reasonable possibility of having a priority superior to the Collateral Agent's Liens (such as landlord liens, ad valorem taxes, production taxes, severance taxes, sales taxes, collections attributable to sale of Hydrocarbons of Persons other than the Loan Parties) in and to such item of Collateral, proceeds or collection; (E) to the extent not taken into account in the most recent Reserve Report delivered to Agent, amounts which Agent determines are appropriate to account for minority interests and other interests of Persons other than Borrower and any natural gas imbalances of Borrower and for sales of Oil and Gas Properties; (F) unrealized losses related to Commodities Hedging Agreements; (G) any reserves that Agent may impose as a result of the non-compliance with Section 6.5 by any owner or operator of the Oil and Gas Properties of Borrower; and (H) amounts owing by Borrower or any Guarantor in connection with costs and expenses payable to any Person with a payment priority senior to Agent's or Lenders' payment priority under Section 4.05 of the Intercreditor Agreement. Borrower and Agent understand and agree that any amount of Agent Reserves shall not be considered a disbursement bearing interest hereunder, but rather shall be an amount that is not available for borrowing by Borrower. (c) The Lenders shall have no obligation to make additional Advances hereunder to the extent such additional Advances would cause the Revolver Usage to exceed the aggregate amount of the Commitments. (d) Notwithstanding the foregoing, the Lenders shall have no obligation to make Advances if, either immediately before or after giving effect to such Advances, the Revolver Usage exceeds or will exceed the amount of Indebtedness permitted under the Senior Notes Indenture (the amount of any such excess is hereafter referred to as the "Indenture Deficit"). (e) Amounts borrowed pursuant to this Section may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. 29 2.2 [Intentionally Omitted] 2.3 Borrowing Procedures and Settlements. (a) Procedure for Borrowing. Each Borrowing shall be made by an irrevocable written request by an Authorized Person delivered to Agent (which request must be received by Agent no later than 10:00 a.m. (California time) on the Business Day prior to the date that is the requested Funding Date in the case of a request for an Advance specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day; provided, however, that in the case of a request for Swing Loan in an amount of $5,000,000, or less, such notice will be timely received if it is received by Agent no later than 10:00 a.m. (California time) on the Business Day that is the requested Funding Date) specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. At Agent's election, in lieu of delivering the above-described written request, any Authorized Person may give Agent telephonic notice of such request by the required time, with such telephonic notice to be confirmed in writing within 24 hours of the giving of such notice. (b) Agent's Election. Promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall elect, in its discretion, (i) to have the terms of Section 2.3(c) apply to such requested Borrowing, or (ii) if the Borrowing is for an Advance, to request Swing Lender to make a Swing Loan pursuant to the terms of Section 2.3(d) in the amount of the requested Borrowing; provided, however, that if Swing Lender declines in its sole discretion to make a Swing Loan pursuant to Section 2.3(d), Agent shall elect to have the terms of Section 2.3(c) apply to such requested Borrowing. (c) Making of Advances. (i) In the event that Agent shall elect to have the terms of this Section 2.3(c) apply to a requested Borrowing as described in Section 2.3(b), then promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall notify the Lenders, not later than 1:00 p.m. (California time) on the Business Day immediately preceding the Funding Date applicable thereto, by telecopy, telephone, or other similar form of transmission, of the requested Borrowing. Each Lender shall make the amount of such Lender's Pro Rata Share of the requested Borrowing available to Agent in immediately available funds, to Agent's Account, not later than 10:00 a.m. (California time) on the Funding Date applicable thereto. After Agent's receipt of the proceeds of such Advances, upon satisfaction of the applicable conditions precedent set forth in Section 3 hereof, Agent shall make the proceeds thereof available to Borrower on the applicable Funding Date by transferring immediately available funds equal to such proceeds received by Agent to Borrower's Designated Account; provided, however, that, subject to the provisions of Section 2.3(i), Agent shall not request any Lender to make, and no Lender shall make, any Advance if Agent shall have actual knowledge that (1) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (2) the requested Borrowing would exceed the Availability on such Funding Date. 30 (ii) Unless Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least 1 Business Day prior to the date of such Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Borrower the amount of that Lender's Pro Rata Share of the Borrowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds and Agent in such circumstances has made available to Borrower such amount, that Lender shall on the Business Day following such Funding Date make such amount available to Agent, together with interest at the Defaulting Lender Rate for each day during such period. A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is so made available, such payment to Agent shall constitute such Lender's Advance on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to Agent on the Business Day following the Funding Date, Agent will notify Borrower of such failure to fund and, upon demand by Agent, Borrower shall pay such amount to Agent for Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Advances composing such Borrowing. The failure of any Lender to make any Advance on any Funding Date shall not relieve any other Lender of any obligation hereunder to make an Advance on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on any Funding Date. (iii) Agent shall not be obligated to transfer to a Defaulting Lender any payments made by Borrower to Agent for the Defaulting Lender's benefit, and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payments to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender's Advance was funded by the other members of the Lender Group) or, if so directed by Borrower and if no Default, Unmatured Default or Event of Default had occurred and is continuing (and to the extent such Defaulting Lender's Advance was not funded by the Lender Group), retain same to be re-advanced to Borrower as if such Defaulting Lender had made Advances to Borrower. Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrower for the account of such Defaulting Lender the amount of all such payments received and retained by it for the account of such Defaulting Lender. Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a "Lender" and such Lender's Commitment shall be deemed to be zero. This Section shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent, and Borrower shall have waived such Defaulting Lender's default in writing, or (z) the Defaulting Lender makes its Pro Rata Share of the applicable Advance and pays to Agent all amounts owing by Defaulting Lender in respect thereof. The operation of this Section shall not be 31 construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder, or to relieve or excuse the performance by Borrower of its duties and obligations hereunder to Agent or to the Lenders other than such Defaulting Lender. Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be acceptable to Agent. In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no right to refuse to be replaced hereunder, and agrees to execute and deliver a completed form of Assignment and Acceptance Agreement in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations (other than Bank Product Obligations) (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever; provided further, however, that any such assumption of the Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups' or Borrower's rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund. (d) Making of Swing Loans. (i) In the event Agent shall elect, with the consent of Swing Lender, as a Lender, to have the terms of this Section 2.3(d) apply to a requested Borrowing as described in Section 2.3(b), Swing Lender as a Lender shall make such Advance in the amount of such Borrowing (any such Advance made solely by Swing Lender as a Lender pursuant to this Section 2.3(d) being referred to as a "Swing Loan" and such Advances being referred to collectively as "Swing Loans") available to Borrower on the Funding Date applicable thereto by transferring immediately available funds to Borrower's Designated Account. Each Swing Loan is an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, except that all payments on any Swing Loan shall be payable to Swing Lender as a Lender solely for its own account (and for the account of the holder of any participation interest with respect to such Swing Loan). Subject to the provisions of Section 2.3(i), Agent shall not request Swing Lender as a Lender to make, and Swing Lender as a Lender shall not make, any Swing Loan if Agent has actual knowledge that (i) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (ii) the requested Borrowing would exceed the Availability on such Funding Date. Swing Lender as a Lender shall not otherwise be required to determine whether the applicable conditions precedent set forth in Section 3 have been satisfied on the Funding Date applicable thereto prior to making, in its sole discretion, any Swing Loan. (ii) The Swing Loans shall be secured by the Collateral Agent's Liens, shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. 32 (e) Agent Advances. (i) Agent hereby is authorized by Borrower and the Lenders, from time to time in Agent's sole discretion, (1) after the occurrence and during the continuance of a Default or an Unmatured Default or Event of Default, or (2) at any time that any of the other applicable conditions precedent set forth in Section 3 have not been satisfied, to make Advances to Borrower on behalf of the Lenders that Agent, in its Permitted Discretion deems necessary or desirable (A) to preserve or protect the Collateral, or any portion thereof, (B) to enhance the likelihood of repayment of the Obligations (other than Bank Product Obligations), or (C) to pay any other amount chargeable to Borrower pursuant to the terms of this Agreement, including Lender Group Expenses and the costs, fees, and expenses described in Section 10 (any of the Advances described in this Section 2.3(e) shall be referred to as "Agent Advances"). Each Agent Advance is an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, and all payments thereon shall be payable to Agent solely for its own account (and for the account of the holder of any participation interest with respect to such Agent Advance). (ii) The Agent Advances shall be repayable by Borrower on demand and secured by the Collateral Agent's Liens, shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. (f) Settlement. It is agreed that each Lender's funded portion of the Advances is intended by the Lenders to equal, at all times, such Lender's Pro Rata Share of the outstanding Advances. Such agreement notwithstanding, Agent, Swing Lender, and the other Lenders agree (which agreement shall not be for the benefit of or enforceable by Borrower) that in order to facilitate the administration of this Agreement and the other Loan Documents, settlement among them as to the Advances, the Swing Loans, and the Agent Advances shall take place on a periodic basis in accordance with the following provisions: (i) Agent shall request settlement ("Settlement") with the Lenders on a weekly basis, or on a more frequent basis if so determined by Agent, (1) on behalf of Swing Lender, with respect to each outstanding Swing Loan, (2) for itself, with respect to each Agent Advance, and (3) with respect to Collections received, as to each by notifying the Lenders by telecopy, telephone, or other similar form of transmission, of such requested Settlement, no later than 2:00 p.m. (California time) on the Business Day immediately prior to the date of such requested Settlement (the date of such requested Settlement being the "Settlement Date"). Such notice of a Settlement Date shall include a summary statement of the amount of outstanding Advances, Swing Loans, and Agent Advances for the period since the prior Settlement Date. Subject to the terms and conditions contained herein (including Section 2.3(c)(iii)): (y) if a Lender's balance of the Advances, Swing Loans, and Agent Advances exceeds such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, then Agent shall, by no later than 12:00 p.m. (California time) on the Settlement Date, transfer in immediately available funds to the account of such Lender as such Lender may designate, an amount such that each such Lender shall, upon receipt of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances, Swing Loans, and Agent Advances, and (z) if a Lender's balance of the Advances, Swing Loans, and Agent Advances is less than such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, such Lender shall no later than 12:00 p.m. (California time) on the Settlement Date transfer in immediately available funds to the Agent's Account, an amount such that each such Lender shall, upon transfer of such amount, have as of the 33 Settlement Date, its Pro Rata Share of the Advances, Swing Loans, and Agent Advances. Such amounts made available to Agent under clause (z) of the immediately preceding sentence shall be applied against the amounts of the applicable Swing Loan or Agent Advance and, together with the portion of such Swing Loan or Agent Advance representing Swing Lender's Pro Rata Share thereof, shall constitute Advances of such Lenders. If any such amount is not made available to Agent by any Lender on the Settlement Date applicable thereto to the extent required by the terms hereof, Agent shall be entitled to recover for its account such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate. (ii) In determining whether a Lender's balance of the Advances, Swing Loans, and Agent Advances is less than, equal to, or greater than such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, Agent shall, as part of the relevant Settlement, apply to such balance the portion of payments actually received in good funds by Agent with respect to principal, interest and fees payable by Borrower and allocable to the Lenders hereunder, and proceeds of Collateral. To the extent that a net amount is owed to any such Lender after such application, such net amount shall be distributed by Agent to that Lender as part of such next Settlement. (iii) Between Settlement Dates, Agent, to the extent no Agent Advances or Swing Loans are outstanding, may pay over to Swing Lender any payments received by Agent, that in accordance with the terms of this Agreement would be applied to the reduction of the Advances, for application to Swing Lender's Pro Rata Share of the Advances. If, as of any Settlement Date, Collections received since the then immediately preceding Settlement Date have been applied to Swing Lender's Pro Rata Share of the Advances other than to Swing Loans, as provided for in the previous sentence, Swing Lender shall pay to Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be applied to the outstanding Advances of such Lenders, an amount such that each Lender shall, upon receipt of such amount, have, as of such Settlement Date, its Pro Rata Share of the Advances. During the period between Settlement Dates, Swing Lender with respect to Swing Loans, Agent with respect to Agent Advances, and each Lender (subject to the effect of letter agreements between Agent and individual Lenders) with respect to the Advances other than Swing Loans and Agent Advances, shall be entitled to interest at the applicable rate or rates payable under this Agreement on the daily amount of funds employed by Swing Lender, Agent, or the Lenders, as applicable. (g) Notation. Agent shall record on its books the principal amount of the Advances owing to each Lender, including the Swing Loans owing to Swing Lender, and Agent Advances owing to Agent, and the interests therein of each Lender, from time to time. In addition, each Lender is authorized, at such Lender's option, to note the date and amount of each payment or prepayment of 34 principal of such Lender's Advances in its books and records, including computer records, such books and records constituting conclusive evidence, absent manifest error, of the accuracy of the information contained therein. (h) Lenders' Failure to Perform. All Advances (other than Swing Loans and Agent Advances) shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder. (i) Optional Overadvances. (i) Any contrary provision of this Agreement (including, without limitation, Section 2.3(i)(ii)) notwithstanding, the Lenders hereby authorize Agent or Swing Lender, as applicable, and Agent or Swing Lender, as applicable, may, but is not obligated to, knowingly and intentionally, continue to make Advances (including Swing Loans) to Borrower notwithstanding that an Overadvance exists or thereby would be created. The foregoing provisions are for the exclusive benefit of Agent, Swing Lender, and the Lenders and are not intended to benefit Borrower in any way. The Advances and Swing Loans, as applicable, that are made pursuant to this Section 2.3(i) shall be subject to the same terms and conditions as any other Advance or Swing Loan, as applicable, and the rate of interest applicable thereto shall be the rate applicable to Advances that are Base Rate Loans under Section 2.6(c) hereof without regard to the presence or absence of a Default or an Unmatured Default or Event of Default. (ii) In the event Agent obtains actual knowledge that the Revolver Usage exceeds the amounts permitted by the preceding paragraph, regardless of the amount of, or reason for, such excess, Agent shall notify the Lenders as soon as practicable (and prior to making any (or any additional) intentional Overadvances (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses of Agent and the Lenders) unless Agent determines that prior notice would result in imminent harm to the Collateral or its value), and the Lenders thereupon shall, together with Agent, jointly determine the terms of arrangements that shall be implemented with Borrower intended to reduce, within a reasonable time, the outstanding principal amount of the Advances to Borrower to an amount permitted by the preceding paragraph. In the event Agent or any Lender disagrees over the terms of reduction or repayment of any Overadvance, the terms of reduction or repayment thereof shall be implemented according to the determination of the Required Lenders. (iii) Each Lender shall be obligated to settle with Agent as provided in Section 2.3(f) for the amount of such Lender's Pro Rata Share of any unintentional Overadvances by Agent reported to such Lender, any intentional Overadvances made as permitted under this Section 2.3(i), and any Overadvances resulting from the charging to the Loan Account of interest, fees, or Lender Group Expenses. 35 2.4 Payments. (a) Payments by Borrower. (i) Except as otherwise expressly provided herein, all payments by Borrower shall be made to Agent's Account for the account of the Lender Group and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Agent later than 11:00 a.m. (California time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) Unless Agent receives notice from Borrower prior to the date on which any payment is due to the Lenders that Borrower will not make such payment in full as and when required, Agent may assume that Borrower has made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower does not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid. (b) Apportionment and Application of Payments. (i) Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including letter agreements between Agent and individual Lenders), aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations held by each Lender) and payments of fees and expenses shall be apportioned ratably among the Lenders having a Pro Rata Share of the Commitment or Obligations (other than (x) payments received while no Unmatured Default or Event of Default has occurred and is continuing and which relate to the payment of principal or interest of specific Obligations or which relate to the payment of specific fees, (y) payments received from the Collateral Agent during the existence of a Default Period which relate to the payment of specific Obligations as set forth in Section 4.06(b) of the Intercreditor Agreement and (z) payments received from Bridge Loan Dispositions described in clause (b) of such definition which will be governed by Section 4.05 of the Intercreditor Agreement, and all proceeds of Accounts or other Collateral received by Agent, shall be applied (unless otherwise agreed by the Required Lenders) as follows: (A) first, to pay any Lender Group Expenses then due to Agent under the Loan Documents, until paid in full, 36 (B) second, to pay any Lender Group Expenses then due to the Lenders under the Loan Documents, on a ratable basis, until paid in full, (C) third, to pay any fees then due to Agent under the Loan Documents until paid in full, (D) fourth, to pay any fees then due to any or all of the Lenders under the Loan Documents, on a ratable basis, until paid in full, (E) fifth, to pay interest due in respect of all Agent Advances, until paid in full, (F) sixth, ratably to pay interest due in respect of the Advances (other than Agent Advances) and the Swing Loans until paid in full, (G) seventh, to pay the principal of all Agent Advances until paid in full, (H) eighth, to pay the principal of all Swing Loans until paid in full, (I) ninth, ratably (i) to pay the principal of all Advances until paid in full, and (ii) to Agent, to be held by Agent, for the benefit of Wells Fargo or its Affiliates, as applicable, as cash collateral in an amount up to the amount of the Bank Product Obligations until Borrower's and its Subsidiaries' obligations in respect of the then extant Bank Products have been paid in full or the cash collateral amount has been exhausted, and (iii) to be held by Agent, for the ratable benefit of Issuing Lender and those Lenders having a Commitment, as cash collateral in an amount up to 105% of the then extant Letter of Credit Usage until paid in full, (J) tenth, to pay the Applicable Prepayment Premium until paid in full, (K) eleventh, to pay any other Obligations (including Bank Product Obligations) until paid in full, and (L) twelfth, to Borrower (to be wired to the Designated Account) or such other Person entitled thereto under applicable law or under the Intercreditor Agreement. (ii) Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive, subject to a Settlement delay as provided in Section 2.3(h). (iii) In each instance, so long as no Unmatured Default or Event of Default has occurred and is continuing, Section 2.4(b)(i) shall not be deemed to apply to any payment by Borrower specified by Borrower to 37 be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement. (iv) For purposes of the foregoing, "paid in full" means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding. (v) [Intentionally Omitted] (vi) In the event of a direct conflict between the priority provisions of this Section 2.4 and other provisions contained in any other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 shall control and govern. (c) Indenture Deficit. If on any day an Indenture Deficit exists, Borrower shall immediately pay to Agent an amount equal to such Indenture Deficit to be applied to the outstanding principal of the Advances. 2.5 Overadvances. If, at any time or for any reason, the amount of the Obligations (other than Bank Product Obligations and Related Indebtedness) owed by Borrower to the Lender Group pursuant to Sections 2.1 and 2.12 is greater than either the Dollar or percentage limitations set forth in Sections 2.1 or 2.12, (an "Overadvance"), Borrower immediately shall pay to Agent (unless an Overadvance is created pursuant to Section 2.3(i) in which case such payment shall be on demand), in cash, the amount of such excess, which amount shall be used by Agent to reduce the Obligations in accordance with the priorities set forth in Section 2.4(b). In addition, Borrower hereby promises to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full to the Lender Group as and when due and payable under the terms of this Agreement and the other Loan Documents. 2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations. (a) Interest Rates. Except as provided in clause (c) below, all Obligations (except for undrawn Letters of Credit and except for Bank Product Obligations) whether or not charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to the Base Rate plus the Base Rate Margin. (b) Letter of Credit Fee. Borrower shall pay Agent (for the ratable benefit of the Lenders, subject to any letter agreement between Agent and individual Lenders), a Letter of Credit fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.12(e)) which shall accrue at a rate equal to 4.0% per annum times the Daily Balance of the undrawn amount of all outstanding Letters of Credit. (c) Default Rate. Upon the occurrence and during the continuation of an Unmatured Default or Event of Default (and at the election of Agent or the Required Lenders), 38 (i) all Obligations (except for undrawn Letters of Credit and except for Bank Product Obligations) whether or not charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 4 percentage points above the per annum rate otherwise applicable hereunder, and (ii) the Letter of Credit fee provided for above shall be increased to 4 percentage points above the per annum rate otherwise applicable hereunder. (d) Payment. Interest shall be due and payable, in arrears, on the first day of each month at any time that Obligations or Commitments are outstanding. Letter of Credit fees and all other fees payable hereunder shall be due and payable on the date upon which such fees are due and payable hereunder. Borrower hereby authorizes Agent, from time to time without prior notice to Borrower, to, and Agent agrees that it may (at its sole and absolute discretion), charge such interest and fees, all Lender Group Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in Section 2.12(e) (as and when accrued or incurred), the fees and costs provided for in Section 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document, including any amounts due and payable to Wells Fargo or its Affiliates in respect of Bank Products (up to the amount of the then extant Bank Products Reserve) to Borrower's Loan Account, which amounts thereafter shall constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded by being charged to Borrower's Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Base Rate Loans hereunder. (e) Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360-day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate. (f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 39 2.7 Cash Management. Borrower shall establish and maintain cash management services in accordance with the requirements set forth in the Collateral Documents. 2.8 Crediting Payments. The receipt of any payment item by Agent shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to the Agent's Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Agent only if it is received into the Agent's Account on a Business Day on or before 11:00 a.m. (California time). If any payment item is received into the Agent's Account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day. 2.9 Designated Account. Agent is authorized to make the Advances, and Issuing Lender is authorized to issue the Letters of Credit, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(d). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Borrower, any Advance, Agent Advance, or Swing Loan requested by Borrower and made by Agent or the Lenders hereunder shall be made to the Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances (including Agent Advances and Swing Loans) made by Agent, Swing Lender, or the Lenders to Borrower or for Borrower's account, the Letters of Credit issued by Issuing Lender for Borrower's account, and with all other payment Obligations hereunder or under the other Loan Documents (including Bank Product Obligations up to the amount of the then extant Bank Products Reserve), including, accrued interest, fees and expenses, and Lender Group Expenses. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Agent from Borrower or for Borrower's account. Agent shall render statements regarding the Loan Account to Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within 30 days after receipt thereof by Borrower, Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 2.11 Fees. Borrower shall pay to Agent the following fees and charges, which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is terminated thereafter) and shall be apportioned among the Lenders in accordance with their Pro Rata Share (as determined by clause (a) of the definition thereof): 40 (a) Commitment Fee. On the first day of each month during the term of this Agreement, a commitment fee in an amount equal to the Commitment Fee Percentage times the result of (i) the greater of (A) the aggregate amount of the Commitments and (B) $5,000,000, less (ii) the sum of (A) the average Daily Balance of Advances that were outstanding during the immediately preceding month, plus (B) the average Daily Balance of the Letter of Credit Usage during the immediately preceding month, (b) Fee Letter Fees. As and when due and payable under the terms of the Fee Letter, Borrower shall pay to Agent the fees set forth in the Fee Letter, and (c) Audit, Appraisal, and Valuation Charges. For the separate account of Agent, audit, appraisal, and valuation fees and charges as follows, (i) a fee of $850 per day, per auditor (such fees for all auditors for any single financial audit not to exceed $5,000 in the aggregate), plus out-of-pocket expenses for each financial audit of a Loan Party performed by personnel employed by Agent, (ii) a fee of $1,500 per day per appraiser, plus out-of-pocket expenses, for each appraisal of the Collateral performed by personnel employed by Agent, and (iii) the actual charges paid or incurred by Agent if it elects to employ the services of one or more third Persons to perform financial audits of any Loan Party, to appraise the Collateral, or any portion thereof, to review or examine the Oil and Gas Properties of any Loan Party or to assess any Loan Party's business valuation, provided that, (x) with respect of clause (i) above, so long as no Unmatured Default or Event of Default shall have occurred and be continuing, Borrower shall not be obligated to pay for more than four (4) financial audits during any calendar year and (y) with respect to any Reserve Report requested by Borrower or Agent (in addition to the Reserve Reports required to be delivered semi-annually by Borrower to Agent pursuant to Section 6.2(e)), the party requesting the issuance of such Reserve Report shall pay the costs and expenses associated therewith in the absence of a continuing Default, Unmatured Default or Event of Default (and during a continuing Default, Unmatured Default or Event of Default, such Reserve Report shall be at Borrower's sole cost and expense). 2.12 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, the Issuing Lender agrees to issue letters of credit for the account of Borrower (each, an "L/C") or to purchase participations or execute indemnities or reimbursement obligations (each such undertaking, an "L/C Undertaking") with respect to letters of credit issued by an Underlying Issuer (as of the Closing Date, the prospective Underlying Issuer is to be Wells Fargo) for the account of Borrower. To request the issuance of an L/C or an L/C Undertaking (or the amendment, renewal, or extension of an outstanding L/C or L/C Undertaking), Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Lender) to the Issuing Lender and Agent (reasonably in advance of the requested date of issuance, amendment, renewal, or extension) a notice requesting the issuance of an L/C or L/C Undertaking, or identifying the L/C or L/C Undertaking to be amended, renewed, or extended, the date of issuance, amendment, renewal, or extension, the date on which such L/C or L/C Undertaking is to expire, the amount of such L/C or L/C Undertaking, the name and address of the beneficiary thereof (or the beneficiary of the Underlying Letter of Credit, as applicable), and such other information as shall be necessary to prepare, amend, renew, or extend such L/C or L/C Undertaking. If requested by the Issuing Lender, Borrower 41 also shall be an applicant under the application with respect to any Underlying Letter of Credit that is to be the subject of an L/C Undertaking. The Issuing Lender shall have no obligation to issue a Letter of Credit if any of the following would result after giving effect to the requested Letter of Credit: (i) the Letter of Credit Usage would exceed the Borrowing Base less the amount of outstanding Advances, or (ii) the Letter of Credit Usage would exceed $2,500,000, or (iii) the Letter of Credit Usage would exceed the aggregate amount of the Commitments less the then extant amount of outstanding Advances, or (iv) an Indenture Deficit would exist. Borrower and the Lender Group acknowledge and agree that certain Underlying Letters of Credit may be issued to support letters of credit that already are outstanding as of the Closing Date. Each Letter of Credit (and corresponding Underlying Letter of Credit) shall be in form and substance acceptable to the Issuing Lender (in the exercise of its Permitted Discretion), including the requirement that the amounts payable thereunder must be payable in Dollars. If Issuing Lender is obligated to advance funds under a Letter of Credit, Borrower immediately shall reimburse such L/C Disbursement to Issuing Lender by paying to Agent an amount equal to such L/C Disbursement not later than 11:00 a.m., California time, on the date that such L/C Disbursement is made, if Borrower shall have received written or telephonic notice of such L/C Disbursement prior to 10:00 a.m., California time, on such date, or, if such notice has not been received by Borrower prior to such time on such date, then not later than 11:00 a.m., California time, on the Business Day that Borrower receives such notice, if such notice is received prior to 10:00 a.m., California time, on the date of receipt, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances that are Base Rate Loans under Section 2.6. To the extent an L/C Disbursement is deemed to be an Advance hereunder, Borrower's obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Advance. Promptly following receipt by Agent of any payment from Borrower pursuant to this paragraph, Agent shall distribute such payment to the Issuing Lender or, to the extent that Lenders have made payments pursuant to Section 2.12(c) to reimburse the Issuing Lender, then to such Lenders and the Issuing Lender as their interest may appear. (b) Promptly following receipt of a notice of L/C Disbursement pursuant to Section 2.12(a), each Lender agrees to fund its Pro Rata Share of any Advance deemed made pursuant to the foregoing subsection on the same terms and conditions as if Borrower had requested such Advance and Agent shall promptly pay to Issuing Lender the amounts so received by it from the Lenders. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Lender or the Loan Lenders, the Issuing Lender shall be deemed to have granted to each Lender, and each Lender shall be deemed to have purchased, a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit, and each such Lender agrees to pay to Agent, for the account of the Issuing Lender, such 42 Lender's Pro Rata Share of any payments made by the Issuing Lender under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to Agent, for the account of the Issuing Lender, such Lender's Pro Rata Share of each L/C Disbursement made by the Issuing Lender and not reimbursed by Borrower on the date due as provided in clause (a) of this Section, or of any reimbursement payment required to be refunded to Borrower for any reason. Each Lender acknowledges and agrees that its obligation to deliver to Agent, for the account of the Issuing Lender, an amount equal to its respective Pro Rata Share pursuant to this Section 2.12(b) shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Unmatured Default, Event of Default or Default or the failure to satisfy any condition set forth in Section 3 hereof. If any such Lender fails to make available to Agent the amount of such Lender's Pro Rata Share of any payments made by the Issuing Lender in respect of such Letter of Credit as provided in this Section, Agent (for the account of the Issuing Lender) shall be entitled to recover such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate until paid in full. (c) Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless from any loss, cost, expense, or liability, including reasonable attorneys fees and disbursements incurred by the Lender Group arising out of or in connection with any Letter of Credit; provided, however, that Borrower shall not be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. Borrower agrees to be bound by the Underlying Issuer's regulations and interpretations of any Underlying Letter of Credit or by Issuing Lender's interpretations of any L/C issued by Issuing Lender to or for Borrower's account, even though this interpretation may be different from Borrower's own, and Borrower understands and agrees that the Lender Group shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Borrower understands that the L/C Undertakings may require Issuing Lender to indemnify the Underlying Issuer for certain costs or liabilities arising out of claims by Borrower against such Underlying Issuer. Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by the Lender Group under any L/C Undertaking as a result of the Lender Group's indemnification of any Underlying Issuer; provided, however, that Borrower shall not be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. (d) Borrower hereby authorizes and directs any Underlying Issuer to deliver to the Issuing Lender all instruments, documents, and other writings and property received by such Underlying Issuer pursuant to such Underlying Letter of Credit and to accept and rely upon the Issuing Lender's instructions with respect to all matters arising in connection with such Underlying Letter of Credit and the related application. (e) Any and all charges, commissions, fees, and costs incurred by the Issuing Lender relating to Underlying Letters of Credit shall be Lender Group Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrower to Agent for the account of the Issuing Lender; it 43 being acknowledged and agreed by Borrower that, as of the Closing Date, the issuance charge imposed by the prospective Underlying Issuer is 0.825% per annum times the face amount of each Underlying Letter of Credit, that such issuance charge may be changed from time to time, and that the Underlying Issuer also imposes a schedule of charges for amendments, extensions, drawings, and renewals. (f) If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application thereof by any Governmental Authority, or (ii) compliance by the Underlying Issuer or the Lender Group with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority including, Regulation D of the Federal Reserve Board as from time to time in effect (and any successor thereto): (i) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letter of Credit issued hereunder, or (ii) there shall be imposed on the Underlying Issuer or the Lender Group any other condition regarding any Underlying Letter of Credit or any Letter of Credit issued pursuant hereto, and the result of the foregoing is to increase, directly or indirectly, the cost to the Lender Group of issuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by the Lender Group, then, and in any such case, Agent may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Borrower, and Borrower shall pay on demand such amounts as Agent may specify to be necessary to compensate the Lender Group for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate then applicable to Base Rate Loans hereunder. The determination by Agent of any amount due pursuant to this Section, as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. (g) The parties hereto agree that the Rollover Letter of Credit shall constitute a "Letter of Credit" issued for the account of Borrower under this Agreement. 2.13 Capital Requirements. If, after the date hereof, any Lender determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by such Lender or its parent bank holding company with any guideline, request, or directive of any such entity regarding capital adequacy (whether or not having the force of law), the effect of reducing the return on such Lender's or such holding company's capital as a consequence of such Lender's Commitments hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration such Lender's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital) by any amount deemed by such Lender to be material, then such Lender may notify Borrower and Agent thereof. Following receipt of such notice, 44 Borrower agrees to pay such Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender's calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, such Lender may use any reasonable averaging and attribution methods. 2.14 Registered Notes. Borrower agrees to record each Advance on the Register referred to in Section 14.1(h). Each Advance recorded on the Register (a "Registered Loan") may not be evidenced by promissory notes other than Registered Notes (as defined below). Upon the registration of any Advance, Borrower agrees, at the request of any Lender, to execute and deliver to such Lender a promissory note, in conformity with the terms of this Agreement, in registered form to evidence such Registered Loan, in form and substance reasonably satisfactory to Agent and such Lender, and registered as provided in Section 14.1(h) (a "Registered Note"), payable to the order of such Lender and otherwise duly completed, provided that any Registered Note issued to evidence Advances shall be issued in the principal amount of the applicable Lender's Commitment. Once recorded on the Register, each Advance may not be removed from the Register so long as it or they remain outstanding, and a Registered Note may not be exchanged for a promissory note that is not a Registered Note. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Extension of Credit. The obligation of the Lender Group (or any member thereof) to make the initial Advance (or otherwise to extend any credit provided for hereunder), is subject to the fulfillment, to the satisfaction of Agent, of each of the conditions precedent set forth below: (a) the Collateral Agent shall have received and filed all financing statements required by the Collateral Agent, duly executed or otherwise authorized by Borrower or any Guarantor, and Agent shall have received evidence reflecting the filing of all such financing statements; (b) Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect: (i) the Contribution Agreement, (ii) the Flow of Funds Agreement, (iii) the Fee Letter, (iv) the Intercreditor Agreement, (v) the Pay-Off Letter, and (vi) the Collateral Documents; 45 (c) Agent shall have received a certificate from the Secretary of Borrower (i) attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute the same and (ii) certifying the names and true signatures of the officers of Borrower authorized to sign each Loan Document to which Borrower is a party; (d) Agent shall have received copies of Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Borrower; (e) Agent shall have received a certificate of status with respect to Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (f) Agent shall have received certificates of status with respect to Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (g) Agent shall have received a certificate from the Secretary of each Guarantor (i) attesting to the resolutions of Guarantor's Board of Directors authorizing its execution, delivery, and performance of the Loan Documents to which Guarantor is a party and authorizing specific officers of Guarantor to execute the same and (ii) certifying the names and true signatures of the officers of such Guarantor authorized to sign each Loan Document to which such Guarantor is a party; (h) Agent shall have received copies of each Guarantor's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Guarantor; (i) Agent shall have received a certificate of status with respect to Guarantor, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Guarantor, which certificate shall indicate that Guarantor is in good standing in such jurisdiction; (j) Agent shall have received certificates of status with respect to Guarantor, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of Guarantor) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Guarantor is in good standing in such jurisdictions; (k) Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.7, the form and substance of which shall be satisfactory to Agent; 46 (l) Agent shall have received an opinion of the Loan Parties' counsel in form and substance satisfactory to Agent; (m) Agent shall have received satisfactory evidence (including a certificate of the chief financial officer of Borrower) that all tax returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income, and franchises (including Real Property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (n) Borrower shall have the Required Availability after giving effect to the initial extensions of credit hereunder; (o) Agent shall have received a calculation of the Borrowing Base after updating the two-year NYMEX Strip Price and rolling forward the production volumes of Borrower and Guarantors, in each case the results of which shall be satisfactory to Agent; (p) Agent shall have received (i) evidence satisfactory to it that the debt and capital structure of Borrower and its Subsidiaries after giving effect to this Agreement, is consistent with the projections of Borrower and its Subsidiaries previously delivered to Agent and (ii) financial reports of Borrower and its Subsidiaries for the month ending immediately prior to the Closing Date; (q) Borrower shall pay all Lender Group Expenses incurred in connection with the transactions evidenced by this Agreement; (r) Agent shall have received (i) updated land records and/or title searches and abstracts of Oil and Gas Properties of Borrower, the review of which shall be satisfactory to Agent, and (ii) updated title opinions of such Oil and Gas Properties with respect to the Hydrocarbon Interests therein of Borrower as required by Agent in its sole discretion (of which none will be required); (s) Lenders shall have received the Initial Reserve Report, which shall be satisfactory to Lenders; (t) Agent shall have received satisfactory evidence verifying all production taxes and royalty payments pertaining to each well comprising a part of the Oil and Gas Properties are current; (u) Borrower shall have entered into the Senior Notes Indenture, the terms and conditions of which are set forth in Borrower's Offering Memorandum, dated October 21, 2004, which Senior Notes Indenture shall be in compliance with all applicable laws; (v) Agent shall have received satisfactory evidence that Grey Wolf shall have consummated the Grey Wolf Credit Facility pursuant to the terms and conditions of the Grey Wolf Loan Documents and in compliance with all applicable laws, and no terms or provisions set forth in the Grey Wolf Loan Documents shall have been amended, waived or otherwise modified without the prior written consent of Agent; 47 (w) Agent shall have received satisfactory evidence that Borrower shall have consummated the transactions contemplated by the Bridge Loan Documents in compliance with all applicable laws, and no terms or provisions set forth in the Bridge Loan Documents shall have been amended, waived or otherwise modified without the prior written consent of Agent; (x) no Material Adverse Change shall have occurred; (y) Agent shall have received evidence that Borrower shall have entered into Commodity Hedging Agreements with respect to its Hydrocarbon production with one or more counterparties rated investment grade by Moody's and Standard & Poor's, or the equivalent by a rating agency acceptable to Agent or with a counterparty otherwise reasonably acceptable to Agent, with the aggregate notional volumes of Hydrocarbons covered by such Commodities Hedging Agreements constituting not less than 25% and not more than 75% of the aggregate amount of Borrower's estimated Hydrocarbon production volumes on an mcf equivalent basis (where one barrel of oil is equal to six mcf of gas) for the succeeding six calendar months after the Closing Date from Oil and Gas Properties classified as Proved Developed Producing Reserves in the Initial Reserve Report plus the estimated production from anticipated drilling by Borrower or its Restricted Subsidiaries during such succeeding six months; (z) Agent shall have received fully executed copies of each of the Material Contracts, the Senior Notes Documents, the Bridge Loan Documents and the agreements, documents or instruments related to the Existing Note Redemption and the Grey Wolf Loan Documents, together with a certificate of the Chief Executive Officer of Borrower certifying each such document as being a true, correct, and complete copy thereof and that such agreements, documents or instruments remain in full force and effect and that none of the Loan Parties has breached or defaulted in any of its obligations under such agreements; (aa) Borrower shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the Capital Restructuring and the execution and delivery by Borrower and each Guarantor of this Agreement or any other Loan Document or with the consummation of the transactions contemplated by the Capital Restructuring and hereby and thereby; (bb) Agent shall have received evidence that (i) Borrower shall have deposited funds sufficient to effect a redemption or discharge, on terms satisfactory to Agent, of the Existing Notes and shall have effected such redemption or discharge of such Existing Notes in compliance with all applicable laws and pursuant to documents satisfactory to Agent and (ii) immediately upon the deposit of such funds, the trustee of the Existing Notes shall have terminated, discharged, and released its Liens and mortgages on all of Borrower's and its Subsidiaries' properties and assets and shall have delivered and/or authorized the filing of UCC and PPSA termination statements, discharges or release or mortgages and such other documentation evidencing such termination, discharge and release (such redemption and terminations described in clauses (i) and (ii) collectively the "Existing Note Redemption"); (cc) Agent shall have received evidence that the Collateral Agent, for the benefit of Agent and Lenders, shall have a perfected, first priority lien on all Collateral; and 48 (dd) all other documents and legal matters in connection with the transactions contemplated by this Agreement and the Capital Restructuring shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent. 3.2 [Intentionally Omitted] 3.3 Conditions Precedent to all Extensions of Credit. The obligation of the Lender Group (or any member thereof) to make all Advances (or to extend any other credit hereunder) shall be subject to the following conditions precedent: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (b) no Default, Unmatured Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof, (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against Borrower, Agent, any Lender, or any of their Affiliates, and (d) no Material Adverse Change shall have occurred. 3.4 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower, Guarantors, Agent, and the Lenders and shall continue in full force and effect for a term ending on October 28, 2008 (the "Maturity Date"). The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Unmatured Default or Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrower with respect to outstanding Letters of Credit and including all Bank Products Obligations) immediately shall become due and payable without notice or demand (including (a) either (i) providing cash collateral to be held by Agent in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to Agent and (b) providing cash collateral, in such amounts as Wells Fargo or its Affiliates, as applicable, requires from its customers generally with respect to such products, to be held by Agent for the benefit of Wells Fargo or its Affiliates with respect to the then extant Bank Products Obligations). No termination of this Agreement, however, shall relieve or discharge Borrower of its duties, Obligations, or covenants hereunder and the Collateral Agent's Liens in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and Lenders' obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations have been fully and finally discharged and Lenders' obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Agent will (and to the extent necessary), and will 49 authorize Collateral Agent to (and to the extent necessary), at Borrower's sole expense, execute and deliver any UCC termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, Liens and all notices of security interests and liens previously filed with respect to the Obligations. 3.6 Early Termination; Permanent Reductions of Commitment. (a) Borrower has the option, at any time upon 30 days' prior written notice to Agent, to terminate this Agreement by paying to Agent, in cash, the Obligations (including (a) either (i) providing cash collateral to be held by Agent in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to Agent, and (b) providing cash collateral, in such amounts as Wells Fargo or its Affiliates, as applicable, requires from its customers generally with respect to such products, to be held by Agent for the benefit of Wells Fargo or its Affiliates with respect to the then extant Bank Products Obligations), in full, together with the Applicable Prepayment Premium. If Borrower has sent a notice of termination pursuant to the provisions of this Section, then Lenders' obligations to extend credit hereunder shall terminate and Borrower shall be obligated to repay the Obligations (including (a) either (i) providing cash collateral to be held by Agent (in an interest-bearing account) in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to Agent, and (b) providing cash collateral, in such amounts as Wells Fargo or its Affiliates, as applicable, requires from its customers generally with respect to such products, to be held by Agent for the benefit of Wells Fargo or its Affiliates with respect to the then extant Bank Products Obligations), in full, together with the Applicable Prepayment Premium, on the date set forth as the date of termination of this Agreement in such notice. (b) On and after the occurrence of the applicable Commitment Reduction Event, from time to time the Pro Rata Share of the Lenders' Commitments shall be permanently reduced in an amount equal to the applicable Commitment Reduction Amount, if any (which, in the case of a Commitment Reduction Amount attributable to clause (i) of the definition thereof, results in connection with an Asset Sale (as such term is defined in the Indenture) or Event of Loss (as such term is defined in the Indenture)) and Borrower shall pay to Agent the Applicable Prepayment Premium on any date the Commitments are so permanently reduced; provided, however, that on the date that the aggregate amount of all such permanent reductions of the Commitments pursuant to this Section 3.6(b) equals or exceeds $10,000,000 (such date hereinafter referred to as the "Commitment Reduction Date"), Borrower may elect to terminate this Agreement by providing irrevocable notice (the "Commitment Termination Notice") to Agent on or prior to the Commitment Reduction Date, with such termination being effective 90 days (or such earlier date as may be agreed upon by Agent and Borrower) after the date of the Commitment Termination Notice (such date hereinafter referred to as the "Commitment Termination Date"). On the Commitment Termination Date Agents' and Lenders' obligations to extend credit hereunder shall terminate and Borrower shall pay, in cash, the Obligations (including (1) either (x) providing cash collateral to be held by Agent in an amount equal to 105% of the then extant Letter of Credit Usage, or (y) causing the original Letters of Credit to be returned to Agent, and (2) providing cash collateral, in 50 such amounts as Wells Fargo or its Affiliates, as applicable, requires from its customers generally with respect to such products, to be held by Agent for the benefit of Wells Fargo or its Affiliates with respect to the then extant Bank Products Obligations) in full, together with the Applicable Prepayment Premium. (c) In the event of the termination of this Agreement and repayment of the Obligations at any time prior to the Maturity Date, for any other reason, including (i) termination upon the election of the Required Lenders to terminate after the occurrence of an Event of Default, (ii) foreclosure and sale of Collateral, (iii) sale of the Collateral in any Insolvency Proceeding, or (iv) restructure, reorganization, or compromise of the Obligations by the confirmation of a plan of reorganization or any other plan of compromise, restructure, or arrangement in any Insolvency Proceeding, then, in view of the impracticability and extreme difficulty of ascertaining the actual amount of damages to Lenders or profits lost by the Lenders as a result of such early termination, and by mutual agreement of the parties as to a reasonable estimation and calculation of the lost profits or damages of the Lenders, Borrower shall pay the Applicable Prepayment Premium to the Lenders, measured as of the date of such termination or the date of the Commitment Termination Notice; provided, however, that notwithstanding the foregoing, Borrower shall not be obligated to pay the Applicable Prepayment Premium pursuant to clauses (a) and (b) of this Section 3.6 if, in connection with the termination of this Agreement pursuant to the preceding sentence, the repayment of the Obligations at any time prior to the Maturity Date is from the proceeds received by Borrower pursuant to (x) a public or private placement of stock (including a placement in the form of a merger) or subordinated indebtedness of any Loan Party (other than proceeds received pursuant to a public or private placement of stock constituting an Asset Sale or an Event of Loss pursuant to clause (b) of this Section 3.6), (y) a sale of assets of any Loan Party (other than proceeds received pursuant to an Asset Sale or an Event of Loss pursuant to clause (b) of this Section 3.6) or (z) a financing facility provided by, or consented to by, Wells Fargo. 4. SECURITY INTERESTS; RIGHT TO INSPECT COLLATERAL. 4.1 Acknowledgement of Security Interest. Each Loan Party hereby acknowledges the grant to the Collateral Agent, for the benefit of the Lender Group, of the security interests in the Collateral created by the Intercreditor Agreement and the other Collateral Documents in order to secure prompt repayment of any and all of the Obligations or the Guaranteed Obligations (as the case may be) in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by each such Loan Party of each of its covenants and duties under the Loan Documents. 4.2 Right to Inspect Collateral. Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, upon notice to Borrower, which notice shall not be required upon the occurrence and during the continuance of an Unmatured Default or Event of Default, from time to time hereafter to inspect the Books and to check, test, and appraise the Collateral and review and examine the Oil and Gas Properties of Borrower in order to verify Borrower's or any Guarantor's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 51 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender Group to enter into this Agreement, each Loan Party makes the following representations and warranties to the Lender Group which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit) made thereafter, as though made on and as of the date of such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Each Loan Party has good and indefeasible title to the Collateral and the Real Property (other than Oil and Gas Properties constituting Real Property) or good and defensible title to Oil and Gas Properties constituting Real Property, free and clear of Liens except for Permitted Liens. 5.2 Equipment. All of the Equipment is used or held for use in each Loan Party's business and is fit for such purposes. 5.3 Location of Inventory and Equipment. The Equipment is located only at the locations identified on Schedule 5.3 other than such Equipment in transit or temporarily removed to a location not identified therein for refurbishment or repair. There is no location at which any Loan Party has any Inventory, including Hydrocarbon products (except for Hydrocarbon products in transit), other than the locations identified on Schedule 5.3 and 5.22. Schedule 5.3 and 5.22 contains a true, correct and complete list, as of the Closing Date, of each location at which Hydrocarbon products of the Loan Parties are stored. 5.4 Inventory Records. Each Loan Party keeps correct and accurate records itemizing and describing the type and quantity of its Inventory and the book value thereof. 5.5 Location of Chief Executive Office; FEIN. (a) The chief executive office of each Loan Party is located at the address indicated on Schedule 5.5 and such Loan Party's FEIN is identified on Schedule 5.5. (b) Each Loan Party's organizational identification number is identified on Schedule 5.5. (c) No Loan Party holds any commercial tort claims as of the date hereof, except as identified on Schedule 5.5. 5.6 Due Organization and Qualification; Subsidiaries. (a) Each Loan Party is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to have a Material Adverse Change. 52 (b) Set forth on Schedule 5.6(b), is a complete and accurate description of the authorized capital Stock of Borrower, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 5.6(b), there are no subscriptions, options, warrants, or calls relating to any shares of Borrower's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on Schedule 5.6(c), is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their organization, (ii) the number of shares of each class of common and preferred Stock authorized for each of such Subsidiaries, and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (d) Except as set forth on Schedule 5.6(c), there are no subscriptions, options, warrants, or calls relating to any shares of Borrower's Subsidiaries' capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Neither Borrower nor any of its Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of Borrower's Subsidiaries' capital Stock or any security convertible into or exchangeable for any such capital Stock. 5.7 Due Authorization; No Conflict. (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents and the agreements, documents and instruments related to the Capital Restructuring to which it is a party have been duly authorized by all necessary action on the part of Borrower. (b) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents and the agreements, documents and instruments related to the Capital Restructuring to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Borrower (including, without limitation, any Material Contract of any Loan Party), (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of Borrower's interestholders or any approval or consent of any Person under any material contractual obligation of Borrower that has not been obtained by Borrower on or prior to the Closing Date. (c) Other than the filing of financing statements and informational filings with the SEC, fixture filings, and Mortgages, the execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which Borrower is a party do not and will not require any registration with, consent, 53 or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (d) This Agreement and the other Loan Documents and the agreements, documents and instruments related to the Capital Restructuring to which Borrower is a party, and all other documents contemplated hereby and thereby, and the agreements, documents and instruments related to the Capital Restructuring when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Collateral Agent's Liens (created on behalf of Agent and Lenders) are validly created, perfected, and first priority Liens, subject only to Permitted Liens. (f) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of Guarantor. (g) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to such Guarantor, the Governing Documents of such Guarantor, or any order, judgment, or decree of any court or other Governmental Authority binding on such Guarantor, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of such Guarantor, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Guarantor, other than Permitted Liens, or (iv) require any approval of such Guarantor's interestholders or any approval or consent of any Person under any material contractual obligation of such Guarantor that has not been obtained by Borrower on or prior to the Closing Date. (h) The execution, delivery, and performance by each Guarantor of the Loan Documents to which such Guarantor is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (i) The Loan Documents to which each Guarantor is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Guarantor will be the legally valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with their respective terms, except as enforcement may be limited by such equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. 5.8 Litigation. Other than those matters disclosed on Schedule 5.8, there are no actions, suits, or proceedings pending or, to the best knowledge of Borrower, threatened against Borrower or any of its Subsidiaries, as applicable, except for (a) matters that are fully covered by insurance (subject to customary deductibles), and (b) matters arising after the Closing Date that, if decided 54 adversely to Borrower or any of its Subsidiaries, as applicable, reasonably could not be expected to result in a Material Adverse Change. 5.9 No Material Adverse Change. All financial statements relating to Borrower or any Guarantor that have been delivered by Borrower to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrower's (or such Guarantor's, as applicable) financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrower (or any Guarantor, as applicable) since the date of the latest financial statements submitted to the Lender Group on or before the Closing Date. 5.10 Fraudulent Transfer. (a) After giving effect to the Capital Restructuring, the transactions contemplated by this Agreement, the Loan Documents, the Senior Notes Documents, the Bridge Loan Documents and the Grey Wolf Loan Documents, Borrower individually is, and the Loan Parties taken as a whole are, Solvent. (b) No transfer of property is being made by any Loan Party and no obligation is being incurred by any Loan Party in connection with the Capital Restructuring, or the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of any Loan Party. 5.11 Employee Benefits. None of Borrower any of its Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan. Each Loan Party and each ERISA Affiliate has satisfied the minimum funding standards of ERISA, the IRC, and any other applicable laws relating to employee benefits with respect to each Benefit Plan to which it is obligated to contribute, except where the failure to maintain such standards reasonably could not be expected to result in a Material Adverse Change. No ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse Change. No Loan Party or any ERISA Affiliate is required to provide security to any Benefit Plan under Section 401(a)(29) of the IRC. 5.12 Environmental Condition. Except as set forth on Schedule 5.12, (a) to each Loan Party's knowledge, no assets of any Loan Party has ever been used by any such Loan Party or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, where such production, storage, handling, treatment, release or transport was in violation, in any material respect, of applicable Environmental Law, (b) to each Loan Party's knowledge, no properties or assets of any Loan Party have ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, (c) no Loan Party has received notice that a Lien arising under any Environmental Law has attached to any revenues or to any Real Property owned or operated by any such Loan Party, and (d) Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 55 5.13 Brokerage Fees. No Loan Party has utilized the services of any broker or finder in connection with Borrower's obtaining financing from the Lender Group under this Agreement, and no brokerage commission or finders fee is payable by any Loan Party in connection herewith. 5.14 Intellectual Property. Each Loan Party owns, or holds licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of its business as currently conducted. Attached hereto as Schedule 5.14 is a true, correct, and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which each Loan Party is the owner or is an exclusive licensee. 5.15 Leases. Each Loan Party enjoys peaceful and undisturbed possession under all leases material to the business of such Loan Party and to which it is a party or under which it is operating. All of such leases are valid and subsisting and no material default by such Loan Party exists under any of them. There are no leases, subleases, contracts or other operating agreements that allocate operating expenses to Borrower or any Guarantor in excess of Borrower's or any Guarantor's working interest of record in the particular Oil and Gas Property subject to such lease, the sublease, contract or other operating agreement. 5.16 DDAs. Set forth on Schedule 5.16 are all of each Loan Party's DDAs, including, with respect to each depository (i) the name and address of such depository, and (ii) the account numbers of the accounts maintained with such depository. 5.17 Compliance with the Law. No Loan Party has violated any laws or failed to obtain any material license, permit, franchise or other authorization from any Governmental Authority necessary for the ownership of any of its Oil and Gas Properties or the conduct of its business. The Oil and Gas Properties of each Loan Party (and assets and properties utilized therewith) have been maintained, operated and developed in a good and workmanlike manner and in substantial conformity with all applicable laws and all rules, regulations and orders of all Governmental Authorities having jurisdiction and in substantial conformity with the provisions of all leases, subleases or other contracts comprising a part of the Hydrocarbon Interests and other contracts and agreements forming a part of such Oil and Gas Properties; specifically in this connection, (i) except as set forth on Schedule 5.17, after the Closing Date, no Oil and Gas Property of any Loan Party is subject to having allowable production reduced below the full and regular allowable production (including the maximum permissible tolerance) because of any overproduction (whether or not the same was permissible at the time) prior to the Closing Date and (ii) none of the wells comprising a part of such Oil and Gas Properties (or assets and properties utilized therewith) is deviated from the vertical by more than the maximum permitted by applicable laws, regulations, rules and orders of any Governmental Authority, and such wells are, in fact, bottomed under and are producing from, and the well bores are wholly within, such Oil and Gas Properties (or in the case of wells located on Real Property utilized therewith, such utilized Real Property) covered by the leases that are the subject of the title opinions delivered pursuant to Section 3.1(r). 5.18 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Borrower in writing to Agent or any Lender (including all information contained in the Schedules hereto or in the other 56 Loan Documents) for purposes of or in connection with the Capital Restructuring or this Agreement, the other Loan Documents, or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrower in writing to Agent or any Lender will not contain any untrue statement of a material fact, on the date as of which such information is dated or certified and will not omit to state any material fact necessary to make such information (taken as a whole) not misleading in any respect at such time in light of the circumstances under which such information was provided. On the Closing Date, the Closing Date Projections represent, and as of the date on which any other Projections are delivered to Agent, such additional Projections will represent Borrower's good faith best estimate of its future performance for the periods covered thereby. 5.19 Indebtedness. Set forth on Schedule 5.19 is a true and complete list of all Indebtedness of each Loan Party outstanding on or immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 5.20 Oil and Gas Imbalances. Except as set forth on Schedule 5.20 or on the most recent certificate delivered pursuant to Section 6.2(e), on a net basis there are not gas imbalances, take-or-pay oil and gas or other prepayments with respect to Borrower's and Guarantors' Oil and Gas Properties which would require such Person either to make cash settlements for such production or deliver Hydrocarbons produced from such Oil and Gas Properties at some future time without then or thereafter receiving full payments therefor exceeding two percent (2%) of the current monthly production of oil and gas from the Oil and Gas Properties of Borrower and Guarantors in the aggregate. 5.21 Hedging Agreements. Schedule 5.21 (which schedule, so long as a Default, Unmatured Default or Event of Default has not occurred and is not continuing, shall be deemed to be amended by the most recent certificate delivered by Borrower pursuant to Section 6.2(d)) sets forth, as of the Closing Date, a true and complete list of all Hedging Agreements (including commodity price swap agreements, forward agreements or contracts of sale which provide for prepayment for deferred shipment or delivery of Hydrocarbons or other commodities) of Borrower and Guarantors, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), all credit support agreements relating thereto (including any margin required or supplied), and the counterparty to each such agreement. 5.22 Location of Real Property and Leased Premises. (a) (i) Part A of Schedule 5.22 lists completely and correctly as of the Closing Date all Real Property (other than Oil and Gas Properties) owned in fee by each Loan Party and the addresses thereof, (ii) Part B of Schedule 5.22 lists completely and correctly as of the Closing Date all Real Property (other than Oil and Gas Properties) leased by each Loan Party and the respective addresses thereof and (iii) Part C of Schedule 5.22 lists completely and correctly as of the Closing Date all Oil and Gas Properties with a PV-10 of at least $50,000 that are Real Property whether leased or owned by any Loan Party and the respective legal descriptions, addresses (if any), counties and states thereof. 57 (b) As of the Closing Date, each Loan Party has valid leasehold interests in the leases described on Schedule 5.22 and such schedule sets forth with respect to each such lease, the commencement date, termination date, renewal options (if any) and annual base rents. Each such lease is valid and enforceable in accordance with its terms in all material respects and is in full force and effect. No consent or approval of any landlord or other third party in connection with any such lease is necessary for any Loan Party to enter into and execute the Loan Documents to which it is a party, except as set forth on Schedule 5.22. To the knowledge of any Loan Party, no other party to any such lease is in default of its obligations thereunder, and no Loan Party (or any other party to any such lease) has at any time delivered or received any notice of default which remains uncured under any such lease and, as of the Closing Date, no event has occurred which, with the giving of notice or the passage of time or both, would constitute a default under any such lease. (c) Each Loan Party has good and defensible title to all of its Oil and Gas Properties set forth on Schedule 5.22 which constitute Real Property and good and indefeasible title to all of its Oil and Gas Properties which constitute personal property, except for (i) such imperfections of title which do not in the aggregate materially detract from the value thereof to, or the use thereof in, the business of such Loan Party and (ii) Permitted Liens. The quantum and nature of the interest of such Loan Party in and to the Oil and Gas Properties as set forth in the Initial Reserve Report or the most recent Reserve Report, as the case may be, includes the entire interest of such Loan Party in such Oil and Gas Properties as of the date of the Initial Reserve Report or such applicable Reserve Report delivered by Borrower to Agent pursuant to Section 6.2(e), as the case may be, and are complete and accurate in all material respects as of the date of the Initial Reserve Report or such applicable Reserve Report, as the case may be; and there are no "back-in" or "reversionary" interests held by third parties which could materially reduce the interest of such Loan Party in such Oil and Gas Properties except as expressly set forth in the Initial Reserve Report or the most recent Reserve Report, as the case may be. The ownership of the Oil and Gas Properties by each Loan Party shall not in any material respect obligate any such Loan Party to bear the costs and expenses relating to the maintenance, development or operations of each such Oil and Gas Property in an amount in excess of the working interest of record of such Loan Party in each Oil and Gas Property set forth in the Initial Reserve Report or the most recent Reserve Report, as the case may be. (d) Each Loan Party's marketing, gathering, transportation, processing and treating facilities and equipment, together with any marketing, gathering, transportation, processing and treating contracts in effect between and/or among such Loan Party and any other Person, are sufficient to gather transport, process and/or treat, reasonably anticipated volumes of production of Hydrocarbons from the Oil and Gas Properties of the Loan Party. 5.23 Senior Notes Documents and Intercreditor Agreement. (a) The Borrower's Indebtedness incurred from (i) the Advances made by the Lenders on and after the Closing Date and (ii) the issuance of Letters of Credit, in each case, subject to the limitations set forth in this Agreement, does not and will not conflict with or result in a default under any Senior Notes Document, any Bridge Loan Document, any Grey Wolf Loan Document, or the Intercreditor Agreement. 58 (b) Other than Borrower's Indebtedness that may be incurred under the Loan Documents, the Loan Parties have not created, incurred, assumed, permitted, guaranteed, or otherwise become, directly or indirectly, liable with respect to any Indebtedness permitted pursuant to clause (1) of the definition of "Permitted Indebtedness" contained in the Senior Notes Indenture. 5.24 Material Contracts. Set forth on Schedule 5.24 is a complete and accurate list as of the Closing Date of all Material Contracts of each Loan Party, showing the parties and subject matter thereof and amendments and modifications thereto. Each such Material Contract (i) is in full force and effect and is binding upon and enforceable against each Loan Party and, to the knowledge of such Loan Party, all other parties thereto in accordance with its terms, (ii) has not been otherwise amended or modified, and (iii) is not in default due to the action of Borrower or, to the knowledge of such Loan Party, any other party thereto. 5.25 Permits, Etc. Each Loan Party has, and is in compliance with, all permits, licenses, authorizations, approvals, entitlements and accreditations required for such Person lawfully to own, lease, manage or operate, or to acquire, each business and the Real Property currently owned, leased,` managed or operated, or to be acquired, by such Person except for such permits, licenses, authorizations, approvals, entitlements and accreditations the absence of which could not reasonably be expected to result in a Material Adverse Change. No condition exists or event has occurred which, in itself or with the giving of notice or lapse of time or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such permit, license, authorization, approval, entitlement or accreditation, and, to Borrower's knowledge, there is no claim that any thereof is not in full force and effect. 5.26 Employee and Labor Matters. Except as set forth on Schedule 5.26, there is (a) no unfair labor practice complaint pending or, to Borrower's knowledge, threatened against any Loan Party before any Governmental Authority and no grievance or arbitration proceeding pending or threatened against any Loan Party which arises out of or under any collective bargaining agreement, (b) no strike, labor dispute, slowdown, stoppage or similar action or grievance pending or, to the knowledge of Borrower, threatened against any Loan Party and (c) no union representation question existing with respect to the employees of any Loan Party and no union organizing activity taking place with respect to any of the employees of any of them. Neither any Loan Party nor any ERISA Affiliate of any Loan Party has incurred any liability or obligation under the Worker Adjustment and Retraining Notification Act ("WARN") or similar state law, which remains unpaid or unsatisfied. The hours worked and payments made to employees of each Loan Party have not been in violation of the Fair Labor Standards Act, or any other applicable legal requirements. All material payments due from any Loan Party on account of workers compensation, wages and employee health and welfare insurance and other benefits have been paid or accrued as a liability on the books of such Loan Party. 5.27 Bonds and Insurance. Schedule 5.27 contains an accurate and complete description of all performance bonds related to operations on or pertaining to the Oil and Gas Properties, and all material policies of insurance owned or held by Borrower and each Restricted Subsidiary. Except as set forth on Schedule 5.27, all such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Such bonds and policies are sufficient for 59 compliance with all requirements of law and of all agreements to which Borrower or any of its Restricted Subsidiaries is a party; are valid, outstanding and enforceable policies; provide adequate coverage in at least such amounts and against at least such risks (but including in any event public liability) as are required by Governmental Authorities and/or usually insured or bonded against in the same general area by companies engaged in the same or a similar business for the assets and operations of Borrower and each of its Restricted Subsidiaries; will remain in full force and effect through the respective dates set forth in Schedule 5.27 without the payment of additional premiums except as set forth on Schedule 5.27; and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this agreement. Neither Borrower nor any of its Restricted Subsidiaries has been refused any bonds or insurance with respect to its assets or operations, nor has its coverage been limited below usual and customary bond or policy limits, by any bonding company or insurance carrier to which it has applied for any such bond or insurance or with which it has carried insurance during the last three years. 5.28 Nature of Business. Borrower is not engaged in any business other than the Oil and Gas Business within the continental United States or any other territory, jurisdiction (foreign or otherwise) agreed to by Agent. Except as otherwise disclosed on Schedule 5.28, no other Loan Party (x) owns any assets or properties used by Borrower in its Oil and Gas Business, or (y) has any liabilities or conducts any business. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations and the termination of this Agreement, Borrower shall and shall cause each of its Restricted Subsidiaries to do all of the following (unless otherwise agreed to by Agent or the Required Lenders): 6.1 Accounting System. Maintain a system of accounting that enables Borrower to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent. Borrower also shall keep a joint interest billing and remittance system with respect to each of the Oil and Gas Properties on which it is the operator and a reporting system that shows, among other things, the value, revenues and profits/losses of the Oil and Gas Properties of Borrower and its Restricted Subsidiaries, volume of production and value of sales of Hydrocarbon production, the location and condition of the Equipment and Borrower's positions and liability exposure under all Hedging Agreements. 6.2 Collateral Reporting. Provide Agent (and if so requested by Agent, with copies for each Lender) with the following documents at the following times in form satisfactory to Agent: (a) daily notices of any dispute or claim that, if adversely determined, would, individually or in the aggregate, result in liability to Borrower or its Restricted Subsidiaries in excess of $500,000; 60 (b) as soon as available, but in any event within 30 days after the end of each month, (i) a detailed aging, by total, of the Accounts, including, among other things, lease operating expenses and royalty payments and (ii) a summary, by vendor of each Loan Party's accounts payable and any book overdraft; (c) as soon as available, but in any event within 30 days after the end of each month, a report, in form and substance satisfactory to Agent, setting forth on a well-by-well or unit-by-unit basis and also on an aggregated basis (i) a statement of gross and net sales proceeds of all Hydrocarbons produced from the Oil and Gas Properties of each Loan Party and pricing information (and in the aggregate only on a hedged and unhedged basis) relating thereto, (ii) the volume and/or quantity of Hydrocarbon products sold for the previous month, (iii) the severance, gross production, occupation, and/or gathering taxes deducted from or paid out of the proceeds payable to the Loan Parties, (iv) the operating expenses, drilling costs, and capital expenditures, (v) the number of wells operated (or the numbers of pooled units), drilled or abandoned, (vi) a statement of all funds received from the sale of Hydrocarbons representing amounts attributable to trust fund taxes or Hydrocarbon Interests of third parties, and (vii) such other information as Agent may reasonably request; (d) as soon as available, but in any event within 30 days after the end of each month, a report, in form and substance satisfactory to Agent, setting forth, as of the last Business Day of such month, a summary of the hedging positions of each Loan Party under all Hedging Agreements (including, without limitation, any contracts of sale which provide for prepayment for deferred shipment or delivery of oil, gas or other commodities) of each Loan Party, including the type, term, effective date, termination date and notional principal amounts or volumes, the hedged price(s), interest rate(s) or exchange rate(s), as applicable, and any new credit support agreements relating thereto; (e) as soon as available, but in any event not later than 75 days after June 30th and December 31st of each year, a Reserve Report, prepared under the supervision of the chief engineer of Borrower who shall certify such Reserve Report to be true and accurate and to have been prepared in accordance with the procedures used in the Initial Reserve Report, and together with each such Reserve Report, a certificate of an Authorized Person certifying that, to such Person's knowledge (i) the information contained in the Reserve Report and any other information delivered in connection therewith is true and correct, (ii) Borrower owns good and defensible title to its Oil and Gas Properties evaluated in such Reserve Report and such Oil and Gas Properties are free and clear of all Liens except for Permitted Liens, (iii) except as set forth on an exhibit to the certificate, on a net basis there are no gas imbalances, take-or-pay or other prepayments with respect to its Oil and Gas Properties evaluated in such Reserve Report which would require any such Loan Party to deliver Hydrocarbons produced from such Oil and Gas Properties or make cash payments at some future time without then or thereafter receiving full payment therefor, (iv) except as set forth on an exhibit to the certificate, none of its Oil and Gas Properties have been sold since the date of the Reserve Report most recently delivered pursuant to this Section 6.2(e), which exhibit shall list all of its Oil and Gas Properties sold and in such detail as is reasonably required by Agent, (v) attached as an exhibit to the certificate is a list of its Oil and Gas Properties added to and deleted from the Reserve Report most recently delivered pursuant to this Section 6.2(e) and a list of all Persons disbursing proceeds to Borrower or any Guarantor, as applicable from its Oil and Gas Properties, (vi) all of the Oil and Gas Properties evaluated by such Reserve Report are subject 61 to a Mortgage, the Collateral Agent's Liens and UCC financing statements, that in each case create a first priority perfected Lien in such Oil and Gas Properties in favor of the Collateral Agent for the benefit of Agent and the Lenders subject only to Permitted Liens that arise by operation of law and securing obligations for the payment of money not delinquent, (vii) except as set forth on an exhibit to such certificate, none of the Oil and Gas Properties evaluated by such Reserve Report are subject to any farm-out or similar arrangement, and (viii) except as set forth on an exhibit to such certificate, there has not been any change in the working interest or net revenue interest of any Loan Party in any of the Oil and Gas Properties included on such Reserve Report; provided, however, that, notwithstanding the foregoing semi-annual reporting requirement of this Section 6.2(e), Borrower or Agent may have a Reserve Report prepared more frequently than semi-annually and such Reserve Report shall be used to update the Borrowing Base to the extent such Reserve Report complies with the requirements set forth in this Section 6.2(e) and is otherwise satisfactory to Agent; (f) as soon as available, but in any event within 30 days after the end of each quarter (or, at any time when Excess Availability is less than $10,000,000, within 30 days after the end of each month) ending after the Closing Date, (i) (x) a Borrowing Base Certificate, current as of the last day of such quarter or month, as applicable, supported by schedules showing the derivation thereof, including the calculation of the PV-10 of the Proved Developed Producing Reserves composing the Borrowing Base and (y) a certificate, current as of the last day of such quarter or month, as applicable, supported by schedules showing the derivation thereof, a calculation of the PV-10 of the Proved Developed Non-Producing Reserves and the Proved Undeveloped Reserves and a calculation of the Collateral Coverage Ratio and, in each case of clauses (x) and (y), containing such detail and other information as Agent may request from time to time, provided, that (A) the information contained therein, including, without limitation, the Borrowing Base set forth in the Borrowing Base Certificate, shall be determined pursuant to the information set forth in the Reserve Report most recently delivered by Borrower pursuant to Section 6.2(e), such calculation to be made by multiplying (x) the volumetric quantity of the categories of estimated Proved Reserves set forth in such Reserve Report less such aggregate projected production volumes of Proved Reserves since the date of and as provided in such Reserve Report by (y) the applicable NYMEX Strip Price as of the last Business Day of the month preceding the date of the delivery by Borrower of such report to Agent, (B) the Borrowing Base shall be effective from and including the date such Borrowing Base Certificate is duly received by Agent but not including the date on which a subsequent Borrowing Base Certificate is received by Agent unless Agent disputes the eligibility of any Oil and Gas Property for inclusion in the calculation of the Borrowing Base or the valuation thereof by notice of such dispute to Borrower and (C) in the event of any dispute about the eligibility of any such property included in the calculation of the Borrowing Base or the valuation thereof, Agent's good faith judgment shall control, and (ii) a report, with a certificate of an Authorized Person of Borrower certifying to the completeness and accuracy of the report, discussing (A) any change since the date of such Reserve Report in the categorization of any Oil and Gas Properties among Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves, Proved Undeveloped Reserves and "other", (B) any change in the working interest or net revenue interest in the Oil and Gas Properties of any Loan Party reflected on such Reserve Report, and (C) such other information as Agent shall reasonably consider appropriate or necessary from the perspective of an asset-based lender; 62 (g) as soon as available, but in any event not later than 45 days after the end of each quarter, a report, certified by an Authorized Person of Borrower: (i) setting forth the total amount actually paid by each Loan Party during the preceding quarter for: (A) plugging and abandonment costs for previous or ongoing plugging and abandonment operations pertaining to its Oil and Gas Properties, and (B) general bond and supplemental bond payments pertaining to plugging and abandonment costs; and (ii) estimating the future payments for (A) and (B), above, for each of the succeeding two quarters; and (h) upon request by Agent, such other reports as to the Oil and Gas Properties, the other Collateral or the financial condition of Borrower or any of its Restricted Subsidiaries, and, upon the reasonable request by Agent, such other reports as to the Oil and Gas Properties or the financial condition of Grey Wolf so long as Grey Wolf is a Subsidiary of Borrower. 6.3 Financial Statements, Reports, Certificates. Deliver to Agent, with copies to each Lender: (a) as soon as available, but in any event within 30 days (45 days in the case of a month that is the end of one of the first 3 fiscal quarters in a fiscal year) after the end of each month during each of Borrower's fiscal years, (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering Borrower's and its Subsidiaries' operations during such period, (ii) a certificate signed by the chief financial officer of Borrower to the effect that: (A) the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of Borrower and its Subsidiaries, (B) the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), and (C) there does not exist any condition or event that constitutes a Default, Unmatured Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto), and (iii) for each month that is the date on which a financial covenant in Section 7.20 is to be tested, a Compliance Certificate 63 demonstrating, in reasonable detail, compliance at the end of such period with the applicable financial covenants contained in Section 7.20, and (b) as soon as available, but in any event within 90 days after the end of each of Borrower's fiscal years, (i) financial statements of Borrower and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications (including, without limitation, (A) any going concern or like qualification or exception or (B) any qualification as to the scope of such audit), by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants' letter to management), (ii) a certificate of such accountants addressed to Agent and the Lenders stating that such accountants do not have knowledge of the existence of any Default, Unmatured Default or Event of Default under Section 7.20, (c) as soon as available, but in any event within 30 days prior to the start of each of Borrower's fiscal years, copies of Borrower's Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its sole discretion, for the forthcoming 3 years, year by year, and for the forthcoming fiscal year, month by month, certified by the chief financial officer of Borrower as being such officer's good faith best estimate of the financial performance of Borrower during the period covered thereby, (d) if and when filed by Borrower, (i) Form 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports, (ii) any other filings made by Borrower with the SEC, (iii) copies of Borrower's federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and (iv) any other information that is provided by Borrower to its shareholders, (e) if and when filed by any Loan Party and as requested by Agent, satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which (i) such Loan Party conducts business or is required to pay any such excise tax, (ii) where such Loan Party's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of such Loan Party, or (iii) where such Loan Party's failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change, (f) promptly after sending or receipt thereof, copies of any material notice or other correspondence sent to, or received from, any Governmental Authority related to the Oil and Gas Properties of any Loan Party, 64 including, without limitation, notice of any new plugging and abandonment or other performance or other assurance bond requirements related to such Oil and Gas Properties, (g) promptly after the commencement thereof, but in any event within five days after the service of process with respect thereto on any Loan Party, notice of all actions, suits or proceedings brought by or against any Loan Party before any Governmental Authority which, if determined adversely to such Loan Party, could result in a Material Adverse Change, (h) as soon as Borrower has knowledge of any event or condition that constitutes a Default or an Unmatured Default or an Event of Default, notice thereof and a statement of the curative action that Borrower proposes to take with respect thereto, (i) (i) promptly after receipt or delivery thereof, copies of any material notices that any Loan Party receives from or sends to any Person in connection with the Senior Notes Documents or the Bridge Loan Documents and (ii) at least 3 Business Days prior to the effective date thereof, any amendments, modifications, waivers or other changes to any of the Senior Notes Documents or the Bridge Loan Documents, and (j) upon the request of Agent, any other report reasonably requested relating to the financial condition of Borrower or any of its Subsidiaries. In addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on both a consolidated and consolidating basis, and for it and its Restricted Subsidiaries and for Grey Wolf so long as Grey Wolf is a Subsidiary of Borrower, and agrees that no Subsidiary of Borrower will have a fiscal year different from that of Borrower. Borrower agrees that its independent certified public accountants are authorized to communicate with Agent and to release to Agent whatever financial information concerning Borrower Agent reasonably may request. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Agent pursuant to or in accordance with this Agreement, and agrees that Agent may contact directly any such accounting firm or service bureau in order to obtain such information. 6.4 Guarantor Reports. Cause each Guarantor to deliver its annual financial statements at the time when Borrower provides its audited financial statements to Agent and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 6.5 Maintenance of Properties. (a) Maintain and preserve all of its properties which are necessary or useful in the proper conduct to its business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder. (b) Cause to be done all things necessary to preserve and keep in good repair, working order and efficiency all the Oil and Gas Properties of each Loan Party and other material assets including, without limitation, all 65 equipment, machinery, facilities, and marketing, gathering, transportation and processing assets and, from time to time, will make all the reasonably necessary repairs, renewals and replacements so that at all times the state and conditions of such Oil and Gas Properties and other material assets will be fully preserved and maintained, except to the extent a portion of such assets is no longer capable of producing Hydrocarbons in economically reasonable amounts. (c) Promptly: (i) pay and/or discharge or cause to be paid and/or discharged, all rentals, royalties, expenses, taxes and Indebtedness accruing under the lease or other agreements affecting or pertaining to the Oil and Gas Properties of each Loan Party, (ii) perform, observe and comply or make reasonable and customary efforts to cause to be performed, observed and complied with, in accordance with usual and customary industry standards, the obligations required by each and all of the assignments, deeds, leases, sub-leases, contracts and agreements affecting its interests in such Oil and Gas Properties and the accompanying elements therefrom and other material properties so long as such properties are capable of producing Hydrocarbons and the accompanying elements in quantities and at prices providing for continued efficient and profitable operations of business and (iii) do all other things necessary to keep unimpaired, except for Permitted Liens, its rights with respect thereto and prevent any forfeiture thereof or a default thereunder, except to the extent a portion of such properties is no longer capable of producing Hydrocarbons in economically reasonable amounts. (d) Operate its Oil and Gas Properties and other material properties or cause or make reasonable and customary efforts to cause such Oil and Gas Properties and other material properties to be operated on a continuous basis for the production of Hydrocarbons and in a careful and efficient manner in accordance with the usual and customary practices of the industry and in substantial compliance with all applicable contracts and agreements and in compliance in all material respects with all material laws. (e) Operate and produce, as a reasonably prudent operator, the Oil and Gas Properties of the Loan Parties in accordance with good engineering practices and the following requirements: (i) the amount of Hydrocarbons produced from any well shall not exceed in any month the lower of (A) the maximum amount that such well is capable of producing at its maximum efficient rate of flow and (B) the respective allowable rate of flow under applicable orders, rules, regulations or laws, if any; (ii) the amount of Hydrocarbons produced from the Loan Parties' wells shall be sufficient to prevent a net migration of Hydrocarbons from the reservoirs to which Proved Reserves are attributed; and (iii) subject to field rules established by any Governmental Authority having or asserting jurisdiction, the amount of Hydrocarbons produced from the Loan Parties' wells shall be equitable and ratable, based on factors used in determining such field rules. (f) To the extent the interests in Oil and Gas Properties of Borrower (other than working interests of record) are operated by Persons other than Borrower, Borrower shall cause any owner or operator of such Oil and Gas Properties to comply with this Section 6.5; provided, however, that it shall not be a breach of this Section 6.5 if such owners or operators are not in compliance with this Section 6.5 on Oil and Gas Properties of Borrower with an aggregate PV-10 for all such Oil and Gas Properties of less than $200,000. 66 6.6 Taxes. Cause all assessments, remittances, source deductions, and taxes (including, without limitation, withholding taxes), whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed ("Tax Payments") against any Loan Party or any of such Loan Party's assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such Tax Payment shall be the subject of a Permitted Protest. Each Loan Party will make timely payment or deposit of all Tax Payments required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that each such Loan Party has made such Tax Payments or deposits. Borrower shall deliver satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which a Loan Party is required to pay any such excise tax. 6.7 Insurance. (a) At Borrower's expense, maintain insurance respecting its assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrower also shall maintain public liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation to the extent Borrower maintains such insurance on the Closing Date or is otherwise required by Agent, in its reasonable discretion, to maintain such insurance after the Closing Date to the extent the premiums related thereto are not at levels commercially unreasonable. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrower shall deliver copies of all such policies to Agent with a satisfactory lender's loss payable endorsement naming the Collateral Agent as sole loss payee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days' prior written notice to the Collateral Agent in the event of cancellation of the policy for any reason whatsoever. During the period of the drilling of wells and the construction of any other improvements comprising a part of the Oil and Gas Properties of any Loan Party, Borrower shall, or, as applicable, shall cause its contractors or subcontractors to, obtain and maintain well control insurance (including coverage for costs and redrilling) and builder's risk insurance, as applicable, in such form and amounts as is customary in the industry and worker's compensation insurance covering all Persons employed by any Loan Party or its agents or subcontractors of any tier in connection with any construction affecting such Oil and Gas Properties, including, without limitation, all agents and employees of any Loan Party and such Loan Party's subcontractors with respect to whom death or bodily injury claims could be asserted against any Loan Party. Borrower shall give Agent prompt notice of any loss covered by such insurance. (b) No Loan Party will take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.7, unless the Collateral Agent is included thereon as named insured with the loss payable to the Collateral Agent under a lender's loss payable endorsement or its equivalent. 6.8 [Intentionally Omitted] 6.9 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act 67 and other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 6.10 Leases. Pay when due all rents and other amounts payable under any leases to which any Loan Party is a party or by which any Loan Party's properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.11 Brokerage Commissions. Pay any and all brokerage commission or finders fees incurred in connection with or as a result of Borrower's obtaining financing from the Lender Group under this Agreement. Borrower agrees and acknowledges that payment of all such brokerage commissions or finders' fees shall be the sole responsibility of Borrower, and Borrower agrees to indemnify, defend, and hold Agent and the Lender Group harmless from and against any claim of any broker or finder arising out of Borrower's obtaining financing from the Lender Group under this Agreement. 6.12 Existence. At all times preserve and keep in full force and effect each Loan Party's valid existence and good standing and any rights and franchises material to each Loan Party's businesses. 6.13 Environmental. (a) Keep any property either owned or operated by any Loan Party free of any Environmental Liens or post bonds or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Agent documentation of such compliance which Agent reasonably requests, (c) promptly notify Agent of any release of a Hazardous Material in a quantity which is in violation of any Environmental Law from or onto property owned or operated by any Loan Party and take any Remedial Actions required to abate said release or otherwise to come into compliance with applicable Environmental Law, and (d) promptly provide Agent with written notice within 10 days of the receipt of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of any Loan Party, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against any Loan Party, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change. 6.14 Disclosure Updates. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, (a) notify Agent if any written information, exhibit, or report furnished to the Lender Group contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and (b) correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgement, filing, or recordation thereof. 6.15 After Acquired Properties. With respect to any Oil and Gas Property of any Loan Party with a PV-10 of at least $50,000 acquired after the Closing Date by Borrower or any discovery and/or confirmation of the existence of Hydrocarbons in any property owned or leased by Borrower, promptly (and in any event within 30 days after the acquisition thereof): (A) execute and deliver to the Collateral Agent such amendments to the Mortgages or such other documents as the Collateral Agent shall deem necessary or advisable to grant to the 68 Collateral Agent, for the benefit of the Agent and the Lenders, a perfected first priority Lien on such Oil and Gas Property; (B) take all actions necessary or advisable to cause such Lien to be duly perfected in accordance with all applicable law, including, without limitation, the filing of Mortgages, financing statements in such jurisdictions as may be requested by the Collateral Agent; and (C) deliver to the Collateral Agent title opinions and/or legal opinions relating to the matters described in clauses (A) and (B) immediately preceding, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent. 6.16 Protection Against Drainage. To the extent that the Oil and Gas Properties of any Loan Party (i) are operated by Borrower or its Restricted Subsidiaries, Borrower or its Restricted Subsidiaries shall, or shall cause its Restricted Subsidiaries to, act as a reasonably prudent operator in an effort to identify and prevent the occurrence of any drainage of Hydrocarbons from such Oil and Gas Properties and (ii) are not operated by Borrower or its Restricted Subsidiaries, Borrower shall utilize, or cause its Restricted Subsidiaries to utilize, its property and contractual rights as a reasonably prudent owner in an effort to identify and prevent the occurrence of any drainage of Hydrocarbons from such Oil and Gas Properties. 6.17 Additional Collateral Reviews. Borrower shall, from time to time upon the reasonable request of Agent, take such actions and execute and deliver such documents and instruments as Agent shall require to ensure that Agent shall, at all times, have received satisfactory title reviews (including, if requested, supplemental or new title opinions addressed to it), which title opinions shall be in form and substance acceptable to Agent in its sole discretion and shall include opinions regarding the before payout and after payout ownership interests held by Borrower, for all wells located on the Oil and Gas Properties covered thereby as to the ownership of Oil and Gas Properties of Borrower and its Restricted Subsidiaries. 6.18 Hedging Agreements. Maintain in effect one or more Commodities Hedging Agreements with respect to its Hydrocarbon production with one or more counterparties rated investment grade by Moody's and Standard & Poor's, or the equivalent by a rating agency acceptable to Agent or with a counterparty otherwise reasonably acceptable to Agent. The aggregate notional volumes of Hydrocarbons covered by such Commodities Hedging Agreements shall constitute not less than 25% and not more than 75% of the Loan Parties' aggregate estimated Hydrocarbon production volumes on an mcf equivalent basis (where one barrel of oil is equal to six mcf of gas) for the succeeding six calendar months on a rolling six calendar month basis for such period from Oil and Gas Properties classified as Proved Developed Producing Reserves as of the date of the most recent Reserve Report delivered pursuant to Section 6.2(e) hereof plus the estimated production from anticipated drilling by Borrower or its Restricted Subsidiaries during such succeeding six months. Borrower shall use such Commodities Hedging Agreements solely as a part of its normal business operations as a risk management strategy and/or hedge against changes resulting from market conditions related to Borrower's and its Restricted Subsidiaries' oil and gas operations and not as a means to speculate for investment purposes on trends and shifts in financial or commodities markets. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations and the termination of this Agreement, Borrower will not and will not permit any of its 69 Restricted Subsidiaries to do any of the following (unless otherwise agreed to by Agent or the Required Lenders): 7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement and the other Loan Documents, together with Indebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit, (b) Indebtedness set forth on Schedule 5.19, (c) Permitted Purchase Money Indebtedness, (d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b), (c), (e) and (l) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not, in Agent's judgment, materially impair the prospects of repayment of the Obligations by any Loan Party or materially impair any Loan Party's creditworthiness, (ii) such refinancings, renewals, or extensions do not result in an increase in the principal amount of, or interest rate with respect to, the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions that, taken as a whole, are materially more burdensome or restrictive to such Loan Party, (iv) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the refinanced, renewed, or extended Indebtedness and (v) if the Permitted Liens securing the Indebtedness that is refinanced, renewed or extended was subordinated to the Collateral Agent's Liens securing the Obligations, then the terms and conditions of such refinancing, renewal, or extension shall include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the Indebtedness being refinanced, renewed or extended; (e) Indebtedness evidenced by the Senior Notes issued pursuant to the terms of the Senior Notes Documents, so long as all such Indebtedness and such documents are subject to the Intercreditor Agreement; (f) Indebtedness under Hedging Agreements incurred in the ordinary course of business of Borrower and its Restricted Subsidiaries consistent with prudent business practice and not for speculative purposes and in accordance with this Agreement; (g) Indebtedness associated with bonds or surety obligations required by applicable law in connection with the operation of Borrower's and its Restricted Subsidiaries' Oil and Gas Properties; (h) Indebtedness composing Permitted Investments; 70 (i) (i) intercompany Indebtedness incurred by Borrower and made by a Guarantor that is unsecured and subject to an intercompany subordination agreement satisfactory to Agent, (ii) intercompany Indebtedness incurred by Grey Wolf and made by any Loan Party so long as (A) Grey Wolf is a wholly-owned Subsidiary of Borrower, (B) such Indebtedness is evidenced by a promissory note that is pledged to the Collateral Agent for the benefit of Agent and the Lenders, and (C) the aggregate principal amount of all such Indebtedness owing by Grey Wolf (x) outstanding on the Closing Date shall not exceed $6,500,000 and (y) incurred after the Closing Date shall not exceed $1,000,000 at any time and (iii) intercompany Indebtedness incurred by any Loan Party (other than Borrower) and made by Borrower so long as (A) such Indebtedness is evidenced by a promissory note that is pledged to the Collateral Agent for the benefit of Agent and the Lenders and (B) the aggregate outstanding principal amount of all such Indebtedness owing to Borrower shall not exceed $500,000 at any time; (j) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that the aggregate amount of such Indebtedness is extinguished within two (2) Business Days of incurrence and does not at any time exceed $50,000 (or such longer period or greater amount which may be agreed to by Agent); (k) Indebtedness of Borrower or any of its Restricted Subsidiaries represented by letters of credit for the account of Borrower or any of its Restricted Subsidiaries, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business, to the extent such letters of credit are unsecured and subordinated, in form and substance satisfactory to Agent, to the Obligations; (l) Indebtedness evidenced by the Bridge Loan Documents, so long as such Indebtedness and such Bridge Loan Documents are subject to the Intercreditor Agreement or such Indebtedness and Liens securing such Indebtedness are otherwise subordinated in a manner satisfactory to Agent; and (m) other unsecured Indebtedness of Borrower or any of its Restricted Subsidiaries in an aggregate principal amount at any time outstanding not to exceed $500,000 (or such greater amount which may be agreed to by Agent). 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extended under Section 7.1(d) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed, or extended Indebtedness). 71 7.3 Restrictions on Fundamental Changes. Other than Permitted Dispositions: (a) enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its Stock; (b) liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution); or (c) convey, sell, lease, license, assign, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its assets. 7.4 Disposal of Assets. Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer, or otherwise dispose of any of Borrower's assets, including, without limitation, sell, lease, license, assign, farm-out, convey or otherwise transfer any Oil and Gas Property or any interest in any Oil and Gas Property. 7.5 Change Name. Change any Loan Party's name, organizational identification number, state of incorporation, FEIN, corporate structure, or identity, or add any new fictitious name; provided, however, that Borrower may change its name upon at least 30 days' prior written notice to Agent and Collateral Agent of such change and so long as, at the time of such written notification, such Loan Party provides any financing statements, fixture filings or Mortgages necessary to perfect and continue perfected the Collateral Agent's Liens. 7.6 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except (a) by endorsement of instruments or items of payment for deposit to the account of any Loan Party or which are transmitted or turned over to the Collateral Agent and (b) guarantees of Indebtedness permitted under Section 7.1. 7.7 Nature of Business. Make any change in the principal nature of its business as described in Section 5.28. 7.8 Payments, Prepayments and Amendments. (a) Except (i) in connection with a refinancing permitted by Section 7.1(d), (ii) the repayment of intercompany Indebtedness permitted by Section 7.1(i), (iii) payments permitted under clause (c) of this Section 7.8 or (iv) (A) so long as no Event of Default has occurred or is continuing, payments from the net proceeds received by Borrower from the issuance or sale of Qualified Capital to permanently repay all or part of the principal amount of the loans under the Bridge Loan Documents or (B) so long as no Default, Unmatured Default or Event of Default has occurred or is continuing, payments from the net proceeds received by Borrower from the issuance or sale of Qualified Capital to permanently prepay, redeem, defease, purchase or otherwise acquire the Senior Notes, prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of Borrower and its Restricted Subsidiaries, including, without limitation, the Indebtedness evidenced by the Senior Note Documents and the Bridge Loan Documents, other than the Obligations in accordance with this Agreement. (b) Except in connection with a refinancing permitted by Section 7.1(d) or as otherwise permitted in accordance with the terms of the Intercreditor Agreement, directly or indirectly, amend, modify, alter, increase, 72 or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b), (c), (e) or (l) without the prior written consent of Agent; (c) Directly or indirectly, by deposit of monies or otherwise, make any payment on account of any principal of, premium, interest, fees or other amounts payable in connection with the Indebtedness under the Senior Notes Documents or the Bridge Loan Agreement, other than (w) any repayment permitted under clause (a) of this Section 7.8, (x) (i) in connection with a refinancing permitted by Section 7.1(d), (ii) fees and expenses of the Senior Notes Trustee and the Bridge Loan Administrative Agent incurred in the ordinary course and (iii) payments of the Bridge Loan Obligations with the proceeds of any Grey Wolf Stock Sale, (y) in the absence of a Default Period, (i) payments from the proceeds of the Bridge Loan Disposition described in clause (b) of such definition to be applied in accordance with Section 4.05 of the Intercreditor Agreement, (ii) scheduled interest payments on the Senior Notes to be paid on June 1 and December 1 of each calendar year, commencing June 1, 2005, and (iii) interest, fees or other amounts payable in connection with the Indebtedness under the Bridge Loan Agreement, and (z) during the existence of a Default Period, payments as may be permitted by the terms of the Intercreditor Agreement; (d) (i) Amend, modify or otherwise change its or its Restricted Subsidiaries' Governing Documents, including, without limitation, by the filing or modification of any certificate of designation, or any agreement or arrangement entered into by it with respect to any of its Stock (including any shareholders' agreement), or enter into any new agreement with respect to any of its Stock, or (ii) amend, modify or otherwise change any Material Contract of Borrower or its Restricted Subsidiaries, except any such amendments, modifications or changes or any such new agreements or arrangements pursuant to this paragraph (d) that (x) either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Change or (y) is in connection with the issuance or sale of Qualified Capital. 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 Forward Sales. Except in accordance with the ordinary course of the Oil and Gas Business, and except for Permitted Dispositions, enter into or permit to exist any advance payment agreement or other arrangement pursuant to which any Loan Party, having received full or substantial payment of the purchase price for a specified quantity of Hydrocarbons upon entering such agreement or arrangement, is required to deliver, in one or more installments subsequent to the date of such agreement or arrangement, such quantity of Hydrocarbons pursuant to and during the terms of such agreement or arrangement. 7.11 Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than Qualified Capital) on, or purchase, acquire, redeem, or retire (for cash or other property, other than a purchase, acquisition, redemption or retirement solely in exchange for Qualified Capital) any of Borrower's Stock, of any class, whether now or hereafter outstanding. 73 7.12 Accounting Methods. Modify or change its method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of any Loan Party's accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding the Collateral or any Loan Party's financial condition. 7.13 Investments. Except for Permitted Investments, directly or indirectly, make or acquire any Investment or incur any liabilities (including contingent obligations) for or in connection with any Investment. 7.14 Transactions with Affiliates. Other than with respect to the transactions contemplated by the agreement identified in Part B of Schedule 5.24 or the Existing Note Redemption, directly or indirectly enter into or permit to exist any transaction with any Affiliate of any Loan Party except for transactions that are (i) in the ordinary course of such Loan Party's business, (ii) upon fair and reasonable terms, (iii) fully disclosed to Agent, and (iv) no less favorable to such Loan Party than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 Suspension. Suspend or go out of a substantial portion of its business. 7.16 Compensation. Increase the annual fee or per-meeting fees paid in cash to any member of its Board of Directors during any year by more than 20% (or such greater amount which may be agreed to by Agent) over the prior year; pay or accrue total cash compensation, during any year, to its officers and senior management employees in an aggregate amount in excess of 120% (or such greater amount which may be agreed to by Agent) of that paid or accrued in the prior year. 7.17 Use of Proceeds. Use the proceeds of the Advances for any purpose other than (a) on the Closing Date, (i) as specified in the Flow of Funds Agreement and (ii) to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and (b) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted purposes. 7.18 Change in Location of Chief Executive Office; Equipment with Bailees. Relocate its chief executive office to a new location without providing 30 days' prior written notification thereof to Agent. 7.19 [Intentionally Omitted] 7.20 Financial Covenants. Net Cash Interest Coverage Ratio. At any time when Excess Availability is less than $10,000,000, permit the Net Cash Interest Coverage Ratio of Borrower and its Restricted Subsidiaries to be less than the amount set forth in the following table for the applicable period set forth opposite thereto: 74 Applicable Period Cash Interest Coverage Ratio For the 4 fiscal quarters ending at the end of each fiscal quarter 1.25 to 1.00 7.21 Oil and Gas Imbalances. Enter into any contracts or agreements which warrant production of Hydrocarbons (other than Hedging Agreements otherwise permitted hereunder) and will not hereafter allow gas imbalances, take-or-pay or other prepayments with respect to its Oil and Gas Properties which would require any Loan Party to deliver Hydrocarbons produced on Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor to exceed, during any monthly period two percent (2%) of the current aggregate monthly gas production for such monthly period from the Oil and Gas Properties of any Loan Party. 7.22 Environmental. Permit the use, handling, generation, storage, treatment, Release or disposal of Hazardous Materials at any Real Property owned, operated or leased by any Loan Party, except in compliance in all material respects with Environmental Laws. 7.23 Limitation on Leases. Create, incur, assume or suffer to exist any obligation for the payment of rent or hire of Oil and Gas Properties of any kind whatsoever (real or personal, including capital leases but excluding leases of Hydrocarbon Interests and leases directly related to oil and gas field operations), under leases or lease agreements which would cause the aggregate amount of all payments made by such Person pursuant to such leases or lease agreements to exceed $800,000 (or such greater amount agreed to by the Agent), in any period of twelve consecutive calendar months in the aggregate. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (other than any event described in Section 8.2 or 8.11, which shall constitute an event of default upon notice to Borrower by Agent of any such event) (each, an "Event of Default") under this Agreement: 8.1 If Borrower fails to pay when due and payable, or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations); 8.2 (i) If any Loan Party fails to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in Sections 6.1, 6.4, 6.5, 6.6, 6.9 and 6.16 of this Agreement, or comparable provisions of the other Loan Documents, and such failure continues for 15 days, (ii) if any Loan Party fails to perform, keep, or observe any term, provision, condition, covenant or agreement contained in Sections 6.2, 6.3 (other than clause (h) thereof), 6.8 and 6.10 of this Agreement, or comparable provisions of the other Loan Documents, and such failure continues for 5 days, or (iii) if any Loan Party 75 otherwise fails to perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement or in any of the other Loan Documents; 8.3 If any material portion of Borrower's or any of its Restricted Subsidiaries' assets is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person; 8.4 If an Insolvency Proceeding is commenced by Borrower or any of its Subsidiaries (including, without limitation, Grey Wolf so long as Grey Wolf is a Subsidiary of Borrower); 8.5 If an Insolvency Proceeding is commenced against Borrower or any of its Subsidiaries (including, without limitation, Grey Wolf so long as Grey Wolf is a Subsidiary of Borrower), and any of the following events occur: (a) Borrower or such Subsidiary consents to the institution of such Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Agent (including any successor agent) and each other member of the Lender Group shall be relieved of their obligations to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower or any of its Subsidiaries, or (e) an order for relief shall have been entered therein; 8.6 If Borrower or any of its Restricted Subsidiaries is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.7 If a notice of Lien, levy, or assessment is filed of record with respect to (a) any of Borrower's or any of its Subsidiaries' assets (other than assets of Grey Wolf) in an amount or with respect to assets (other than their Proved Developed Producing Reserves) in excess of $100,000, or (b) any of Borrower's or any of its Subsidiaries' Proved Developed Producing Reserves (other than Proved Developed Producing Reserves of Grey Wolf), by the United States or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon (x) any of Borrower's or any of its Subsidiaries' assets (other than assets of Grey Wolf) in an amount or with respect to assets (other than their Proved Developed Producing Reserves) in excess of $100,000, or (y) any of Borrower's or any of its Subsidiaries' Proved Developed Producing Reserves (other than Proved Developed Producing Reserves of Grey Wolf), and the same is not paid before such payment is delinquent; 8.8 If a judgment or other claim in excess of $100,000 (to the extent not bonded or insured by a bonding or insurance company acceptable to Agent) in the aggregate becomes a Lien or encumbrance upon any material portion of Borrower's or any of its Subsidiaries' (other than Grey Wolf) assets; 76 8.9 If there is a continuing default under any material agreement (including any of the Senior Notes Documents, the Bridge Loan Documents or any Material Contract of Borrower or its Restricted Subsidiaries) to which Borrower or any of its Restricted Subsidiaries is a party and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of Borrower's or its Restricted Subsidiaries' obligations thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein; 8.10 If Borrower or any of its Restricted Subsidiaries makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness and except as permitted under Section 7.8; 8.11 If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or Record made to any member of the Lender Group by Borrower or any of its Subsidiaries, or any officer, employee, agent, or director of Borrower or any of its Subsidiaries; 8.12 If there is a loss, suspension or revocation of, or failure to renew, any license or permit now held or hereafter acquired by Borrower or any of its Restricted Subsidiaries and such loss, suspension, revocation or failure to renew could reasonably be expected to have a Material Adverse Change; 8.13 If the obligation of any Guarantor under the applicable Guaranty is limited or terminated by operation of law or by such Guarantor thereunder; 8.14 If the Intercreditor Agreement, the Collateral Documents or any other agreement, instrument or document that purports to create a Lien in favor of the Collateral Agent, for the benefit of the Agent and the Lenders, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; or 8.15 Any provision of any Loan Document shall at any time for any reason be declared by a court of competent jurisdiction to be null and void or invalid or unenforceable, or the validity or enforceability thereof shall be contested in a proceeding by any Loan Party, or a proceeding shall be commenced by any Loan Party, or by any Governmental Authority having jurisdiction over any Loan Party, seeking to establish the invalidity or unenforceability thereof, or any Loan Party shall deny that it has any liability or obligation purported to be created under any Loan Document. 8.16 If any Loan Party fails to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in clause (h) of Section 6.3. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may authorize and 77 instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting the Obligations; (d) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of the Code), and subject to the terms of the Intercreditor Agreement, set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by the Lender Group, or (ii) Indebtedness at any time owing to or for the credit or the account of Borrower held by the Lender Group; (e) Subject to the terms of the Intercreditor Agreement, hold, as cash collateral, any and all balances and deposits of Borrower held by the Lender Group, to secure the full and final repayment of all of the Obligations and apply, to the extent permitted by applicable law, such cash collateral to repay the Obligations; and (f) Agent and the Lender Group shall have all other rights and remedies available at law or in equity or pursuant to the Intercreditor Agreement and any other Loan Document. 9.2 Remedies Cumulative. The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Default, Unmatured Default or Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If any Loan Party fails to pay any monies (whether taxes, assessments, remittances, source deductions, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to any Loan Party, may do any or all of the following: (a) make payment of the same or any part thereof, (b) set up such reserves in Borrower's Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure, or (c) in the case of the failure to comply with Section 6.7 hereof, obtain and maintain 78 insurance policies of the type described in Section 6.7 and take any action with respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Unmatured Default or Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which Borrower may in any way be liable. 11.2 The Lender Group's Liability for Collateral. Borrower hereby agrees that: (a) so long as Agent complies with its obligations, if any, under the Code, the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the Lender-Related Persons with respect to each Lender, each Participant (subject to Section 14.1(e)(v)), and each of their respective officers, directors, employees, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, amendment, waiver or administration of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrower was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrower with respect thereto. WITHOUT LIMITATION, 79 THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by Borrower or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Borrower or Agent, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrower or Agent, as the case may be, at its address set forth below: If to Borrower: ABRAXAS PETROLEUM CORPORATION 500 North Loop 1604 East, Suite 100 San Antonio, Texas 78232 Attn: Robert Carington Fax No. 210-490-8816 with copies to: Cox Smith MATtHEWS Incorporated 112 East Pecan, Suite 1800 San Antonio, Texas 78205 Attn: Steven R. Jacobs, Esq. Fax No. 210-226-8395 If to Agent: WELLS FARGO FOOTHILL, INC. 2450 Colorado Avenue Suite 3000 West Santa Monica, California 90404 Attn: Business Finance Division Manager Fax No. 310-478-9788 with copies to: SCHULTE ROTH & ZABEL LLP 919 Third Avenue New York, New York 10022 Attn: Kirby Chin, Esq. Fax No. 212-593-5955 Agent and Borrower may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 12 shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit thereof in the mail. 80 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY AND PERFECTION OR THE PERFECTION AND EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST CREATED HEREBY OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAW OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b). (c) BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 14.1 Assignments and Participations. (a) Any Lender may, with the written consent of Agent (provided that no written consent of Agent shall be required in connection with any 81 assignment and delegation by a Lender to an Eligible Transferee), assign and delegate to one or more assignees (each an "Assignee") all, or any part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $1,000,000 (except such minimum amount shall not apply to any Affiliate of a Lender or to a Related Fund or account managed by a Lender); provided, however, that Borrower and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Borrower and Agent a fully executed Assignment and Acceptance, and (iii) the assignor Lender or Assignee has paid to Agent for Agent's separate account a processing fee in the amount of $5,000. Anything contained herein to the contrary notwithstanding, the consent of Agent shall not be required (and payment of any fees shall not be required) if (x) such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of such Lender or (y) the assignee is an Affiliate of a Lender or a Related Fund. (b) From and after the date that Agent notifies the assignor Lender (with a copy to Borrower) that it has received a fully executed Assignment and Acceptance and payment (if applicable) of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from its obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall affect a novation between Borrower and the Assignee. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (2) such assigning Lender 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 this Agreement or any other Loan Document furnished pursuant hereto, (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, 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 this Agreement, (5) 82 such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance and receipt and acknowledgment by Agent of such fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of such Lender (a "Participant") participating interests in its Obligations owing to such Lender, the Commitment of such Lender, and the other rights and interests of that Lender (the "Originating Lender") hereunder and under the other Loan Documents (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the Originating Lender shall remain a "Lender" for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and interests of the Originating Lender hereunder shall not constitute a "Lender" hereunder or under the other Loan Documents and the Originating Lender's obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no originating Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or substantially all of the guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums in respect of the Obligations hereunder in which such Participant is participating, and (v) all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Unmatured Default or Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant 83 shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrower, the Collections, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves. The provisions of this Section 14.1(e) are solely for the benefit of the Lender Group, and Borrower shall not have any rights as a third party beneficiary of such provisions. (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose to a third party all documents and information which it now or hereafter may have relating to Borrower or Borrower's business. (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR ss.203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. (h) Borrower shall maintain, or cause to be maintained, a register (the "Register") on which it enters the name of a Lender as the registered owner of each Advance held by such Lender. A Registered Loan (and the Registered Note, if any, evidencing the same) may be assigned or sold in whole or in part only by registration of such assignment or sale on the Register (and each Registered Note shall expressly so provide). Any assignment or sale of all or part of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by registration of such assignment or sale on the Register, together with the surrender of the Registered Note, if any, evidencing the same duly endorsed by (or accompanied by a written instrument of assignment or sale duly executed by) the holder of such Registered Note, whereupon, at the request of the designated assignee(s) or transferee(s), one or more new Registered Notes in the same aggregate principal amount shall be issued to the designated assignee(s) or transferee(s). Prior to the registration of assignment or sale of any Registered Loan (and the Registered Note, if any evidencing the same), Borrower shall treat the Person in whose name such Registered Loan (and the Registered Note, if any, evidencing the same) is registered as the owner thereof for the purpose of receiving all payments thereon and for all other purposes, notwithstanding notice to the contrary. In the case of an assignment or delegation covered by Section 14.1(a)(y), the assigning Lender shall maintain a comparable Register on behalf of Borrower. (i) In the event that a Lender sells participations in the Registered Loan, such Lender shall maintain a register on which it enters the name of all participants in the Registered Loans held by it (the "Participant Register"). A Registered Loan (and the Registered Note, if any, evidencing the same) may be participated in whole or in part only by registration of such participation on the Participant Register (and each Registered Note shall expressly so provide). Any participation of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by the registration of such participation on the Participant Register. 84 14.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties hereto; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to Section 14.1 hereof, no consent or approval by Borrower is required in connection with any such assignment. 15. AMENDMENTS; WAIVERS. 15.1 Lenders' Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed (or otherwise authorized) by all of the Lenders affected thereby and Borrower, do any of the following: (a) increase or extend any Commitment of any Lender, (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees, or other amounts due hereunder or under any other Loan Document, (c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document, (d) change the percentage of the Commitments that is required to take any action hereunder, (e) amend, modify or waive this Section 15 or any provision of the Agreement providing for consent or other action by all Lenders, (f) [Intentionally Omitted] (g) change the definition of "Required Lenders" or "Pro Rata Share", (h) [Intentionally Omitted] (i) release Borrower or any Guarantor from any obligation for the payment of money, (j) change, modify or waive Section 2.1(b) or change, modify or waive the definition of "Borrowing Base", "Basis Differential", "NYMEX Strip Price" or "PV-10" or 85 (k) amend, modify or waive any of the provisions of Sections 2.1(a), 2.3(e), 2.3(i), 2.4(b), or 16 (or change any definition of a term used in such Section in a manner adverse to any Lender). and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, Issuing Lender, or Swing Lender, as applicable, affect the rights or duties of Agent, Issuing Lender, or Swing Lender, as applicable, under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrower, shall not, subject to Section 14.1(a), require consent by or the agreement of Borrower. 15.2 [Intentionally Omitted] 15.3 [Intentionally Omitted] 15.4 Replacement of Holdout Lender. (a) If any action to be taken by the Lender Group or Agent hereunder requires the unanimous consent, authorization, or agreement of all Lenders, and a Lender ("Holdout Lender") fails to give its consent, authorization, or agreement, then Agent, upon at least 5 Business Days' prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a "Replacement Lender"), and the Holdout Lender shall have no right to refuse to be replaced hereunder. Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given. (b) Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance Agreement, subject only to the Holdout Lender being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever. If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance Agreement prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance Agreement. The replacement of any Holdout Lender shall be made in accordance with the terms of Section 14.1. Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender's Pro Rata Share of Advances and to purchased a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit. 15.5 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement or any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by 86 Agent or any Lender on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement. Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have. 16. AGENT; THE LENDER GROUP. 16.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints Foothill as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 16. Except as otherwise specifically provided in Sections 16.12 and 16.17, the provisions of this Section 16 are solely for the benefit of Agent, and the Lenders, and Borrower shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word "Agent" is for convenience only, that Foothill is merely the representative of the Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall, subject to the terms of the Intercreditor Agreement, have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections, and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply, and distribute the Collections as provided in the Loan Documents, (e) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the Obligations, the Collateral, the Collections, or otherwise related to any of same as provided in the Loan Documents, (f) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents, and (g) enter into and perform its duties under the Intercreditor Agreement. 16.2 Delegation of Duties. Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all 87 matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made without gross negligence or willful misconduct. 16.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Borrower or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Books or properties of Borrower or the books or records or properties of any of Borrower's Subsidiaries or Affiliates. 16.4 Reliance by Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 16.5 Notice of Default, Unmatured Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default, Unmatured Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders, except with respect to Defaults, Unmatured Defaults and Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default, Unmatured Default or Event of Default, and stating that such notice is a "notice of default." Agent promptly will notify the Lenders of its receipt of any such notice or of any Unmatured Default or Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Unmatured Default or Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Unmatured Default or 88 Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 16.4, Agent shall take such action with respect to such Default, Unmatured Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default, Unmatured Default or Event of Default as it shall deem advisable. 16.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons. 16.7 Costs and Expenses; Indemnification. Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including court costs, reasonable attorneys fees and expenses, costs of collection by outside collection agencies and auctioneer fees and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrower is obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from Collections received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from Collections received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified 89 Liabilities resulting solely from such Person's gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any Defaulting Lender in failing to make an Advance or other extension of credit hereunder. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender's ratable share of any costs or out-of-pocket expenses (including attorneys fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment, or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent. 16.8 Agent in Individual Capacity. Foothill and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally engage in any kind of banking, lending, trust, financial advisory, underwriting, or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though Foothill were not Agent hereunder, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, Foothill or its Affiliates may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them. The terms "Lender" and "Lenders" include Foothill in its individual capacity. 16.9 Successor Agent. (a) Agent may resign as Agent upon 45 days' notice to the Lenders. If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. (b) After all of the Obligations have been paid in full, all Letters of Credit have either been terminated or cash collateralized and the Commitments have been terminated, Agent agrees to resign. (c) Nothing contained in this Section 16.9 shall be construed to limit or eliminate Agent's right to resign as an Agent in accordance with this Section 16.9. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers, and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers, and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. 90 16.10 Lender in Individual Capacity. Any Lender and its respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender not shall be under any obligation to provide such information to them. With respect to the Swing Loans and Agent Advances, Swing Lender shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the sub-agent of Agent. 16.11 Withholding Taxes. (a) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and Borrower: (i) if such Lender claims an exemption from withholding tax pursuant to its portfolio interest exception, (a) a statement of the Lender, signed under penalty of perjury, that it is not a (I) a "bank" as described in Section 881(c)(3)(A) of the IRC, (II) a 10% shareholder (within the meaning of Section 881(c)(3)(B) of the IRC), or (III) a controlled foreign corporation described in Section 881(c)(3)(C) of the IRC, and (B) a properly completed IRS Form W-8BEN, before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (ii) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-8BEN before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (iii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form W-8ECI before the first payment of any interest is due under this Agreement and at any other time reasonably requested by Agent or Borrower; (iv) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. 91 Such Lender agrees promptly to notify Agent and Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrower to such Lender. To the extent of such percentage amount, Agent will treat such Lender's IRS Form W-8BEN as no longer valid. (c) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (d) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent. (e) All payments made by Borrower hereunder or under any note will be made without setoff, counterclaim, or other defense, except as required by applicable law other than for Taxes (as defined below). All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of a Lender, or (ii) to the extent that such tax results from a change in the circumstances of the Lender, including a change in the residence, place of organization, or principal place of business of the Lender, or a change in the branch or lending office of the Lender participating in the transactions set forth herein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including any amount paid pursuant to this Section 16.11(e) after withholding or deduction for or on account of any Taxes, will not be less than the amount 92 provided for herein; provided, however, that Borrower shall not be required to increase any such amounts payable to Agent or any Lender (i) that is not organized under the laws of the United States, if such Person fails to comply with the other requirements of this Section 16.11, or (ii) if the increase in such amount payable results from Agent's or such Lender's own willful misconduct or gross negligence. Borrower will furnish to Agent as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrower. 16.12 Collateral Matters. (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release or authorize the release of any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrower of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Borrower certifies to Agent that the sale or disposition is permitted under Section 7.4 of this Agreement or under the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which Borrower owned no interest at the time the security interest was granted or at any time thereafter, or (iv) constituting property leased to Borrower under a lease that has expired or is terminated in a transaction permitted under this Agreement. Notwithstanding the foregoing, so long as no Unmatured Default or Event of Default shall have occurred and be continuing, Agent shall, for the benefit and at the request of Borrower, release or authorize the release of the Lien on Collateral in a transaction constituting a Permitted Disposition. Except as provided above, Agent will not execute and deliver a release or authorize the execution and delivery of a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Revolving Loan Lenders or (z) otherwise, the Required Lenders. Upon request by Agent or Borrower at any time, the Lenders will confirm in writing Agent's authority to release or authorize the release of any such Liens on particular types or items of Collateral pursuant to this Section 16.12; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release or authorization on terms that, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of or authorization of the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrower in respect of) all interests retained by Borrower, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrower or is cared for, protected, or insured or has been encumbered, or that the Collateral Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, absent Agent's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction, in its sole discretion given Agent's own interest in 93 the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 16.13 Restrictions on Actions by Lenders; Sharing of Payments. (a) Each of the Lenders agrees that it shall not, without the express consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrower or any deposit accounts of Borrower now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral the purpose of which is, or could be, to give such Lender any preference or priority against the other Lenders with respect to the Collateral. (b) If, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any payments with respect to the Obligations arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's Pro Rata Share portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 16.14 Agency for Perfection. Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Collateral Agent's Liens in assets which, in accordance with Article 9 of the Code can be perfected only by possession. Should any Lender obtain possession of any such Collateral, such Lender shall notify the Collateral Agent thereof, and, promptly upon the Collateral Agent's request therefor shall deliver such Collateral to the Collateral Agent or in accordance with the Collateral Agent's instructions. 16.15 Payments by Agent to the Lenders. All payments to be made by Agent to the Lenders shall be made by bank wire transfer or internal transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, or interest of the Obligations. 94 16.16 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement, the Intercreditor Agreement and the other Loan Documents relating to the Collateral, for the benefit of the Lender Group. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By becoming a party to this Agreement, each Lender: (a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports") prepared by or at the request of Agent, and Agent shall so furnish each Lender with such Reports, (b) expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report, (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon the Books, as well as on representations of Borrower's personnel, (d) agrees, for the benefit of the Lender Group and, notwithstanding Section 16.1, the Loan Parties, to keep all Reports and other material, non-public information regarding Borrower and its Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner; it being understood and agreed by Borrower that in any event such Lender may make disclosures (a) to counsel for and other advisors, accountants, and auditors to such Lender, (b) reasonably required by any bona fide potential or actual Assignee or Participant in connection with any contemplated or actual assignment or transfer by such Lender of an interest herein or any participation interest in such Lender's rights hereunder, (c) of information that has become public by disclosures made by Persons other than such Lender, its Affiliates, assignees, transferees, or Participants, or (d) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation, or court order; provided, however, that, unless prohibited by applicable law, statute, regulation, or court order, such Lender shall notify Borrower of any request by any court, governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of any such non-public material information concurrent with, or where practicable, prior to the disclosure thereof, and (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any other Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying 95 Lender has made or may make to Borrower, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a loan or loans of Borrower, and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrower to Agent that has not been contemporaneously provided by Borrower to such Lender, and, upon receipt of such request, Agent promptly shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrower, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's notice to Agent, whereupon Agent promptly shall request of Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender. 16.18 Several Obligations; No Liability. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of the Lenders to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 16.7, no member of the Lender Group shall have any liability for the acts or any other member of the Lender Group. No Lender shall be responsible to Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 17. GENERAL PROVISIONS. 17.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower, Agent, and each Lender whose signature is provided for on the signature pages hereof. 96 17.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 17.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 17.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 17.5 Amendments in Writing. This Agreement only can be amended by a writing signed by Agent (on behalf of the requisite Lenders) and Borrower. 17.6 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or electronic mail shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile or electronic mail also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 17.7 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or Guarantor or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrower or Guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 17.8 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 97 18. GUARANTY 18.1 Guaranty; Limitation of Liability. Each Guarantor hereby, unconditionally and irrevocably, guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all Obligations of Borrower now or hereafter existing under any Loan Document, whether for principal, interest (including, without limitation, all interest that accrues after the commencement of any case, proceeding or other action relating to bankruptcy, insolvency or reorganization of Borrower), fees, expenses or otherwise (such obligations, to the extent not paid by Borrower, being the "Guaranteed Obligations"), and agrees to pay any and all expenses (including reasonable counsel fees and expenses) incurred by the Lender Group in enforcing any rights under the guaranty set forth in this Section 18. Without limiting the generality of the foregoing, each such Guarantor's liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by Borrower to any member of the Lender Group under any Loan Document but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving Borrower. 18.2 Guaranty Absolute. Each Guarantor guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of Agent or the Lenders with respect thereto. The obligations of such Guarantor under this Section 18 are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against such Guarantor to enforce such obligations, irrespective of whether any action is brought against Borrower or whether the Borrower is joined in any such action or actions. The liability of such Guarantor under this Section 18 shall be irrevocable, absolute and unconditional irrespective of, and such Guarantor hereby irrevocably waives any defenses it may now or hereafter have in any way relating to, any or all of the following: (a) any lack of validity or enforceability of any Loan Document or any agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment or waiver of or any consent to departure from any Loan Document, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to Borrower or otherwise; (c) any taking, exchange, release or non-perfection of any Collateral, or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Guaranteed Obligations; (d) any change, restructuring or termination of the corporate, limited liability company or partnership structure or existence of Borrower; or (e) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by 98 Agent or the Lenders that might otherwise constitute a defense available to, or a discharge of, Guarantor, Borrower or any other guarantor or surety. This Section 18 shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by a Lender or any other Person upon the insolvency, bankruptcy or reorganization of Borrower or otherwise, all as though such payment had not been made. 18.3 Waiver. Each Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and this Section 18 and any requirement that Agent or the Lenders exhaust any right or take any action against Borrower or any other Person. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated herein and that the waiver set forth in this Section 18.3 is knowingly made in contemplation of such benefits. Each Guarantor hereby waives any right to revoke this Section 18, and acknowledges that this Section 18 is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future. 18.4 Continuing Guaranty; Assignments. This Section 18 is a continuing guaranty and shall (a) remain in full force and effect until the later of (i) the cash payment in full of the Guaranteed Obligations (other than indemnification obligations as to which no claim has been made) and all other amounts payable under this Section 18 and (ii) the Maturity Date, (b) be binding upon each Guarantor, its successors and assigns and (c) inure to the benefit of and be enforceable by Agent and the Lenders and their successors, pledgees, transferees and assigns. Without limiting the generality of the foregoing clause (c), any Lender may pledge, assign or otherwise transfer all or any portion of its rights and obligations under this Agreement (including, without limitation, all or any portion of its Commitments owing to it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted such Lender herein or otherwise, in each case as provided in Section 14.1. 18.5 Subrogation. Each Guarantor will not exercise any rights that it may now or hereafter acquire against Borrower or any other insider guarantor that arise from the existence, payment, performance or enforcement of such Guarantor's obligations under this Section 18, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of Agent and the Lenders against Borrower or any other insider guarantor or any collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from Borrower or any other insider guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security solely on account of such claim, remedy or right, unless and until all of the Guaranteed Obligations and all other amounts payable under this Section 18 shall have been paid in full in cash and the Maturity Date or earlier termination of this Agreement shall have occurred. If any amount shall be paid to each Guarantor in violation of the immediately preceding sentence at any time prior to the later of the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Section 18 and the earlier of the Maturity Date and the early termination of this Agreement, such amount shall be held in trust for the benefit of Agent and the Lenders and shall forthwith be paid to Agent and the Lenders to be credited and applied to the Guaranteed Obligations and all other amounts payable under this Section 18, whether matured or 99 unmatured, in accordance with the terms of this Agreement, or to be held as collateral for any Guaranteed Obligations or other amounts payable under this Section 18 thereafter arising. If (i) any Guarantor shall make payment to Agent and the Lenders of all or any part of the Guaranteed Obligations, (ii) all of the Guaranteed Obligations and all other amounts payable under this Section 18 shall be paid in full in cash and (iii) the Maturity Date or earlier termination of this Agreement shall have occurred, Agent and the Lenders will, at such Guarantor's request and expense, execute and deliver to such Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to such Guarantor of an interest in the Guaranteed Obligations resulting from such payment by such Guarantor. [Signature page to follow.] 100 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. BORROWER: ABRAXAS PETROLEUM CORPORATION By: -------------------------------------------------- Title: GUARANTORS: SANDIA OIL & GAS CORPORATION By: -------------------------------------------------- Name: Title: SANDIA OPERATING CORP. By: ------------------------------------------------- Name: Title: EASTSIDE COAL COMPANY, INC. By: ------------------------------------------------- Name: Title: WESTERN ASSOCIATED ENERGY CORPORATION By: ------------------------------------------------- Name: Title: WAMSUTTER HOLDINGS, INC. By: -------------------------------------------------- Name: Title: 101 AGENT AND LENDERS: WELLS FARGO FOOTHILL, INC., as Agent and as a Lender By: ------------------------------------------------ title: 102 TABLE OF CONTENTS Page 1. DEFINITIONS AND CONSTRUCTION.........................................1 1.1 Definitions...............................................1 1.2 Accounting Terms.........................................27 1.3 Code.....................................................27 1.4 Construction.............................................28 1.5 Schedules and Exhibits...................................28 2. LOAN AND TERMS OF PAYMENT...........................................28 2.1 Revolver Advances........................................28 2.2 [Intentionally Omitted]..................................30 2.3 Borrowing Procedures and Settlements.....................30 2.4 Payments.................................................36 2.5 Overadvances.............................................38 2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations...............................38 2.7 Cash Management..........................................40 2.8 Crediting Payments.......................................40 2.9 Designated Account.......................................40 2.10 Maintenance of Loan Account; Statements of Obligations...40 2.11 Fees.....................................................40 2.12 Letters of Credit........................................41 2.13 Capital Requirements.....................................44 2.14 Registered Notes.........................................45 3. CONDITIONS; TERM OF AGREEMENT.......................................45 3.1 Conditions Precedent to the Initial Extension of Credit..45 3.2 [Intentionally Omitted]..................................49 3.3 Conditions Precedent to all Extensions of Credit.........49 3.4 Term.....................................................49 3.5 Effect of Termination....................................49 3.6 Early Termination; Permanent Reductions of Commitment....50 4. SECURITY INTERESTS; RIGHT TO INSPECT COLLATERAL.....................51 4.1 Acknowledgement of Security Interest.....................51 4.2 Right to Inspect Collateral..............................51 5. REPRESENTATIONS AND WARRANTIES......................................52 5.1 No Encumbrances..........................................52 5.2 Equipment................................................52 5.3 Location of Inventory and Equipment......................52 5.4 Inventory Records........................................52 5.5 Location of Chief Executive Office; FEIN.................52 5.6 Due Organization and Qualification; Subsidiaries.........52 5.7 Due Authorization; No Conflict...........................53 i 5.8 Litigation...............................................54 5.9 No Material Adverse Change...............................55 5.10 Fraudulent Transfer......................................55 5.11 Employee Benefits........................................55 5.12 Environmental Condition..................................55 5.13 Brokerage Fees...........................................56 5.14 Intellectual Property....................................56 5.15 Leases...................................................56 5.16 DDAs.....................................................56 5.17 Compliance with the Law..................................56 5.18 Complete Disclosure......................................56 5.19 Indebtedness.............................................57 5.20 Oil and Gas Imbalances...................................57 5.21 Hedging Agreements.......................................57 5.22 Location of Real Property and Leased Premises............57 5.23 Senior Notes Documents and Intercreditor Agreement.......58 5.24 Material Contracts.......................................59 5.25 Permits, Etc.............................................59 5.26 Employee and Labor Matters...............................59 5.27 Bonds and Insurance......................................59 5.28 Nature of Business.......................................60 6. AFFIRMATIVE COVENANTS...............................................60 6.1 Accounting System........................................60 6.2 Collateral Reporting.....................................60 6.3 Financial Statements, Reports, Certificates..............63 6.4 Guarantor Reports........................................65 6.5 Maintenance of Properties................................67 6.6 Taxes....................................................67 6.7 Insurance................................................67 6.8 [Intentionally Omitted]..................................67 6.9 Compliance with Laws.....................................67 6.10 Leases...................................................68 6.11 Brokerage Commissions....................................68 6.12 Existence................................................68 6.13 Environmental............................................68 6.14 Disclosure Updates.......................................68 6.15 After Acquired Properties................................68 6.16 Protection Against Drainage..............................69 6.17 Additional Collateral Reviews............................69 6.18 Hedging Agreements.......................................69 7. NEGATIVE COVENANTS..................................................69 7.1 Indebtedness.............................................70 7.2 Liens....................................................71 7.3 Restrictions on Fundamental Changes......................72 7.4 Disposal of Assets.......................................72 ii 7.5 Change Name..............................................72 7.6 Guarantee................................................72 7.7 Nature of Business.......................................72 7.8 Payments, Prepayments and Amendments.....................72 7.9 Change of Control........................................73 7.10 Forward Sales............................................73 7.11 Distributions............................................73 7.12 Accounting Methods.......................................74 7.13 Investments..............................................74 7.14 Transactions with Affiliates.............................74 7.15 Suspension...............................................74 7.16 Compensation.............................................74 7.17 Use of Proceeds..........................................74 7.18 Change in Location of Chief Executive Office; Equipment with Bailees.............................................74 7.19 [Intentionally Omitted]..................................74 7.20 Financial Covenants......................................74 7.21 Oil and Gas Imbalances...................................75 7.22 Environmental............................................75 7.23 Limitation on Leases.....................................75 8. EVENTS OF DEFAULT...................................................75 9. THE LENDER GROUP'S RIGHTS AND REMEDIES..............................77 9.1 Rights and Remedies......................................77 9.2 Remedies Cumulative......................................78 10. TAXES AND EXPENSES..................................................78 11. WAIVERS; INDEMNIFICATION............................................79 11.1 Demand; Protest; etc.....................................79 11.2 The Lender Group's Liability for Collateral..............79 11.3 Indemnification..........................................79 12. NOTICES.............................................................80 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..........................81 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS..........................81 14.1 Assignments and Participations...........................81 14.2 Successors...............................................85 15. AMENDMENTS; WAIVERS.................................................85 15.1 Lenders' Amendments and Waivers..........................85 15.2 [Intentionally Omitted]..................................86 15.3 [Intentionally Omitted]..................................86 15.4 Replacement of Holdout Lender............................86 15.5 No Waivers; Cumulative Remedies..........................86 iii 16. AGENT; THE LENDER GROUP.............................................87 16.1 Appointment and Authorization of Agent...................87 16.2 Delegation of Duties.....................................87 16.3 Liability of Agent.......................................88 16.4 Reliance by Agent........................................88 16.5 Notice of Default, Unmatured Default or Event of Default.88 16.6 Credit Decision..........................................89 16.7 Costs and Expenses; Indemnification......................89 16.8 Agent in Individual Capacity.............................90 16.9 Successor Agent..........................................90 16.10 Lender in Individual Capacity............................91 16.11 Withholding Taxes........................................91 16.12 Collateral Matters.......................................93 16.13 Restrictions on Actions by Lenders; Sharing of Payments..94 16.14 Agency for Perfection....................................94 16.15 Payments by Agent to the Lenders.........................94 16.16 Concerning the Collateral and Related Loan Documents.....95 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information....95 16.18 Several Obligations; No Liability........................96 17. GENERAL PROVISIONS..................................................96 17.1 Effectiveness............................................96 17.2 Section Headings.........................................97 17.3 Interpretation...........................................97 17.4 Severability of Provisions...............................97 17.5 Amendments in Writing....................................97 17.6 Counterparts; Telefacsimile Execution....................97 17.7 Revival and Reinstatement of Obligations.................97 17.8 Integration..............................................97 18. GUARANTY............................................................98 18.1 Guaranty; Limitation of Liability........................98 18.2 Guaranty Absolute........................................98 18.3 Waiver...................................................99 18.4 Continuing Guaranty; Assignments.........................99 18.5 Subrogation..............................................99 iv EX-10 4 warrant.txt WARRANT - GUGGENHEIM EXHIBIT 10.6 WARRANT to Purchase 1,000,000 shares of Common Stock of ABRAXAS PETROLEUM CORPORATION Original Issue Date: October 28, 2004 NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE OR OF THE SECURITIES ISSUABLE UPON EXERCISE THEREOF SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) THE HOLDER OF THE SECURITIES PROPOSED TO BE TRANSFERRED SHALL HAVE DELIVERED TO THE COMPANY EITHER A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION OR AN OPINION OF COUNSEL (WHO MAY BE AN EMPLOYEE OF SUCH HOLDER) EXPERIENCED IN SECURITIES MATTERS TO THE EFFECT THAT SUCH PROPOSED TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT OR (C) SUCH TRANSFER IS PURSUANT TO RULE 144 OR RULE 144A UNDER THE ACT AND SUCH HOLDER(S) SHALL HAVE DELIVERED TO THE COMPANY A CERTIFICATE SETTING FORTH THE BASIS FOR APPLYING SUCH RULE TO THE PROPOSED TRANSFER. WARRANT ABRAXAS PETROLEUM CORPORATION THIS IS TO CERTIFY THAT GUGGENHEIM CORPORATE FUNDING, LLC, or registered assigns, is entitled, at any time prior to the Expiration Date (such term, and certain other capitalized terms used herein being hereinafter defined), to purchase from ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (the "Company"), ONE MILLION (1,000,000) shares of the Common Stock of the Company (such number of shares being subject to adjustment from time to time as provided herein), at an initial purchase price of $0.01 per share (such initial purchase price being subject to adjustment from time to time as provided herein and as so adjusted, the "Exercise Price"), all on the terms and conditions and pursuant to the provisions hereinafter set forth. 1. DEFINITIONS As used in this Warrant, the following terms have the respective meanings set forth below. "Affiliate" of any Person means a Person (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with such Person, (b) which beneficially owns or holds more than five percent (5.0%) of the outstanding shares of any class of voting stock of such Person or (c) more than five percent (5.0%) of the outstanding shares of any class of voting stock (or, in the case of a Person which is not a corporation, more than five percent (5.0%) of the equity interest) of which is beneficially owned or held by such Person. The term "control" as used with respect to any Person means 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, by contract or otherwise. "After-Tax Basis" when referring to a payment that is required hereunder (the "target amount"), shall mean a total payment (the "total amount") that, after deduction of all federal, state and local taxes that are required to be paid by the recipient in respect of the receipt or accrual of such total amount, is equal to the target amount. "Agreed Rate" shall mean 10% per annum. "Appraised Value" per share of Common Stock as of a date specified herein shall mean the value of such a share as of such date as determined by an investment bank of nationally recognized standing selected by the Majority Warrant Holders and reasonably acceptable to the Company. If the investment bank selected by the Majority Warrant Holders is not reasonably acceptable to the Company, and the Company and the Majority Warrant Holders cannot agree on a mutually acceptable investment bank, then the Company and the Majority Warrant Holders shall each choose one such investment bank and the respective chosen firms shall jointly select a third investment bank, which shall make the determination. The Company shall pay the costs and fees of each such investment bank (including any such investment bank selected by the Majority Warrant Holders), and the decision of the investment bank making such determination of Appraised Value shall be final and binding on the Company and all affected holders of Warrants or Warrant Stock. Such Appraised Value shall be determined as a pro rata portion of the value of the Company taken as a whole, based on the higher of (A) the value derived from a hypothetical sale of the entire Company as a going concern by a willing seller to a willing buyer (neither acting under any compulsion) and (B) the liquidation value of the entire Company. No discount shall be applied on account of (i) any Warrants or Warrant Stock representing a minority interest, (ii) any lack of liquidity of the Common Stock or the Warrants, (iii) the fact that the Warrants or Warrant Stock may constitute "restricted securities" for securities law purposes or (iv) the existence of any call option. "Bank Holding Company Act" shall mean the Bank Holding Company Act of 1956, as amended. 2 "Book Value" per share of Common Stock as of a date specified herein shall mean the consolidated book value of the Company and its Subsidiaries as of such date divided by the number of shares of Common Stock Outstanding on such date. Such book value shall be determined in accordance with GAAP, except that there shall be no reduction in such book value by reason of any amount that may be required either as an offset to or reserve against retained earnings or as a deduction from book value as a result of the issuance, existence, anticipated exercise of, or anticipated cost to the Company of the repurchase of, any of the Warrants. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York. "Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. "Common Stock" shall mean (except where the context otherwise indicates) the Common Stock of the Company, par value $0.01 per share, as constituted on the Original Issue Date, and any capital stock into which such Common Stock may thereafter be changed, and shall also include (i) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of any Common Stock upon any reclassification thereof which is also not preferred as to dividends or liquidation over any other class of stock of the Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation (as defined in Section 4.3 hereof) received by or distributed to the holders of Common Stock of the Company in the circumstances contemplated by Section 4.3 hereof. "Company" means Abraxas Petroleum Corporation, a Nevada corporation, and any successor corporation. "Company Default" means (a) the breach of any warranty or the inaccuracy at the time when made of any representation made by the Company herein or (b) the failure by the Company to comply with any covenant of the Company contained herein. "Continuously Effective", with respect to a specified registration statement, shall mean that it shall not cease to be effective and available for Transfers of Warrant Stock thereunder for longer than either (i) any ten (10) consecutive business days, or (ii) an aggregate of fifteen (15) business days during the period specified in the relevant provision of Section 9 hereof. "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities that are convertible into or exchangeable for, with or without payment of additional consideration in cash or property, shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "Current Market Price" shall mean as of any specified date the average of the daily market prices of the Common Stock of the Company for the shorter of (x) the twenty (20) consecutive Business Days immediately preceding such date or (y) the period commencing on the Business Day next following the first public announcement of any event giving rise to an adjustment of the Exercise Price 3 pursuant to Section 4 below. The "daily market price" for each such Business Day shall be: (i) if the Common Stock is then listed on a national securities exchange or is listed on NASDAQ and is designated as a National Market System security, the last sale price, regular way, on such day on the principal stock exchange or market system on which such Common Stock is then listed or admitted to trading, or, if no such sale takes place on such day, the average of the closing bid and asked prices for the Common Stock on such day as reported on such stock exchange or market system or (ii) if the Common Stock is not then listed or admitted to trading on any national securities exchange or designated as a National Market System security on NASDAQ but is traded over-the-counter, the average of the closing bid and asked prices for the Common Stock as reported on NASDAQ or the Electronic Bulletin Board or in the National Daily Quotation Sheets, as applicable. "Demand Registration" shall have the meaning set forth in Section 9.2(a) hereof. "Demanding Holders" shall have the meaning set forth in Section 9.2(a) hereof. "Designated Office" shall have the meaning set forth in Section 11 hereof. "Dilution Fee" shall have the meaning set forth in Section 12 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Exercise Date" shall have the meaning set forth in Section 2.1 hereof. "Exercise Notice" shall have the meaning set forth in Section 2.1 hereof. "Exercise Period" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1 hereof. "Exercise Price" shall mean, in respect of a share of Common Stock at any date herein specified, the initial Exercise Price set forth in the preamble of this Warrant as adjusted from time to time pursuant to Section 4 hereof. "Expiration Date" shall mean the tenth anniversary of the Original Issue Date. "Fair Value" per share of Common Stock as of any specified date shall mean the higher of (i) the Book Value per share of Common Stock as of such date and (ii) (A) if the Common Stock is publicly traded on such date, the Current Market Price per share or (B) if the Common Stock is not publicly traded on such date, (1) the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Company and set forth in a written notice to each Holder or (2) if any such Holder objects in writing to such price as determined by the Board of Directors within thirty (30) days after receiving notice of same, the Appraised Value per share as of such date. 4 "Financial Holding Company" shall mean a bank holding company that meets the requirements of Section 4(l)(1) of the Bank Holding Company Act. "Fully Diluted Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding on such date and all shares of Common Stock issuable in respect of (x) the Warrants outstanding on such date, (y) any Convertible Securities outstanding on such date and (z) any other Stock Purchase Rights outstanding on such date, in each case regardless of whether or not the conversion, exchange, subscription or purchase rights associated with such Convertible Securities or Stock Purchase Rights are presently exercisable. "GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect. "Glass-Steagall Act" shall mean Section 24 (Seventh) and Section 378 of Title 12 (12 U.S.C. ss.ss. 24 (Seventh) 378), or any similar federal legislation. "Holder" shall mean (a) with respect to this Warrant, the Person in whose name the Warrant set forth herein is registered on the books of the Company maintained for such purpose and (b) with respect to any other Warrant or shares of Warrant Stock, the Person in whose name such Warrant or Warrant Stock is registered on the books of the Company maintained for such purpose. "Insolvency Event" shall mean any proceeding being instituted by or against the Company seeking a declaration or order for relief, or entailing a finding, that the Company is insolvent or bankrupt, or seeking reorganization, liquidation, dissolution, winding-up, charter revocation or other similar relief with respect to the Company or any of its properties, assets or debts, or seeking the appointment of a receiver, trustee, custodian, liquidator, sequestrator or similar official for the Company or any of its properties or assets, or the Company becoming insolvent or bankrupt or generally unable to pay its debts as they become due, or the Company voluntarily suspending its business or making a general assignment for the benefit of creditors; provided that an Insolvency Event shall not be deemed to have occurred on account of any such proceeding which is involuntary on the part of the Company unless same shall not have been dismissed or stayed within 60 days. "Lien" shall mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Uniform Commercial Code or comparable law of any jurisdiction). "Majority Warrant Holders", with respect to a given determination, shall mean the Holders of Warrants and/or Warrant Stock representing more than fifty percent (50%) of all Warrants and/or Warrant Stock (with any such Warrants being deemed to represent, for the purposes of such calculation, the shares of Warrant 5 Stock then issuable upon exercise thereof) directly affected by such determination. "Majority Selling Holders" shall mean those Selling Holders whose Warrants and/or Warrant Stock included in a registration under Section 9 hereof represents a majority of the Warrants and/or Warrant Stock (with any such Warrants being deemed to represent, for the purposes of such calculation, the shares of Warrant Stock then issuable upon exercise thereof) included therein by all Selling Holders. "NASD" shall mean the National Association of Securities Dealers, Inc., or any successor corporation thereto. "NASDAQ" shall mean the NASDAQ quotation system, or any successor reporting system. "Opinion of Counsel" means a written opinion of counsel (who may be an employee of a Holder) experienced in Securities Act or bank regulatory matters, as the case may be, chosen by the Holder of this Warrant or Warrant Stock issued upon the exercise hereof and reasonably acceptable to the Company. "Original Issue Date" shall mean the date on which the Original Warrants were issued, as set forth on the cover page of this Warrant. "Original Warrants" shall mean the Warrants originally issued by the Company on the Original Issue Date to the Lenders. "Other Property" shall have the meaning set forth in Section 4.3 hereof. "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company or any Subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "Outstanding", when used with respect to Warrant Stock for the purposes of Section 9 hereof shall have the meaning set forth in Section 9.1(d) hereof. "Person" shall mean any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Piggyback Registration" shall have the meaning set forth in Section 9.3(a) hereof. 6 "Register", "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering by the Commission of effectiveness of such registration statement or document. "Registration Expenses" shall have the meaning set forth in Section 9.6(a) hereof. "Restricted Common Stock" shall mean shares of Common Stock which are, or which upon their issuance on the exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 8.2(a) hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Holders" shall mean, with respect to a specified registration under Section 9 hereof, WS Holders whose Registrable Securities are included in such registration. "Share Withholding Option" has the meaning set forth in Section 2.1 hereof. "Shelf Registration" shall have the meaning set forth in Section 9.2(a) hereof. "Stock Purchase Rights" shall mean any options, warrants or other securities or rights to subscribe to or exercisable for the purchase of shares of Common Stock or Convertible Securities, whether or not immediately exercisable. "Subsidiary" means any corporation or association (a) more than fifty percent (50%) (by number of votes) of the voting stock of which is at the time owned by the Company or by one or more Subsidiaries or by the Company and one or more Subsidiaries, or any other business entity in which the Company or one or more Subsidiaries or the Company and one or more Subsidiaries own more than a fifty percent (50%) interest either in the profits or capital of such business entity or (b) whose net earnings, or portions thereof, are consolidated with the net earnings of the Company and are recorded on the books of the Company for financial reporting purposes in accordance with GAAP. "Transfer" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a "sale" thereof within the meaning of the Securities Act. "Violation" has the meaning set forth in Section 9.7(a) hereof. "Warrant Price" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1 hereof, multiplied by (ii) the Exercise Price as of the date of such exercise. 7 "Warrants" shall mean the Original Warrants and all warrants issued upon transfer, division or combination of, or in substitution for, such Original Warrants or any other such Warrant. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised. "Warrant Stock" generally shall mean the shares of Common Stock issued, issuable or both (as the context may require) upon the exercise of Warrants until such time as such shares of Common Stock have either been (i) Transferred in a public offering pursuant to a registration statement filed under the Securities Act or (ii) Transferred in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof with all transfer restrictions and restrictive legends with respect to such Common Stock being removed in connection with such transaction. "Warrant Stock" for the purposes of Section 9 hereof shall have the meaning set forth in Section 9.1(b) hereof. "WS Holder" shall have the meaning set forth in Section 9.1(a) hereof. 8 2. EXERCISE OF WARRANT 2.1. Manner of Exercise. (a) From and after the Original Issue Date and until 5:00 P.M., New York time, on the Expiration Date, the Holder of this Warrant may from time to time exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder (as determined pursuant to Section 4.2 hereof). In order to exercise this Warrant, in whole or in part, the Holder shall (i) deliver to the Company at the Designated Office (x) a written notice of the Holder's election to exercise this Warrant (an "Exercise Notice"), which Exercise Notice shall be irrevocable and specify the number of shares of Common Stock to be purchased and (y) this Warrant, and (ii) pay to the Company the Warrant Price (the date on which both such delivery and payment shall have first taken place being hereinafter sometimes referred to as the "Exercise Date"). Such Exercise Notice shall be in the form of Annex A hereto and shall be duly executed by the Holder or its duly authorized agent or attorney. (b) Upon receipt of such Exercise Notice, Warrant and payment, the Company shall, as promptly as practicable, and in any event within five (5) Business Days thereafter, execute (or cause to be executed) and deliver (or cause to be delivered) to the Holder a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as the exercising Holder shall reasonably request in the Exercise Notice and shall be registered in the name of the Holder or (upon payment by the Holder of any applicable transfer taxes then due and owing) such other name as shall be designated in the Exercise Notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the Exercise Date. (c) Payment of the Warrant Price shall be made by, at the option of the Holder, one or more of the following methods: (i) by delivery of a certified or official bank check in the amount of such Warrant Price; (ii) by instructing the Company to withhold a number of shares of Warrant Stock then issuable upon exercise of this Warrant with an aggregate Fair Value equal to such Warrant Price (the "Share Withholding Option"); or (iii) by surrendering to the Company shares of Common Stock previously acquired by the Holder with an aggregate Fair Value equal to such Warrant Price. In the event of any withholding of Warrant Stock or surrender of Common Stock pursuant to clause (ii) or (iii) above where the number of shares whose Fair Value is equal to the Warrant Price is not a whole number, the number of shares withheld by or surrendered to the Company shall be rounded up to the nearest whole share and the Company shall make a cash payment to the Holder based on the incremental fraction of a share being so withheld by or surrendered to the Company in an amount determined in accordance with Section 2.3 hereof. 9 (d) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing the shares of Common Stock being issued, deliver to the Holder a new Warrant in the name of Holder evidencing the rights of the Holder to purchase the unpurchased shares of Common Stock called for by this Warrant. Such new Warrant shall in all other respects be identical with this Warrant. 2.2. Payment of Taxes. All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable, issued without violation of any preemptive rights and free and clear of all Liens (other than any created by actions of the Holder). The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof, unless such tax or charge is imposed by law upon the Holder, in which case such taxes or charges shall be paid by the Holder and the Company shall reimburse the Holder therefor on an After-Tax Basis. 2.3. Fractional Shares. The Company shall not be required to issue a fractional share of Common Stock upon exercise of any Warrant. As to any fraction of a share that the Holder of one or more Warrants, the rights under which are exercised in the same transaction, would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of (i) the Current Market Price of one share of Common Stock on the Exercise Date, if the Common Stock is then publicly traded or (ii) the Book Value per share of Common Stock based on the most recent available consolidated balance sheet of the Company, if the Common Stock is not then publicly traded. 2.4. Continued Validity and Application. A Holder of shares of Warrant Stock issued upon the exercise of this Warrant, in whole or in part, including any transferee of such shares (other than a transferee in whose hands such shares no longer constitute Warrant Stock as defined herein), shall continue, with respect to such shares, to be entitled to all rights and to be subject to all obligations that are applicable to such Holder by the terms of this Warrant. The Company shall, at the time of any exercise of this Warrant or any transfer of Warrant Stock, upon the request of the Holder of the shares of Warrant Stock issued in connection with such exercise or transfer, acknowledge in writing, in a form reasonably satisfactory to such Holder, its continuing obligation to afford to such Holder such rights referred to in this Section 2.4; provided, however, that if such Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Holder all such rights. 2.5. Limitation on Holder's Exercise. (a) Notwithstanding anything in this Warrant to the contrary, the Holder of this Warrant, if subject to the Bank Holding Company Act or any provision of the Glass-Steagall Act, may exercise this Warrant only if the Notice of Exercise is accompanied by an Opinion of Counsel of such Holder to the effect that, as of the date of delivery of such opinion, no federal or state regulatory clearances are required for such Holder to exercise this Warrant or, in the event any such 10 federal or state regulatory clearances are required prior to the exercise of this Warrant, to the effect that all such clearances have been obtained or, if not then obtained, that no statute or regulation or regulatory policy or guidelines known to such counsel would by their terms preclude the obtaining of such clearances or make it unlikely that such clearances would be obtained or make it likely that such clearances would, if obtained, contain material conditions adverse to such Holder; provided, however, that no Holder subject to the Bank Holding Company Act shall exercise this Warrant in any manner that would thereafter result in such Holder and any of its Affiliates not qualified as a Small Business Investment Company, as such term is defined in the Small Business Investment Act, owning in the aggregate five percent (5%) or more of the Common Stock then outstanding or such greater percentage as may then be in accordance with any then applicable rule, regulation or policy of the Federal Reserve Board relating to equity investments by bank holding companies. Notwithstanding the foregoing, the five percent (5%) limitation shall not apply to a Holder who is a Financial Holding Company and no Opinion of Counsel is required to accompany a Notice of Exercise from a Financial Holding Company. In the event that federal or state regulatory clearances are required prior to the exercise of this Warrant by the Holder hereof, the Company shall cooperate fully with such Holder in providing such information to any regulatory agency as such agency may require. In the event any such regulatory clearance is withheld or denied, such Holder may continue to hold this Warrant until its expiration or may sell or otherwise transfer this Warrant in accordance with the terms hereof. (b) Each and every exercise of this Warrant is contingent upon such issuance of Warrant Stock upon exercise being exempt from (or otherwise not subject to) the registration requirements of the Securities Act and any applicable State securities or "Blue Sky" laws. 3. TRANSFER, DIVISION AND COMBINATION 3.1. Transfer. Subject to compliance with Section 8 hereof, each transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the Designated Office, together with a written assignment of this Warrant in the form of Annex B hereto duly executed by the Holder or its duly authorized agent or attorney. Upon such surrender and delivery, the Company shall, subject to Section 8, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the rights of the assignor to purchase the shares of Common Stock called for by this Warrant not so assigned and this Warrant shall promptly be cancelled. Such new Warrant or Warrants shall in all other respects be identical with this Warrant. A Warrant, if properly assigned in compliance with Section 8, may be exercised by the new Holder for the purchase of shares of Common Stock without having a new Warrant issued. 3.2. Division and Combination. Subject to compliance with the applicable provisions of this Warrant, this Warrant may be divided or combined with other Warrants upon presentation hereof at the Designated Office, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its duly authorized agent or attorney. Subject to compliance with the applicable provisions of this Warrant as to any 11 transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. 3.3. Expenses. The Company shall prepare, issue and deliver at its own expense any new Warrant or Warrants required to be issued under this Section 3. 3.4. Maintenance of Books. The Company agrees to maintain, at the Designated Office, books for the registration and transfer of the Warrants. 4. ANTIDILUTION PROVISIONS The number of shares of Common Stock for which this Warrant is exercisable and the Exercise Price shall be subject to adjustment from time to time as set forth in this Section 4. 4.1. Stock Dividends, Subdivisions and Combinations. If at any time the Company shall (i) pay a dividend in, or make a distribution of, additional shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of such Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of such Common Stock, then the Exercise Price shall be adjusted to equal the product of the Exercise Price in effect immediately prior to such event multiplied by a fraction the numerator of which is equal to the number of shares of Common Stock Outstanding immediately prior to the adjustment and the denominator of which is equal to the number of shares of Common Stock Outstanding immediately after such adjustment. 4.2. Adjustment of Number of Shares Purchasable. Upon any adjustment of the Exercise Price as provided in Section 4.1 hereof, the Holder hereof shall thereafter be entitled to purchase upon the exercise of this Warrant, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock (calculated to the nearest 1/100th of a share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable on the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. 4.3. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is any change whatsoever in, or distribution with respect to, the Outstanding Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, (i) shares of common stock of the successor or acquiring corporation or of the Company (if it is the surviving corporation) or (ii) any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property") are to be received by or distributed to the holders of Common Stock of the Company who are holders immediately prior to such transaction, then the Holder of this Warrant shall have the right thereafter to receive, upon exercise 12 of this Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In such event, the aggregate Exercise Price otherwise payable for the shares of Common Stock issuable upon exercise of this Warrant shall be allocated among the shares of common stock and Other Property receivable as a result of such reorganization, reclassification, merger, consolidation or disposition of assets in proportion to the respective fair market values of such shares of common stock and Other Property as determined in good faith by the Board of Directors of the Company. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be reasonably deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of any shares of the common stock of such successor or acquiring corporation for which this Warrant thus becomes exercisable, which modifications shall be as equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.3, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class that is not preferred as to dividends or assets over any other class of stock of such corporation and that is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities that are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.3 shall similarly apply to successive reorganizations, reclassification, mergers, consolidations or disposition of assets. 4.4. Other Dilutive Events. In case any event shall occur as to which the other provisions of this Section 4 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof (including, without limitation, the issuance of securities other than Common Stock which have the right to participate in distributions to the holders of Common Stock, the granting of "phantom stock" rights or "stock appreciation rights" or the repurchase of outstanding shares of Common Stock, Convertible Securities or Stock Purchase Rights for a purchase price exceeding the fair market value thereof), then, in each such case, the Company shall (i) make a determination as to the adjustment, if any, required to be made on a basis consistent with the essential intent and principles established herein as a result of such event in order to preserve the purchase rights represented by the Warrants (the "Adjustment"), (ii) provide the Holders with prompt notice of any Adjustment or any determination that no Adjustment is required and (iii) make such Adjustment, if any. If the Majority Warrant Holders objects to any adjustment (or failure to make an adjustment) made by the Company pursuant to the preceding sentence of this Section 4.4 and provides notice of such objection to the Company within 30 days of such Holder's receipt of notice of such adjustment (or determination that no adjustment is required), the Majority 13 Warrant Holders may select an independent investment banking firm of nationally recognized standing and reasonably acceptable to the Company to determine if the Adjustment (or determination that no adjustment is required) is correct and, if not correct, to make a determination as to the adjustment, if any, required to be made on a basis consistent with the essential intent and principles established herein as a result of such event in order to preserve the purchase rights represented by the Warrants. If the investment bank selected by the Majority Warrant Holders is not reasonably acceptable to the Company, and the Company and the Majority Warrant Holders cannot agree on a mutually acceptable investment bank, then the Company and the Majority Warrant Holders shall each choose one such investment bank and the respective chosen firms shall jointly select a third investment bank, which shall make the determination. The Company shall pay the costs and fees of each such investment bank (including any such investment bank selected by the Majority Warrant Holders), and the decision of the investment bank making such determination shall be final and binding on the Company and all affected holders of Warrants or Warrant Stock. Promptly after receipt of the opinion of such investment bank as to any such required adjustments, the Company shall take any actions necessary to implement same. 4.5. Other Provisions Applicable to Adjustments Under this Section. The following provisions shall be applicable to the adjustments provided for pursuant to this Section 4: (a) When Adjustments To Be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring such an adjustment shall occur. For the purpose of any such adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (b) Record Date. In case the Company shall take a record of the holders of the Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Convertible Securities or Stock Purchase Rights or (ii) to subscribe for or purchase Common Stock, Convertible Securities or Stock Purchase Rights, then all references in this Section 4 to the date of the issuance or sale of such shares of Common Stock, Convertible Securities or Stock Purchase Rights shall be deemed to be references to such record date. (c) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest 1/100th of a share. (d) When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution to which the provisions of Section 4.1 would apply, but shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 14 (e) Maximum Exercise Price. Except as provided in Section 4.1 above, at no time shall the Exercise Price per share of Common Stock exceed the amount set forth in the first paragraph of the preamble of this Warrant. (f) Certain Limitations. Notwithstanding anything herein to the contrary, the Company agrees not to enter into any transaction that, by reason of any adjustment under Section 4.1 above, would cause the Exercise Price to be less than the par value of the Common Stock, if any, unless the Company first reduces the par value of the Common Stock to be less than the Exercise Price that would result from such transaction. (g) Notice of Adjustments. Whenever the number of shares of Common Stock for which this Warrant is exercisable or the Exercise Price shall be adjusted pursuant to this Section 4, the Company shall forthwith prepare a certificate to be executed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated, specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.3) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any related change in the Exercise Price, after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to each Holder in accordance with Section 13.2. The Company shall keep at its principal office or at the Designated Office, if different, copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by any Holder or any prospective transferee of a Warrant designated by a Holder thereof. (h) Independent Application. Except as otherwise provided herein, all subsections of this Section 4 are intended to operate independently of one another (but without duplication). If an event occurs that requires the application of more than one subsection, all applicable subsections shall be given independent effect without duplication. 4.6. Pre-emptive Rights. In the event that the Company at any time grants any pre-emptive rights to any holder of equity securities of the Company to purchase any shares of Common Stock, Convertible Securities or Stock Purchase Rights, the Company shall grant similar pre-emptive rights to each holder of Warrant Stock then outstanding or thereafter issued. 5. NO IMPAIRMENT; REGULATORY COMPLIANCE AND COOPERATION (a) The Company shall not by any action, including, without limitation, amending its charter documents or through any reorganization, reclassification, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other similar voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Holder against impairment. Without limiting the generality of the 15 foregoing, the Company shall take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, free and clear of all Liens, and shall use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (b) Notwithstanding any other provision of this Warrant, the Company shall not, without the written consent (which consent shall not be unreasonably withheld) of any Holder hereof and any holders of Warrant Stock issued hereunder known by the Company to be subject to the Bank Holding Company Act (other than a Financial Holding Company) redeem, purchase or otherwise acquire, directly or indirectly, or convert or take any action with respect to the voting rights of, any shares of any class of its capital stock or any securities convertible into or exchangeable for any shares of any class of its capital stock, so as to increase the proportion of the Company's voting stock which this Warrant entitles the Holder to purchase or which such holder of Warrant Stock then owns. Such a Holder or holder of Warrant Stock will be deemed to have reasonably withheld such consent if, in its reasonable opinion, after giving effect to such action, such Person would have a "Regulatory Problem" (as defined below). In addition, the Company shall not become a party to any merger, consolidation, recapitalization or other transaction pursuant to which the Holder hereof or a holder of Warrant Stock issued hereunder would be required to take any voting securities, or any securities convertible into voting securities, which might reasonably be expected to cause such holder to have a Regulatory Problem. For purposes of this paragraph, a Holder of this Warrant or a holder of Warrant Stock issued hereunder will be deemed to have a "Regulatory Problem" when such holder and such holder's Affiliates would own, control or have power over a greater quantity of securities of any kind issued by the Company than is permitted under any requirement of any governmental authority binding on such Person. 6. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY From and after the Original Issue Date, the Company shall at all times reserve and keep available for issuance upon the exercise of the Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock issuable pursuant to the terms hereof, when issued upon exercise of this Warrant with payment therefor in accordance with the terms hereof, shall be duly and validly issued and fully paid and nonassessable, not subject to preemptive rights and shall be free and clear of all Liens. Before taking any action that would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction over such action. If any shares of Common Stock required to be reserved for issuance upon exercise of Warrants require registration or qualification with any governmental authority under any federal or state law (other than under the Securities Act or any state securities law) before such shares may be so issued, the Company will in good faith and as expeditiously as possible and at its expense endeavor to cause such shares to be duly registered. 16 7. NOTICE OF CORPORATE ACTIONS; TAKING OF RECORD; TRANSFER BOOKS 7.1. Notices of Corporate Actions. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or distribution, or any right to subscribe for, purchase or otherwise acquire any shares of capital stock of any class or any other securities, (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger involving the Company and any other Person or any transfer or other disposition of all or substantially all the assets of the Company to another Person or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company or (d) any amendment of the Certificate of Incorporation of the Company, the Company shall mail to each Holder of a Warrant in accordance with the provisions of Section 13.2 hereof a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, disposition, dissolution, liquidation or winding-up is to take place, the time, if any such time is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for the securities or Other Property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, disposition, dissolution, liquidation or winding-up and a description in reasonable detail of the transaction. Such notice shall be mailed to the extent practicable at least thirty (30), but not more than ninety (90) days' prior to the date therein specified. In the event that the Company at any time sends any other notice to the holders of its Common Stock, it shall concurrently send a copy of such notice to each Holder of a Warrant. 7.2. Taking of Record. In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision of any Section hereof refers to the taking of a record of such holders, the Company will in each such case take such a record and will take such record as of the close of business on a Business Day. 7.3. Closing of Transfer Books. The Company shall not at any time, except upon dissolution, liquidation or winding up of the Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. 8. TRANSFER RESTRICTIONS The Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 8. 8.1. Restrictions on Transfers. (a) Neither this Warrant nor any Warrant Stock issued upon the exercise hereof shall be transferable by any holder that is subject to the Bank Holding Company Act (other than a Financial Holding Company) without the prior written consent of the Company (which consent shall not unreasonably be withheld) except (i) to an Affiliate of such holder, (ii) to a successor 17 corporation to such holder as a result of a merger or consolidation with, or sale of substantially all of the assets of, such holder, (iii) as is or may be required by such holder to comply with any Federal or state law or any rule or regulation of any governmental or public body or authority, (iv) to Persons which are subject to the provisions of the Bank Holding Company Act (provided that the transferor receives an Opinion of Counsel, in form and substance satisfactory to it, to the effect that such transferor will not have failed to comply with the Bank Holding Company Act by making such transfer), (v) to Persons which are not subject to the provisions of the Bank Holding Company Act or Persons who are subject to the Bank Holding Company Act but qualify as a Financial Holding Company (provided that such Persons shall each acquire in such transfer Warrants exercisable as to, or shares of Common Stock representing, not more than two percent (2%) of the then outstanding shares of Common Stock or such greater percentage as may then be in accordance with any then applicable policy of the Federal Reserve Board relating to equity investments by bank holding companies), (vi) to Persons which, at the time of such transfer and without giving effect to such transfer, have the power to vote a majority of the outstanding shares of voting stock of or otherwise control the Company or (vii) in a public offering pursuant to an effective registration statement under the Securities Act or in a "brokers' transaction" pursuant to Rule 144 under the Securities Act. In addition, a transferor that is subject to the Glass-Steagall Act shall not effect any transfer of this Warrant in violation of any provision of the Glass-Steagall Act. (b) In addition to the restrictions set forth in Section 8.1(a) above, neither this Warrant nor any shares of Restricted Common Stock issued upon the exercise hereof shall be Transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from the registration provisions thereof. No Transfer of this Warrant or any such shares of Restricted Stock other than pursuant to such an effective registration statement shall be valid or effective unless (a) the holder of the securities proposed to be transferred shall have delivered to the Company either a no-action letter from the Commission or an Opinion of Counsel to the effect that such proposed Transfer is exempt from the registration requirements of the Securities Act or (b) such Transfer is being made pursuant to Rule 144 or Rule 144A under the Securities Act and such holder shall have delivered to the Company a certificate setting forth the basis for applying such Rule to the proposed Transfer. Each certificate, if any, evidencing such shares of Restricted Common Stock issued upon any such Transfer, other than in a public offering pursuant to an effective registration statement, shall bear the restrictive legend set forth in Section 8.2(a), and each Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 8.2(b), unless the Holder delivers to the Company an Opinion of Counsel to the effect that such legend is not required for the purposes of compliance with the Securities Act. Holders of the Warrants or the Restricted Common Stock, as the case may be, shall not be entitled to Transfer such Warrants or such Restricted Common Stock except in accordance with this Section 8.1. 8.2. Restrictive Legends. (a) Except as otherwise provided in this Section 8, each certificate for Warrant Stock initially issued upon the exercise of this Warrant, and each certificate for Warrant Stock issued to any subsequent transferee of any such 18 certificate, shall be stamped or otherwise imprinted with two legends in substantially the following forms: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) THE HOLDER OF THE SECURITIES PROPOSED TO BE TRANSFERRED SHALL HAVE DELIVERED TO THE COMPANY AN OPINION OF COUNSEL (WHO MAY BE AN EMPLOYEE OF SUCH HOLDER) EXPERIENCED IN SECURITIES MATTERS TO THE EFFECT THAT SUCH PROPOSED TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT OR (C) SUCH TRANSFER IS PURSUANT TO RULE 144 OR RULE 144A UNDER THE ACT AND SUCH HOLDER(S) SHALL HAVE DELIVERED TO THE COMPANY A CERTIFICATE SETTING FORTH THE BASIS FOR APPLYING SUCH RULE TO THE PROPOSED TRANSFER." "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ENTITLED TO THE BENEFIT OF AND ARE SUBJECT TO CERTAIN OBLIGATIONS SET FORTH IN THE WARRANT PURSUANT TO THE EXERCISE OF WHICH SUCH SHARES WERE ISSUED. A COPY OF SUCH WARRANT IS AVAILABLE AT THE EXECUTIVE OFFICES OF THE COMPANY." (b) Except as otherwise provided in this Section 8, each Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE OR OF THE STOCK ISSUABLE UPON EXERCISE THEREOF SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) THE HOLDER OF THE SECURITIES PROPOSED TO BE TRANSFERRED SHALL HAVE DELIVERED TO THE COMPANY EITHER A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION OR AN OPINION OF COUNSEL (WHO MAY BE AN EMPLOYEE OF SUCH HOLDER) EXPERIENCED IN SECURITIES MATTERS TO THE EFFECT THAT SUCH PROPOSED TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT OR (C) SUCH TRANSFER IS PURSUANT TO RULE 144 OR RULE 144A UNDER THE 19 ACT AND SUCH HOLDER SHALL HAVE DELIVERED TO THE COMPANY A CERTIFICATE SETTING FORTH THE BASIS FOR APPLYING SUCH RULE TO THE PROPOSED TRANSFER." 8.3. Termination of Securities Law Restrictions. Notwithstanding the foregoing provisions of this Section 8, the restrictions imposed by Section 8.1(b) upon the transferability of the Warrants and the Restricted Common Stock and the legend requirements of Section 8.2 shall terminate as to any particular Warrant or shares of Restricted Common Stock when the Company shall have received from the Holder thereof an Opinion of Counsel to the effect that such legend is not required in order to ensure compliance with the Securities Act. Whenever the restrictions imposed by Sections 8.1(b) and 8.2 shall terminate as to this Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive from the Company, at the expense of the Company, a new Warrant bearing the following legend in place of the restrictive legend set forth hereon: "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED IN SECTIONS 8.1(b) AND 8.2 HEREOF TERMINATED ON [______________], 20__, AND ARE OF NO FURTHER FORCE AND EFFECT." All Warrants issued upon registration of transfer, division or combination of, or in substitution for, any Warrant or Warrants entitled to bear such legend shall have a similar legend endorsed thereon. Wherever the restrictions imposed by this Section shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the Holder thereof shall be entitled to receive from the Company, at the Company's expense, a new certificate representing such Common Stock not bearing the restrictive legend set forth in Section 8.2(a). 9. REGISTRATION RIGHTS 9.1. Certain Definitions. For the purposes of this Section 9: (a) "Blackout Period" means any period or periods, not to exceed an aggregate of 30 days if, (x) an event occurs and is continuing as a result of which a registration statement as then amended or supplemented, or any related prospectus as then amended or supplemented, would, in the good faith judgment of the Board of Directors of the Company, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading and (y) (1) the Board of Directors of the Company determines in good faith that the disclosure of such event at such time would have a material adverse effect on the business, operations or prospects of the Company or (2) the disclosure otherwise relates to a material business transaction which has not yet been publicly disclosed. (b) The Holders of Warrants and the holders of Warrant Stock are collectively referred to as "WS Holders". 20 (c) "Warrant Stock" shall be deemed to include not only shares of Common Stock already included in the general definition of such term, but also (i) any other securities issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange by the Company generally for, or in replacement by the Company generally of, any shares of Warrant Stock and (ii) any securities issued in exchange for any such Warrant Stock in any merger or reorganization of the Company, but in the either such case only so long as such securities have not been registered and Transferred pursuant to the Securities Act or Transferred in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions and restrictive legends with respect to such securities are removed in connection with such Transfer. (d) Each WS Holder shall be deemed to "hold", as of any specified date, the aggregate of (i) the number of shares of Warrant Stock held by such WS Holder as of such date plus (ii) the number of shares of Warrant Stock issuable upon exercise of any Warrants held by such WS Holder as of such date. (e) The total number of shares of Warrant Stock deemed "outstanding" as of a specified date will be equal to (i) the total number of shares of Warrant Stock Outstanding as of such date plus (ii) the number of shares of Warrant Stock issuable upon exercise of all outstanding Warrants as of such date. (f) "Registrable Securities" shall mean any shares of Warrant Stock. 9.2. Demand Registration. (a) In the event the Company receives at any time a written request from one or more WS Holders holding in the aggregate at least a majority of the number of shares of Warrant Stock then outstanding (the "Demanding Holders") that the Company file a registration statement under the Securities Act for the sale or other disposition of Registrable Securities (a "Demand Registration"), the Company shall promptly give written notice of such request to each other WS Holder and each such WS Holder may elect, by giving written notice of such election to the Company within ten (10) Business Days after receipt of the Company's notice, to have some or all of the Registrable Securities held by it included in such registration. At the option of the Demanding Holders, such request may specify that the requested registration will be for an offering on a delayed or continual basis pursuant to Rule 415 under the Securities Act (a "Shelf Registration"). (b) Following receipt of such a request for a Demand Registration, the Company shall: (1) File the requested registration statement with the Commission as promptly as practicable, and shall use the Company's best efforts to have the registration declared effective under the Securities Act as soon as reasonably practicable, in each instance giving due regard to the need to prepare current financial statements, conduct due diligence and complete 21 other actions that are reasonably necessary to effect a registered public offering; and (2) Use the Company's best efforts to keep the such registration statement Continuously Effective (x) if a Demand Registration, for up to two hundred seventy (270) days or until such earlier date as of which (i) all Registrable Securities covered by such registration statement shall have been disposed of in the manner described in the registration statement or under Rule 144 under the Securities Act or (ii) all the Registrable Securities remaining to be sold under such registration statement have been available for immediate sale to the public under Rule 144(k) under the Securities Act or any successor provision for a period of one hundred twenty (120) consecutive days, and (y) if a Shelf Registration, for three years or until such earlier date as of which (i) all Registrable Securities covered by such registration statement shall have been disposed of in the manner described in the registration statement or under Rule 144 under the Securities Act or (ii) all the Registrable Securities remaining to be sold under such registration statement have been available for immediate sale to the public under Rule 144(k) under the Securities Act or any successor provision for a period of one hundred twenty (120) consecutive days. Notwithstanding the foregoing, if for any reason the effectiveness of a Demand Registration is suspended or postponed as permitted by Subsection (d) below, the foregoing period shall be extended by the aggregate number of days of such suspension or postponement. (c) The Company shall not be required to effect a registration of Registrable Securities pursuant to a Demand Registration: (i) on more than two occasions; (ii) at any time within six months after the effective date of any registration statement filed by the Company under the Securities Act for any offering of Common Stock (other than a registration statement on Form S-4 or Form S-8 or any successor forms); (iii) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; and (iv) during the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a Company-initiated registration; provided that the Company is actively employing, in good faith, all reasonable efforts to cause such registration statement to become effective. For purposes of this Subsection (c), registration shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective, (ii) if after such registration statement has become effective, such registration or the related offer, sale or distribution of Registrable Securities thereunder is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Selling Holders and such interference is not thereafter eliminated or (iii) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of the Selling Holders. If the Company shall have complied with its obligations under this Section 9, a right to demand a registration pursuant to this Section 9.2 shall be deemed to have been satisfied (i) if a Demand Registration other than a Shelf Registration, upon the earlier of (x) the date 22 as of which all of the Registrable Securities included therein shall have been disposed of pursuant to the registration statement and (y) the date as of which such Demand Registration shall have been Continuously Effective for a period of two hundred seventy (270) days, and (ii) if a Shelf Registration, upon the effective date of a Shelf Registration, provided no stop order or similar order, or proceedings for such an order, is thereafter entered or initiated. (d) The Company shall be entitled to postpone for up to 90 days the filing of any Demand Registration statement otherwise required to be prepared and filed pursuant to this Section 9.2, if the Board of Directors of the Company determines, in its good faith reasonable judgment, that such registration and the Transfer of Warrant Stock contemplated thereby would materially interfere with, or require premature disclosure of, any financing, acquisition, divestiture, reorganization or other material transaction involving the Company or any of its wholly owned subsidiaries and the Company promptly gives the Demanding Holders notice of such determination; provided, however, that the Company shall not have postponed pursuant to this Subsection (d) the filing of any other Demand Registration statement otherwise required to be prepared and filed pursuant to this Section 9.2 during the 12-month period ended on the date of the relevant request pursuant to Subsection (a) above. (e) A registration pursuant to this Section 9.2 shall be on such appropriate registration form of the Commission as shall (i) be selected by the Company and be reasonably acceptable to the Majority Selling Holders and (ii) permit the disposition of the Warrant Stock in accordance with the intended method or methods of disposition specified in the request made pursuant to Subsection (a) above. If any registration pursuant to this Section 9.2 involves an underwritten offering (whether on a "firm", "best efforts" or "all reasonable efforts" basis or otherwise), or an agented offering, the Majority Selling Holders shall have the right to select the underwriter or underwriters and manager or managers to administer such underwritten offering or the placement agent or agents for such agented offering; provided, however, that each Person so selected shall be reasonably acceptable to the Company. 9.3. Piggyback Registration. (a) If at any time prior to the date that (i) all Registrable Securities have been sold pursuant to a Demand Registration or Rule 144 under the Securities Act or (ii) all remaining Registrable Securities are available for sale under Rule 144(k) under the Securities Act for a period of one hundred eighty (180) consecutive days, the Company proposes to register (including for this purpose a registration effected by the Company for shareholders of the Company other than the WS Holders) securities under the Securities Act in connection with the public offering solely for cash on Form S-1, S-2 or S-3 (or any replacement or successor forms), the Company shall promptly give each WS Holder written notice of such registration (a "Piggyback Registration"). Upon the written request of each WS Holder given within 15 days following the date of such notice, the Company shall cause to be included in such registration statement and use its best efforts to register under the Securities Act, using such registration statement, all the Registrable Securities that each such WS Holder shall have requested to be registered. The Company shall have the absolute right to withdraw or cease to prepare or file any registration 23 statement for any offering referred to in this Section 9.3 without any obligation or liability to any WS Holder. (b) If the managing underwriter shall advise the Company in writing (with a copy to each Selling Holder) that, in its opinion, the amount of Registrable Securities requested to be included in such registration would materially adversely affect such offering, or the timing thereof, then the Company will include in such registration, to the extent of the amount and class which the Company is so advised can be sold without such material adverse effect in such offering: First, all securities proposed to be sold by the Company for its own account; second, the Warrant Stock requested to be included in such registration by WS Holders pursuant to this Section 9.3, and all other securities being registered pursuant to the exercise of contractual rights comparable to the rights granted in this Section 9.3, pro rata based on the estimated gross proceeds from the sale thereof; and third, all other securities requested to be included in such registration. (c) Each WS Holder shall be entitled to have its Registrable Securities included in an unlimited number of Piggyback Registrations pursuant to this Section 9.3. 9.4. Registration Procedures. Whenever required under Section 9.2 or Section 9.3 hereof to effect the registration of any Registrable Securities, the Company shall, as expeditiously as practicable: (a) Prepare and file with the Commission a registration statement with respect to such Warrant Stock and use the Company's best efforts to cause such registration statement to become effective; provided, however, that before filing a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of the registration statement and prior to effectiveness thereof, the Company shall furnish to one firm of counsel for the Selling Holders (selected by Majority Selling Holders) copies of all such documents in the form substantially as proposed to be filed with the Commission at least four (4) business days prior to filing for review and comment by such counsel, which opportunity to comment shall include an absolute right to control or contest disclosure if the applicable Selling Holder reasonably believes that it may be subject to controlling person liability under applicable securities laws with respect thereto. (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act and rules thereunder with respect to the disposition of all securities covered by such registration statement. If the registration is for an underwritten offering, the Company shall amend the registration statement or supplement the prospectus whenever required by the terms of the underwriting agreement entered into pursuant to Section 9.4(f). Subject to Rule 415 under the Securities Act, if the registration statement is a Shelf Registration, the Company shall amend the registration statement or supplement the prospectus so that it will remain current and in compliance with the requirements of the Securities Act for three years after its effective date, and if during such period any event or development occurs as a result of which 24 the registration statement or prospectus contains a misstatement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Company shall promptly notify each Selling Holder, and (except during a Blackout Period) amend the registration statement or supplement the prospectus so that each will thereafter comply with the Securities Act and furnish to each Selling Holder of Registrable Securities such amended or supplemented prospectus, which each such Holder shall thereafter use in the Transfer of Warrant Stock covered by such registration statement. Pending such amendment or supplement each such Selling Holder shall cease making offers or Transfers of Registrable Securities pursuant to the prior prospectus. In the event that any Registrable Securities included in a registration statement subject to, or required by, this Agreement remain unsold at the end of the period during which the Company is obligated to use its best efforts to maintain the effectiveness of such registration statement, the Company may file a post-effective amendment to the registration statement for the purpose of removing such Registrable Securities from registered status. (c) Furnish to each Selling Holder of Registrable Securities, without charge, such numbers of copies of the registration statement, any pre-effective or post-effective amendment thereto, the prospectus, including each preliminary prospectus and any amendments or supplements thereto, in each case in conformity with the requirements of the Securities Act and the rules thereunder, and such other related documents as any such Selling Holder may reasonably request in order to facilitate the disposition of Registrable Securities owned by such Selling Holder. (d) Furnish to each Selling Holder of Warrant Stock, without charge, such numbers of copies of the registration statement, any pre-effective or post-effective amendment thereto, the prospectus, including each preliminary prospectus and any amendments or supplements thereto, in each case in conformity with the requirements of the Securities Act and the rules thereunder, and such other related documents as any such Selling Holder may reasonably request in order to facilitate the disposition of Registrable Securities owned by such Selling Holder. (e) Use the Company's best efforts (i) to register and qualify, or qualify for exemption from registration for, the securities covered by such registration statement under such other securities or Blue Sky laws of such states or jurisdictions as shall be reasonably requested by the managing underwriter (as applicable, or if inapplicable, the Majority Selling Holders), and (ii) to obtain the withdrawal of any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the qualification (or exemption from qualification) of the offer and transfer of any of the Registrable Securities in any jurisdiction, at the earliest possible moment; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (f) In the event of any underwritten or agented offering, enter into and perform the Company's obligations under an underwriting or agency agreement (including indemnification and contribution obligations of underwriters or agents), in usual and customary form, with the managing underwriter or underwriters of or agents for such offering. The Company shall also cooperate 25 with the Majority Selling Holders and the managing underwriter for such offering in the marketing of the Warrant Stock, including making available, upon reasonable prior notice and subject to such confidentiality restrictions as the Company shall deem reasonably necessary, the Company's officers, accountants, counsel, premises, books and records for such purpose. (g) Promptly notify each Selling Holder of any stop order issued or threatened to be issued by the Commission in connection therewith and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (h) Make generally available to the Company's security holders copies of all periodic reports, proxy statements, and other information referred to in Section 9.9(a) and an earnings statement satisfying the provisions of Section 11(a) of the Securities Act no later than 90 days following the end of the 12-month period beginning with the first month of the Company's first fiscal quarter commencing after the effective date of each registration statement filed pursuant to this Section 9. (i) Make available for inspection by any Selling Holder, any underwriter participating in such offering and the representatives of such Selling Holder and underwriter (but not more than one firm of counsel to such Selling Holders), all financial and other information as shall be reasonably requested by them, and provide the Selling Holder, any underwriter participating in such offering and the representatives of such Selling Holder and underwriter the opportunity to discuss the business affairs of the Company with its principal executives and independent public accountants who have certified the audited financial statements included in such registration statement, in each case all as necessary to enable them to exercise their due diligence responsibility under the Securities Act; provided, however, that information that the Company determines, in good faith, to be confidential and which the Company advises such Person in writing, is confidential shall not be disclosed unless such Person signs a confidentiality agreement reasonably satisfactory to the Company or the related Selling Holder of Registrable Securities agrees to be responsible for such Person's breach of confidentiality on terms reasonably satisfactory to the Company. (j) Use the Company's best efforts to obtain a so-called "comfort letter" from its independent public accountants, and legal opinions of counsel to the Company addressed to the Selling Holders, in customary form and covering such matters of the type customarily covered by such letters, and in a form that shall be reasonably satisfactory to Majority Selling Holders. The Company shall furnish to each Selling Holder a signed counterpart of any such comfort letter or legal opinion. Delivery of any such opinion or comfort letter shall be subject to the recipient furnishing such written representations or acknowledgements as are customarily provided by selling shareholders who receive such comfort letters or opinions. (k) Provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement. 26 (l) Use all reasonable efforts to cause the Registrable Securities covered by such registration statement (i) if the Common Stock is then listed on a securities exchange or included for quotation in a recognized trading market, to continue to be so listed or included for a reasonable period of time after the offering, and (ii) to be registered with or approved by such other United States or state governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Selling Holders of Registrable Securities to consummate the disposition of such Registrable Securities. (m) Use the Company's reasonable efforts to provide a CUSIP number for the Common Stock prior to the effective date of the first registration statement including Registrable Securities. (n) Take such other actions as are reasonably required in order to expedite or facilitate the disposition of Registrable Securities included in each such registration. 9.5. Selling Holders' Obligations. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 9 with respect to the Registrable Securities of any Selling Holder that such Selling Holder shall: (a) Furnish to the Company such information regarding such Selling Holder, the number of Registrable Securities owned by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Selling Holder's Registrable Securities, and to cooperate with the Company in preparing such registration; (b) Agree to sell their Registrable Securities to the underwriters at the same price and on substantially the same terms and conditions as the Company or the other Persons on whose behalf the registration statement was being filed have agreed to sell their securities, and to execute the underwriting agreement agreed to by the Majority Selling Holders (in the case of a registration under Section 9.2) or the Company and the Majority Selling Holders (in the case of a registration under Section 9.3); (c) upon receipt of any notice from the Company of a stop order as described in Section 9.4(g), immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such registration statement until the withdrawal of the stop order referred to in Section 9.4(g), and use commercially reasonable efforts to maintain the confidentiality of such notice and its contents; (d) to the extent required by applicable law, deliver a prospectus to the purchaser of such Registrable Securities; (e) notify the Company when it has sold all of the Registrable Securities held by it; (f) notify the Company in the event that any information supplied by such Holder in writing for inclusion in such registration statement or related prospectus is untrue or omits to state a material fact required to be stated in 27 such prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading; immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such registration statement until the filing of an amendment or supplement to such prospectus as may be necessary so that such prospectus does not contain an untrue statement of material fact or omit to state a material fact required to be stated in such prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and use commercially reasonable efforts to assist the Company as may be appropriate to make such amendment or supplement effective for such purpose; and (g) discontinue any disposition pursuant to a Demand Registration of Registrable Securities during a Blackout Period. 9.6. Expenses of Registration. Expenses incurred in connection with registrations under this Section 9 shall be allocated and paid as follows: (a) With respect to each Demand Registration (including any Shelf Registration), the Company shall bear and pay all expenses incurred in connection with any registration, filing, or qualification of Registrable Securities with respect to such Demand Registration for each Selling Holder, including all registration, filing and NASD fees, all "road show" expenses (to the extent not paid by the underwriters), all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the reasonable fees and disbursements of counsel for the Company, and of the Company's independent public accountants, including the expenses of "cold comfort" letters required by or incident to such performance and compliance, and the reasonable fees and disbursements, not exceeding $15,000, of one firm of counsel for the Selling Holders of Registrable Securities (the "Registration Expenses"), but excluding underwriting discounts and commissions relating to Registrable Securities (which shall be paid on a pro rata basis by the Selling Holders) provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 9.2 if the registration is subsequently withdrawn at the request of the Majority Selling Holders (in which case all Selling Holders shall bear such expense), unless WS Holders whose Registrable Securities constitute a majority of the Registrable Securities then outstanding agree that such withdrawn registration shall constitute the exercise of their one demand registration under Section 9.2 hereof. The counsel for the Selling Holders shall be selected by Demanding Holders owning a majority of the Registrable Securities owned by Demanding Holders to be included in a Demand Registration and, in the case of a Piggyback Registration, by Selling Holders owning a majority of the Registrable Securities to be included in such registration; provided that in the case of a Piggyback Registration, the Selling Holders and any other holders of securities to be included in such registration shall endeavor in good faith to select one firm of counsel to represent all such selling securities holders. (b) The Company shall bear and pay all Registration Expenses incurred in connection with any Piggyback Registrations pursuant to Section 9.3 for each Selling Holder, but excluding underwriting discounts and commissions relating to Registrable Securities (which shall be paid on a pro rata basis by the Selling 28 Holders of Registrable Securities) and any attorney's fees and expenses of counsel to the Holders exceeding $15,000. (c) Any failure of the Company to pay any Registration Expenses as required by this Section 9.6 shall not relieve the Company of its obligations under this Section 9. 9.7. Indemnification; Contribution. If any Registrable Securities are included in a registration statement under this Section 9: (a) To the extent permitted by applicable law, the Company shall indemnify and hold harmless each Selling Holder, each Person, if any, who controls such Selling Holder within the meaning of the Securities Act, and each officer, director, partner, and employee of such Selling Holder and such controlling Person, against any and all losses, claims, damages, liabilities and expenses (joint or several), including reasonable attorneys' fees and disbursements and expenses of investigation, incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may become subject under the Securities Act, the Exchange Act or other federal or state laws, insofar as such losses, claims, damages, liabilities and expenses arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) Any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein, or any amendments or supplements thereto; (ii) The omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) Any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any applicable state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any applicable state securities law; provided, however, that the indemnification required by this Section 9.7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense (A) if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or expense to the extent that it is determined by a court of competent jurisdiction by a final non-appealable order to have solely arisen out of or be based upon a Violation which occurred in reliance upon and in conformity with written information furnished to the Company by the indemnified party expressly for use in connection with such registration, (B) it is based on a failure of such person to deliver or cause to be delivered the final prospectus contained in the registration statement and made available by the Company, if such delivery is required by applicable law, or (C) it arises from the fact that such person delivered or caused to be delivered a prospectus which either contained an untrue statement of a material fact or omitted to state a material fact required to be stated in such prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading and the Company shall have previously provided or made available to 29 such person a supplement to such prospectus or an amended prospectus which would have corrected any such untrue statement or omission. The Company shall also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers, directors, agents and employees and each person who controls such persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the Selling Holders. (b) To the extent permitted by applicable law, each Selling Holder shall indemnify and hold harmless the Company, each of its directors, each of its officers who shall have signed the registration statement, each Person, if any, who controls the Company within the meaning of the Securities Act, any other Selling Holder, any controlling Person of any such other Selling Holder and each officer, director, partner, and employee of such other Selling Holder and such controlling Person, against any and all losses, claims, damages, liabilities and expenses (joint and several), including reasonable attorneys' fees and disbursements and expenses of investigation, incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may otherwise become subject under the Securities Act, the Exchange Act or other federal or state laws, insofar as such losses, claims, damages, liabilities and expenses are determined by a court of competent jurisdiction by a final non-appealable order to have solely arisen out of or be based upon a Violation that occurred in reliance upon and in conformity with written information furnished by such Selling Holder expressly for use in connection with such registration; provided, however, that (x) the indemnification required by this Section 9.7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense if settlement is effected without the consent of the relevant Selling Holder of Registrable Securities, which consent shall not be unreasonably withheld, and (y) in no event shall the amount of any indemnity under this Section 9.7(b) exceed the net proceeds from the applicable offering received by such Selling Holder. (c) Promptly after receipt by an indemnified party under this Section 9.7 of notice of the commencement of any action, suit, proceeding, investigation or threat thereof made in writing for which such indemnified party may make a claim under this Section 9.7, such indemnified party shall deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and disbursements and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time following the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 9.7 but shall not relieve the indemnifying party of any liability that it may have to any indemnified party otherwise than pursuant to this Section 9.7. Any fees and expenses incurred by the indemnified party (including any fees and expenses incurred in connection with investigating or preparing to defend such 30 action or proceeding) shall be paid to the indemnified party, as incurred, within thirty (30) days of written notice thereof to the indemnifying party (regardless of whether it is ultimately determined that an indemnified party is not entitled to indemnification hereunder). Any such indemnified party shall have the right to employ separate counsel in any such action, claim or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be the expenses of such indemnified party unless (i) the indemnifying party has agreed to pay such fees and expenses or (ii) the indemnifying party shall have failed to promptly assume the defense of such action, claim or proceeding or (iii) the named parties to any such action, claim or proceeding (including any impleaded parties) include both such indemnified party and the indemnifying party, and such indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or in addition to those available to the indemnifying party and that the assertion of such defenses would create a conflict of interest such that counsel employed by the indemnifying party could not faithfully represent the indemnified party (in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action, claim or proceeding on behalf of such indemnified party, it being understood, however, that the indemnifying party shall not, in connection with any one such action, claim or proceeding or separate but substantially similar or related actions, claims or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all such indemnified parties, unless in the reasonable judgment of such indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such action, claim or proceeding, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels). No indemnifying party shall be liable to an indemnified party for any settlement of any action, proceeding or claim without the written consent of the indemnifying party, which consent shall not be unreasonably withheld. (d) If the indemnification required by this Section 9.7 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to in this Section 9.7: (i) The indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any Violation has been committed by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Violation. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to 31 include, subject to the limitations set forth in Section 9.7(a) and Section 9.7(b), any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. (ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 9.7(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in Section 9.7(d)(i) above. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (e) If indemnification is available under this Section 9.7, the indemnifying parties shall indemnify each indemnified party to the full extent provided in this Section 9.7 without regard to the relative fault of such indemnifying party or indemnified party or any other equitable consideration referred to in Section 9.7(d) above. (f) The indemnification required by this Section 9.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. (g) The obligations of the Company and the Selling Holders of Registrable Securities under this Section 9.7 shall survive the completion of any offering of Registrable Securities pursuant to a registration statement under this Section 9, and otherwise. 9.8. Holdback. Each WS Holder entitled pursuant to this Section 9 to have Registrable Securities included in a registration statement prepared pursuant to this Section 9, if so requested by the managing underwriter in connection with an offering of any Registrable Securities, shall not effect any public sale or distribution of shares of Common Stock, Convertible Securities or Stock Purchase Rights (excluding any sale pursuant to Rule 144 or Rule 144A under the Securities Act and any sale as part of such underwritten or agented registration), during the 5-day period prior to, and during the 90-day period beginning on, the date such registration statement is declared effective under the Securities Act by the Commission, provided that such WS Holder is timely notified of such effective date in writing by the Company or such managing underwriter. 9.9. Additional Covenants of the Company. The Company hereby agrees and covenants as follows: (a) The Company shall file as and when applicable, on a timely basis, all reports required to be filed by it under the Exchange Act. If the Company is not required to file reports pursuant to the Exchange Act, upon the request of any WS Holder, the Company shall make publicly available the information specified in subparagraph (c)(2) of Rule 144 of the Securities Act, and take such further action as may be reasonably required from time to time and as may be within the reasonable control of the Company, to enable the WS Holders to Transfer Warrants or Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 32 under the Securities Act or any similar rule or regulation hereafter adopted by the Commission. In addition, promptly upon the request of any WS Holder, the Company shall provide such WS Holder with such financial statements, reports and other information as may be required to permit such WS Holder to Transfer shares of Registrable Securities to Qualified Institutional Investors pursuant to Rule 144A of the Securities Act. (b) The Company shall not, and shall permit its majority owned subsidiaries to, effect any public sale or distribution of any shares of Common Stock, Convertible Securities or Stock Purchase Rights during the 5 Business Days prior to, and during the ninety (90) day period beginning on, the commencement of a public distribution of Registrable Securities pursuant to any registration statement prepared pursuant to this Section 9 (other than by the Company pursuant to such registration if the registration is pursuant to Section 9.3). The Company shall not effect any registration of its securities (other than on Form S-4, Form S-8, or any successor forms to such forms or pursuant to such other registration rights agreements as may be approved in writing by the Majority Selling Holders), or effect any public or private sale or distribution of any of its securities, including a sale pursuant to Regulation D under the Securities Act, whether on its own behalf or at the request of any holder or holders of such securities from the date of a request for a Demand Registration pursuant to Section 9.2 until the earlier of (x) ninety (90) days following the date as of which all securities covered by such Demand Registration statement shall have been Transferred, and (y) one hundred eighty (180) days following the effective date of such Demand Registration statement, unless the Company shall have previously notified in writing all Selling Holders of the Company's desire to do so, and the Majority Selling Holders or the managing underwriter, if any, shall have consented thereto in writing. (c) Any agreement entered into on or after the Original Issue Date pursuant to which the Company or any of its majority owned subsidiaries issues or agrees to issue any Common Stock (including, without limitation, any employee stock option, stock purchase agreement, merger agreement or other agreement) shall contain a provision whereby any holder receiving such securities who will hold more than one percent (1%) of the amount of such securities then outstanding shall agree not to effect any public sale or distribution of any such securities during the periods described in the second sentence of Section 9.9(b), in each case including a sale pursuant to Rule 144 under the Securities Act (unless such Person is prevented by applicable statute or regulation from entering into such an agreement). (d) The Company shall not, directly or indirectly, (x) enter into any merger, consolidation or reorganization in which the Company shall not be the surviving corporation or (y) Transfer or agree to Transfer all or substantially all the Company's assets, unless prior to such merger, consolidation, reorganization or asset Transfer, the surviving corporation or the Transferee, respectively, shall have agreed in writing to assume the obligations of the Company under this Agreement, and for that purpose references hereunder to "Registrable Securities" shall be deemed to include the securities which the WS Holders would be entitled to receive in exchange for Registrable Securities pursuant to any such merger, consolidation or reorganization. 33 (e) The Company shall not grant to any Person (other than a WS Holder) any registration rights with respect to securities of the Company, or enter into any agreement, that would entitle the holder thereof to have securities owned by it included in a Demand Registration (including any Shelf Registration). 10. LOSS OR MUTILATION Upon receipt by the Company from any Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and an indemnity reasonably satisfactory to it and, in case of mutilation, upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to such Holder; provided, however, in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. 11. OFFICE OF THE COMPANY As long as any of the Warrants remain outstanding, the Company shall maintain an office or agency, which may be the principal executive offices of the Company (the "Designated Office"), where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. Such Designated Office shall initially be the office of the Company at 500 N. Loop, 1604 East, Suite 100, San Antonio, Texas 78232. The Company may from time to time change the Designated Office to another office of the Company or its agent within the United States by notice given to all registered holders of Warrants at least ten (10) Business Days prior to the effective date of such change. 12. DILUTION FEE In the event that the Company at any time after the Original Issue Date shall pay a dividend or make any other distribution with respect to its Common Stock (or any other shares of the capital stock of the Company for which this Warrant becomes exercisable pursuant to Section 4 above) whether in the form of cash, evidences of indebtedness, securities or other property (other than a stock dividend subject to the provisions of Section 4.1 above), then the Holder of this Warrant shall be entitled to receive a dilution fee (a "Dilution Fee") payable in cash on the date of payment of such dividend or other distribution equal to the number of shares of Common Stock (or such other shares of stock) issuable upon exercise of this Warrant on such date multiplied by the sum of (x) the amount of cash and (y) the fair value of any evidences of indebtedness, securities or other property distributed with respect to each share of Common Stock (or such other stock). The "fair value" of any such evidences of indebtedness, securities or other property shall mean the fair market value thereof, as determined by the Board of Directors of the Company in good faith and supported, upon the request of the Majority Warrant Holders, by an opinion of an investment banking firm or appraisal firm of recognized national standing selected by the Company and acceptable to such Majority Warrant Holders. The fees and expenses of such investment banking firm or appraisal firm shall be paid by the Company. 13. MISCELLANEOUS 34 13.1. Nonwaiver. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Company or the Holder shall operate as a waiver of such right or otherwise prejudice the rights, powers or remedies of such Person. 13.2. Notice Generally. Any notice, demand, request, consent, approval, declaration, delivery or communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) if to any Holder of this Warrant or of Warrant Stock issued upon the exercise hereof, at its last known address appearing on the books of the Company maintained for such purpose; (b) if to the Company, at its Designated Office; or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or three (3) Business Days after the same shall have been deposited in the United States mail, or one (1) Business Day after the same shall have been delivered to Federal Express or another overnight courier service. 13.3. Indemnification. If the Company fails to make, when due, any payments provided for in this Warrant, the Company shall pay to the Holder hereof (a) interest at the Agreed Rate on any amounts due and owing to such Holder and (b) such further amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees and expenses incurred by such Holder in collecting any amounts due hereunder. The Company shall indemnify, save and hold harmless the Holder hereof and the Holders of any Warrant Stock issued upon the exercise hereof from and against any and all liability, loss, cost, damage, reasonable attorneys' and accountants' fees and expenses, court costs and all other out-of-pocket expenses incurred in connection with or arising from a Company Default. This indemnification provision shall be in addition to the rights of such Holder or Holders to bring an action against the Company for breach of contract based on such Company Default. 13.4. Limitation of Liability. No provision hereof, in the absence of affirmative action by the Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder to pay the Exercise Price for any Warrant Stock other than pursuant to an exercise of this Warrant or any liability as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 13.5. Remedies. Each Holder of Warrants and/or Warrant Stock, in addition to being entitled to exercise its rights granted by law, including recovery of damages, shall be entitled to specific performance of its rights provided under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of 35 the provisions of this Warrant and hereby agrees, in an action for specific performance, to waive the defense that a remedy at law would be adequate. 13.6. Successors and Assigns. Subject to the provisions of Sections 3.1, 8.1 and 8.2, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the permitted successors and assigns of the Holder hereof. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and to the extent applicable, all Holders of shares of Warrant Stock issued upon the exercise hereof (including transferees), and shall be enforceable by any such Holder. 13.7. Amendment. This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of the Company and the Majority Warrant Holders, provided that no such Warrant may be modified or amended to reduce the number of shares of Common Stock for which such Warrant is exercisable or to increase the price at which such shares may be purchased upon exercise of such Warrant (before giving effect to any adjustment as provided therein) without the written consent of the Holder thereof. 13.8. Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. 13.9. Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 13.10. GOVERNING LAW; JURISDICTION. IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS WARRANT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, EXCEPT WITH RESPECT TO THE VALIDITY OF THIS WARRANT, THE ISSUANCE OF WARRANT STOCK UPON EXERCISE HEREOF AND THE RIGHTS AND DUTIES OF THE COMPANY WITH RESPECT TO REGISTRATION OF TRANSFER, WHICH SHALL BE GOVERNED BY THE LAWS OF NEVADA. THE COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK SHALL HAVE, EXCEPT AS SET FORTH IN THE PROVISO TO THIS SENTENCE, EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY AND THE HOLDER OF THIS WARRANT PERTAINING TO THIS WARRANT OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT, PROVIDED, THAT IT IS ACKNOWLEDGED THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK COUNTY, NEW YORK. 36 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. ABRAXAS PETROLEUM CORPORATION By: ------------------------------------------------ Name: Title: [SEAL] Attest: By:_________________________ Name: Title: 37 ANNEX A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of [______] shares Common Stock of Abraxas Petroleum Corporation and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to [_______] whose address is [___________________________________________________] and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. --------------------------------- (Name of Registered Owner) --------------------------------- (Signature of Registered Owner) --------------------------------- (Street Address) --------------------------------- (City) (State) (Zip Code) NOTICE: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. Annex A ANNEX B ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: Number of Shares of Name and Address of Assignee Common Stock and does hereby irrevocably constitute and appoint ________ _____________ attorney-in-fact to register such transfer onto the books of Abraxas Petroleum Corporation maintained for the purpose, with full power of substitution in the premises. Dated:___________________ Print Name:___________________ Signature:___________________ Witness:_____________________ NOTICE: The signature on this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. Annex B TABLE OF CONTENTS Page 1. DEFINITIONS..........................................................2 2. EXERCISE OF WARRANT..................................................9 2.1. Manner of Exercise..........................................9 2.2. Payment of Taxes............................................10 2.3. Fractional Shares...........................................10 2.4. Continued Validity and Application..........................10 2.5. Limitation on Holder's Exercise.............................10 3. TRANSFER, DIVISION AND COMBINATION..................................11 3.1. Transfer...................................................11 3.2. Division and Combination...................................11 3.3. Expenses...................................................12 3.4. Maintenance of Books.......................................12 4. ANTIDILUTION PROVISIONS.............................................12 4.1. Stock Dividends, Subdivisions and Combinations.............12 4.2. Adjustment of Number of Shares Purchasable.................12 4.3. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets...................................12 4.4. Other Dilutive Events......................................13 4.5. Other Provisions Applicable to Adjustments Under this Section....................................................14 4.6. Pre-emptive Rights.........................................15 5. NO IMPAIRMENT; REGULATORY COMPLIANCE AND COOPERATION.................15 6. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY......................16 7. NOTICE OF CORPORATE ACTIONS; TAKING OF RECORD; TRANSFER BOOKS........17 7.1. Notices of Corporate Actions................................17 7.2. Taking of Record............................................17 7.3. Closing of Transfer Books...................................17 8. TRANSFER RESTRICTIONS................................................17 8.1. Restrictions on Transfers...................................17 8.2. Restrictive Legends.........................................18 8.3. Termination of Securities Law Restrictions..................20 9. REGISTRATION RIGHTS..................................................20 i 9.1. Certain Definitions.........................................20 9.2. Demand Registration.........................................21 9.3. Piggyback Registration......................................23 9.4. Registration Procedures.....................................24 9.5. Selling Holders' Obligations................................27 9.6. Expenses of Registration....................................28 9.7. Indemnification; Contribution...............................29 9.8. Holdback....................................................32 9.9. Additional Covenants of the Company.........................32 10. LOSS OR MUTILATION...................................................34 11. OFFICE OF THE COMPANY................................................34 12. DILUTION FEE.........................................................34 13. MISCELLANEOUS........................................................34 13.1. Nonwaiver...................................................35 13.2. Notice Generally............................................35 13.3. Indemnification.............................................35 13.4. Limitation of Liability.....................................35 13.5. Remedies....................................................35 13.6. Successors and Assigns......................................36 13.7. Amendment...................................................36 13.8. Severability................................................36 13.9. Headings....................................................36 13.10. GOVERNING LAW; JURISDICTION.................................36 ANNEX A SUBSCRIPTION FORM.....................................................1 ANNEX B ASSIGNMENT FORM.......................................................1 EX-10 5 intercreditor.txt INTERCREDITOR EXHIBIT 10.5 - ------------------------------------------------------------------------------- INTERCREDITOR, SECURITY AND COLLATERAL AGENCY AGREEMENT Dated as of October 28, 2004 among ABRAXAS PETROLEUM CORPORATION, as the Borrower, THE SUBSIDIARIES OF THE BORROWER LISTED ON SCHEDULE I HERETO, as Guarantors, WELLS FARGO FOOTHILL, INC., as Revolving Credit Facility Administrative Agent, GUGGENHEIM CORPORATE FUNDING, LLC, as Bridge Loan Administrative Agent, and U.S. BANK NATIONAL ASSOCIATION, as Trustee and Collateral Agent - ------------------------------------------------------------------------------- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS Section 1.01. Definitions..............................................5 Section 1.02. Generic Terms............................................6 Section 1.03. Construction.............................................6 Section 1.04. Times....................................................6 ARTICLE II SECURITY INTERESTS; COLLATERAL Section 2.01. Security Interests.......................................6 Section 2.02. Sales and Dispositions of Collateral Without Release or Consent..............................................11 Section 2.03. Assets Sales; Release of Affected Assets................12 Section 2.04. Termination of Security Interests.......................13 Section 2.05. No Alteration of Priority...............................13 Section 2.06. Marshaling..............................................14 Section 2.07. Maintenance of Properties...............................14 Section 2.08. Negative Covenants......................................14 ARTICLE III LEGENDS Section 3.01. Legends.................................................15 ARTICLE IV COLLATERAL AGENT ACCOUNTS Section 4.01. Establishment of the Collateral Agent Accounts..........16 Section 4.02. Funding of Asset Sale Proceeds Account and Bridge Loan Asset Sale Proceeds Account........................17 Section 4.03. Funding of Collateral Account..........................18 Section 4.04. Distribution of Amounts on Deposit in Asset Sale Proceeds Account and Bridge Loan Asset Sale Proceeds Account........................................19 Section 4.05. Distribution of Amounts on Deposit in Bridge Loan Asset Proceeds Account..................................19 Section 4.06. Distribution of Amounts on Deposit in Collateral Account During Default Period...........................21 Section 4.07. Payments Under Debt Documents Not During Default Period.24 Section 4.08. Payments Not in Compliance with this Article IV.........25 1 ARTICLE V THE COLLATERAL AGENT Section 5.01. Appointment and Powers..................................25 Section 5.02. Performance of Duties...................................25 Section 5.03. Reliance Upon Documents.................................26 Section 5.04. Successor Collateral Agent..............................26 Section 5.05. Indemnification.........................................28 Section 5.06. Compensation and Reimbursement..........................28 Section 5.07. Representations and Warranties of the Collateral Agent..28 Section 5.08. Representations and Warranties of each Borrower Party...29 Section 5.09. Representations and Warranties of each Secured Party....30 Section 5.10. Waiver of Setoffs.......................................31 ARTICLE VI CONTROL PARTY; REMEDIES Section 6.01. Exercise of Remedies; Management of Collateral..........31 Section 6.02. Control Party...........................................32 Section 6.03. Rights and Remedies.....................................32 Section 6.04. Bankruptcy Issues.......................................34 Section 6.05. Notice of Default and Certain Events....................36 Section 6.06. Remedies Cumulative.....................................36 Section 6.07. The Collateral Agent's and Secured Parties' Liability for Collateral................................36 Section 6.08. Amounts Collected.......................................37 Section 6.09. Appraisals..............................................37 Section 6.10. Reinstatement...........................................37 Section 6.11. Trust Indenture Act.....................................37 ARTICLE VII SUBORDINATION; FINANCING AGREEMENTS Section 7.01. Blockage of Payments to the Junior Secured Parties......37 Section 7.02. Payments Held in Trust/Turnover.........................38 Section 7.03. Collateral Agent to Effectuate Subordination............38 Section 7.04. No Waiver of Subordination Provisions...................38 Section 7.05. Modification of Financing Agreements....................38 ARTICLE VIII MISCELLANEOUS Section 8.01. Amendments..............................................41 Section 8.02. Notices.................................................41 Section 8.03. Severability............................................41 Section 8.04. Term of this Agreement..................................41 Section 8.05. Assignments.............................................42 Section 8.06. TRIAL BY JURY WAIVED....................................42 2 Section 8.07. GOVERNING LAW...........................................43 Section 8.08. Consents to Jurisdiction................................43 Section 8.09. Time of Essence.........................................43 Section 8.10. Counterparts............................................43 Section 8.11. Integration.............................................43 Section 8.12. Headings................................................43 Section 8.13. Full Recourse...........................................43 Section 8.14. Collateral Agent and its Affiliates.....................44 3 INTERCREDITOR, SECURITY AND COLLATERAL AGENCY AGREEMENT (this "Agreement") dated as of October 28, 2004, among (i) ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (the "Borrower"), (ii) the subsidiaries of the Borrower listed on Schedule I hereto (the "Guarantors"), (iii) WELLS FARGO FOOTHILL, INC., a California corporation, in its capacity as agent (in such capacity, together with any successor in such capacity, the "Revolving Credit Facility Administrative Agent") for the lenders who are from time to time parties to the Revolving Credit Facility Documents referred to herein (the "Revolving Lenders"), (iv) U.S. BANK NATIONAL ASSOCIATION, a national banking association, in its capacities as trustee (in such capacity, together with any successor in such capacity, the "Trustee") for the holders of securities issued under the Noteholder Documents referred to herein (the "Noteholders"), and as collateral agent (in such capacity, together with any successor in such capacity appointed in accordance with the terms of this Agreement, the "Collateral Agent") for the Secured Parties referred to herein, and (v) GUGGENHEIM CORPORATE FUNDING, LLC, a Delaware limited liability company, in its capacity as agent (in such capacity, together with any successor in such capacity, the "Bridge Loan Administrative Agent") for the lenders who are from time to time parties to the Bridge Loan Documents referred to herein (the "Bridge Lenders"). RECITALS A. Concurrently herewith, (i) the Borrower is entering into the Loan Agreement, dated as of the date hereof (the "Revolving Credit Facility"), with the Revolving Lenders and the Revolving Credit Facility Administrative Agent pursuant to which the Revolving Lenders may from time to time make loans and other financial accommodations to the Borrower and (ii) each of the Guarantors is guarantying (each, a "Revolving Credit Facility Guaranty") the obligations of the Borrower owing to the Revolving Credit Facility Administrative Agent and the Revolving Lenders under the Revolving Credit Facility. B. Concurrently herewith, (i) each of the Borrower and the Guarantors is entering into the Indenture, dated as of the date hereof (the "Indenture"), among the Borrower, the Guarantors and the Trustee, pursuant to which $125,000,000 aggregate principal amount of Floating Rate Senior Secured Notes due 2009 of the Borrower (the "Notes") are being issued and (ii) each of the Guarantors is guarantying (each, a "Noteholder Guaranty") the obligations of the Borrower owing to the Trustee and the Noteholders under the Notes and the Indenture. C. Concurrently herewith, (i) the Borrower is entering into the Loan Agreement, dated as of the date hereof (the "Bridge Loan"), with the Bridge Lenders and the Bridge Loan Administrative Agent, pursuant to which the Bridge Lenders have agreed to make loans and other financial accommodations to the Borrower, and (ii) each of the Guarantors is guarantying (each, a "Bridge Loan Guaranty") the obligations of the Borrower owing to the Bridge Loan Administrative Agent and the Bridge Lenders under the Bridge Loan. D. The Revolving Lenders and the Noteholders wish to agree as to their respective rights and priorities with respect to payments received in respect of Senior Indebtedness referred to herein and proceeds of the Collateral referred to herein, and as to certain other rights, priorities and interests as between and among the Revolving Credit Facility Administrative Agent and the Revolving Lenders, and the Trustee and the Noteholders, as the holders of Senior Indebtedness. 4 E. The parties hereto wish to agree as to the priority of the repayment of the Senior Indebtedness and the Junior Indebtedness referred to herein, and the rights of each with respect thereto, and as to their respective liens upon and security interests in the Collateral, and as to certain other rights, priorities and interests as between and among the Revolving Credit Facility Administrative Agent and the Revolving Lenders, the Trustee and the Noteholders, and the Bridge Loan Administrative Agent and the Bridge Lenders, as the holders of Secured Obligations referred to herein. F. In order to provide security for the prompt payment and performance of the Borrower's obligations under the Revolving Credit Facility, the Indenture and the Bridge Loan, the Borrower is entering into certain mortgages, deeds of trust, debentures, security agreements, pledge agreements, collateral assignments and other security documents, including this Agreement (collectively, the "Borrower Security Documents"), pursuant to which the Borrower is agreeing to grant to the Collateral Agent, on behalf of and for the benefit of (i) the Revolving Credit Facility Administrative Agent and the Revolving Lenders, a shared first priority security interest in the Collateral, (ii) the Trustee and the Noteholders, a shared first priority security interest in the Collateral, and (iii) the Bridge Loan Administrative Agent and the Bridge Lenders, a second priority security interest in the Collateral, in each case, in the manner set forth in this Agreement and the other Borrower Security Documents. G. In order to provide security for the prompt payment and performance of its obligations under each Revolving Credit Facility Guaranty, Noteholder Guaranty and Bridge Loan Guaranty to which it is a party, each Guarantor is entering into certain mortgages, deeds of trust, debentures, security agreements, pledge agreements, collateral assignments and other security documents, including this Agreement (collectively, the "Guaranty Security Documents"), pursuant to which each such Guarantor is agreeing to grant to the Collateral Agent, on behalf of and for the benefit of (i) the Revolving Credit Facility Administrative Agent and the Revolving Lenders, a shared first priority security interest in the Collateral with respect to such Guarantor, (ii) the Trustee and the Noteholders, a shared first priority security interest in the Collateral with respect to such Guarantor, and (iii) the Bridge Loan Administrative Agent and the Bridge Lenders, a second priority security interest in the Collateral with respect to such Guarantor, in each case, in the manner set forth in this Agreement and the other Guaranty Security Documents. AGREEMENTS In consideration of the premises and of the agreements herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, each of the parties hereto hereby agrees as follows: ARTICLE I DEFINITIONS Section 1.01 Definitions. Certain capitalized terms used herein have the meanings set forth in Appendix A hereto. Terms not defined herein have the respective meanings assigned thereto in the Indenture in effect on the Closing Date. 5 Section 1.02. Generic Terms. The terms "hereof," "herein" or "hereunder," unless otherwise modified by more specific reference, refer to this Agreement (including Appendix A hereto) in its entirety. Unless otherwise indicated in context, the terms "Article", "Section", "Appendix", "Schedule" and "Exhibit" refer to an Article, Section, Appendix, Schedule or Exhibit of this Agreement. Unless otherwise indicated in context, the term "including" shall mean "including, without limitation". The definition of a term includes the singular, the plural, the past, the present, the future, the active and the passive forms of such term. Section 1.03. Construction. A reference herein to any party to this Agreement or any other agreement or instrument referred to herein includes such party's successors and permitted assigns. A reference herein to any agreement shall be to such agreement (together with any appendix, schedule and exhibit attached thereto) as it may have been, or may hereafter be, amended, restated, supplemented, replaced, substituted, renewed, refinanced, refunded, extended, waived or otherwise modified from time to time in accordance with its terms and, if applicable, this Agreement. A reference herein to any law or other legislation or to any provision of any law or other legislation shall include any amendment, modification or re-enactment thereof, any law or other legislative provision substituted therefor and all regulations, rules and interpretations issued thereunder or pursuant thereto. Section 1.04. Times. All times referred to herein shall be to times in The City of New York. ARTICLE II SECURITY INTERESTS; COLLATERAL Section 2.01. Security Interests. (a) Grant to the Collateral Agent, on Behalf of and for the Benefit of the Revolving Loan Parties. In order to secure the full and punctual payment of, and the performance by the Borrower Parties of, all of the Revolving Credit Facility Indebtedness owing from time to time to the holders thereof, and to secure the performance of all obligations of the Borrower Parties under this Agreement and the other Financing Agreements in respect of Revolving Credit Facility Indebtedness, and subject only to the Grant of the shared first priority Lien and security interest pursuant to Section 2.01(b) in respect of the Noteholder Indebtedness to the extent and on the terms set forth in this Agreement and to such Permitted Prior Liens as may be in effect from time to time, each of the Borrower Parties hereby Grants to the Collateral Agent for itself and on behalf of and for the benefit of holders of the Revolving Credit Facility Indebtedness as their interests specified herein may appear, a continuing shared first priority Lien and security interest on and in all of its right, title and interest in and to the Collateral, whether now owned and existing or hereafter acquired or arising and wherever located. (b) Grant to the Collateral Agent, on Behalf of and for the Benefit of the Noteholder Parties. In order to secure the full and punctual payment of, and the performance by the Borrower Parties of, all of the Noteholder Indebtedness owing from time to time to the holders thereof, and to secure the performance of all obligations of the Borrower Parties under this Agreement and the other Financing Agreements in respect of Noteholder Indebtedness, and subject only to the Grant 6 of the shared first priority Lien and security interest pursuant to Section 2.01(a) in respect of the Revolving Credit Facility Indebtedness to the extent and on the terms set forth in this Agreement and to such Permitted Prior Liens as may be in effect from time to time, each of the Borrower Parties hereby Grants to the Collateral Agent for itself and on behalf of and for the benefit of holders of Noteholder Indebtedness as their interests specified herein may appear, a continuing shared first priority Lien and security interest on and in all of its right, title and interest in and to the Collateral, whether now owned and existing or hereafter acquired or arising and wherever located. (c) Grant to Collateral Agent, on Behalf of and for the Benefit of the Junior Secured Parties. In order to secure the full and punctual payment of, and the performance by the Borrower Parties of, all of the Junior Indebtedness owing from time to time to the holders thereof, and to secure the performance of all obligations of the Borrower Parties under this Agreement and the other Financing Agreements in respect of Junior Indebtedness, and subject only to the Grants of the security interests pursuant to Sections 2.01(a) and 2.01(b) in respect of the Senior Indebtedness to the extent and on the terms set forth in this Agreement and to such Permitted Prior Liens as may be in effect from time to time, each of the Borrower Parties hereby Grants to the Collateral Agent on behalf of and for the benefit of holders of Junior Indebtedness as their interests specified herein may appear, a continuing second priority Lien and security interest on and in all of its right, title and interest in and to the Collateral, whether now owned and existing or hereafter acquired or arising and wherever located, which Lien and security interest are subject to, and junior and subordinated in all respects to, the Security Interests for the benefit of the Senior Secured Parties. (d) Priorities. The Borrower Parties intend, and each of the Collateral Agent and the Secured Parties hereby agrees, that, (i) subject to any Permitted Prior Liens and clause (iii) below, the Security Interests in the Collateral securing the Senior Indebtedness for the benefit of each of the several Senior Secured Parties shall rank equally among themselves (except as provided in this Agreement) and shall be prior to all other Liens in respect of the Collateral, (ii) subject to any Permitted Prior Liens and clause (iii) below, the Security Interest in the Collateral securing the Junior Indebtedness for the benefit of each of the several Junior Secured Parties shall rank equally among themselves and shall be prior to all other Liens in respect of the Collateral other than the Security Interests in the Collateral for the benefit of the Senior Secured Parties, (iii) other than during a Default Period, distributions under this Agreement by the Collateral Agent shall be made in accordance with Sections 4.04, 4.05 and 4.07, and (iv) during a Default Period, distributions under this Agreement by the Collateral Agent shall be made in accordance with Section 4.06. The Borrower Parties shall take all actions (including granting control over investment property) necessary to obtain and maintain, in favor of the Collateral Agent for the benefit of (x) the Senior Secured Parties, shared first Liens on and shared first priority, perfected security interests in the Collateral, subject to no other Liens other than Permitted Prior Liens and (y) the Junior Secured Parties, a second Lien on and a second priority, perfected security interest in the Collateral, subject to no other Liens other than the Liens in favor of the Collateral Agent for the benefit of the Senior Secured Parties and Permitted Prior Liens; provided, however, that Borrower shall not be required (i) to deliver to the Collateral Agent Control Agreements in connection with any Securities Accounts or DDAs which have a balance of $25,000 or less, in the aggregate, or (ii) to take perfection actions with respect to items of Personal Property Collateral that have a value of $100,000 or less, in the 7 aggregate, or to any Oil and Gas Properties which, together with any other Oil and Gas Properties not securing the Secured Obligations, do not at any time have either an aggregate "PV-10" (as that term is defined in the Indenture in effect on the Closing Date) or an aggregate fair market acreage value exceeding $250,000. The Collateral Agent, for the benefit of the Secured Parties, acknowledges the Grants of the Security Interests under this Agreement in accordance with the provisions of this Agreement and the other Security Documents. The Security Interests in the Collateral shall attach to all Collateral without further act on the part of any Secured Party or any Borrower Party. Except as provided herein, no Collateral may be withdrawn by the Collateral Agent or any other Person from any Collateral Agent Account. (e) No Transfer of Duties. The Security Interests are granted as security only and shall not (i) transfer or in any way affect or modify, or relieve the Borrower Parties from, any obligation to perform or satisfy any term, covenant, condition or agreement to be performed or satisfied by the applicable Borrower Party under or in connection with this Agreement or any other Financing Agreement to which it is a party or (ii) impose any obligation on any of the Secured Parties or the Collateral Agent to perform or observe any such term, covenant, condition or agreement or impose any liability on any of the Secured Parties or the Collateral Agent for any act or omission on the part of any of the Borrower Parties relative thereto or for any breach of any representation or warranty on the part of any of the Borrower Parties contained therein or made in connection therewith. (f) Negotiable Collateral. If any Collateral, including any proceeds thereof, is evidenced by or consists of Negotiable Collateral, and if to the extent that perfection or priority of the Security Interests is dependent on or enhanced by possession, each Borrower Party, immediately upon request of the Collateral Agent, shall endorse and deliver physical possession of such Negotiable Collateral to the Collateral Agent. (g) Collection of Accounts, General Intangibles and Negotiable Collateral. At any time during a Default Period, the Collateral Agent or the Collateral Agent's designee may (i) notify Account Debtors of any Borrower Party that the Accounts, chattel paper or General Intangibles have been assigned to the Collateral Agent or that the Collateral Agent has Security Interests therein or (ii) collect the Accounts, chattel paper or General Intangibles directly and charge the collection costs and expenses to the Collateral Account. Each Borrower Party agrees that it will (x) hold in trust for the Secured Parties, as the Secured Parties' trustee, any Collections that it receives, (y) immediately deliver to the Collateral Agent for deposit into the Asset Sale Proceeds Account or the Bridge Loan Asset Sale Proceeds Account, as applicable, all Net Cash Proceeds, all Net Loss Proceeds, and any other Collections (in their original form) in connection with each Asset Sale, Event of Loss or Bridge Loan Asset Sale, as applicable, as received by such Borrower Party at all times other than during a Default Period, and (z) immediately deliver to the Collateral Agent for deposit into the Collateral Account all Net Cash Proceeds, all Net Loss Proceeds and any other Collections (in their original form) as received by such Borrower Party at all times during a Default Period. (h) Delivery of Additional Documentation Required. 8 (i) Each Borrower Party authorizes the Collateral Agent to file any financing statement required hereunder, and any continuation statement or amendment with respect thereto, in any appropriate filing office without the signature of such Borrower Party where permitted by Applicable Law. In addition, each Borrower Party hereby authorizes the Collateral Agent at any time and from time to time to file, one or more financing or continuation statements, fixture filings, and amendments thereto that describe the Collateral as all assets of such Borrower Party or words of similar effect and that contain any other information required by Part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any financing statement, continuation statement, fixture filing or amendment, including whether such Borrower Party is an organization, the type of organization and any organization identification number issued to such Borrower Party. (ii) If any Borrower Party acquires any commercial tort claims after the Closing Date, such Borrower Party shall promptly deliver to the Collateral Agent a written description of such commercial tort claim and, upon request of the Collateral Agent, shall deliver a written agreement, in form and substance reasonably satisfactory to the Collateral Agent, pursuant to which such Borrower Party shall pledge and collaterally assign all of its right, title and interest in and to such commercial tort claim to the Collateral Agent as security for the Secured Obligations (each, a "Commercial Tort Claim Assignment"). (iii) At any time upon the request of the Collateral Agent, each Borrower Party shall execute and deliver to the Collateral Agent any and all financing statements, original financing statements in lieu of continuation statements, amendments to financing statements, fixture filings, security agreements, pledges, assignments, Commercial Tort Claim Assignments, endorsements of certificates of title and all other documents (collectively, the "Additional Documents") that the Collateral Agent may request, each in form and substance reasonably satisfactory to the Collateral Agent, to create and perfect and continue perfected or better perfect the Security Interests in the Collateral (whether now owned or hereafter acquired, tangible or intangible, or real or personal), and in order to fully consummate all of the transactions contemplated by this Agreement and the other Financing Agreements. (iv) To the maximum extent permitted by Applicable Law, each Borrower Party authorizes the Collateral Agent to execute any such Additional Documents in such Borrower Party's name and authorizes the Collateral Agent to file such executed Additional Documents in any appropriate filing office. To the maximum extent permitted by Applicable Law, each Borrower Party authorizes the filing of any Additional Documents without the signature of such Borrower Party in any appropriate filing office. The Collateral Agent will promptly provide the Borrower or the applicable Guarantor with a copy of any Additional Documents. Any Agent, in its reasonable discretion, may direct the Collateral Agent to request, execute and file any such Additional Documents. (v) In addition, if any Borrower Party at any time acquires or otherwise owns any property or asset of the kind included in the Collateral that is not subject to valid and enforceable Liens in favor of the Collateral Agent as security for the Secured Obligations, then such Borrower Party will be required 9 to, as soon as practicable (but in any event within 15 days with respect to clause (A) below, and within 30 days with respect to clause (B) below, of the earlier of such acquisition or of the day an officer of such Borrower Party has knowledge or should have reasonably known of any such deficiency with respect to any such property or asset): (A) execute and deliver to the Collateral Agent one or more joinder agreements to the applicable Security Documents and any Additional Documents requested by the Collateral Agent, each in form and substance reasonably satisfactory to the Collateral Agent, required to grant security interests in such Collateral in favor of the Collateral Agent for the benefit of the holders of the Secured Obligations, and deliver to the Collateral Agent one or more opinions of counsel reasonably satisfactory to the Collateral Agent with respect to the matters set forth in this clause (A) consistent with the opinions delivered on the Closing Date; and (B) cause the Liens granted in each Security Document to be duly perfected first and second priority security interests (subject to Permitted Prior Liens) in favor of the Collateral Agent, including by pledging any capital stock constituting such Collateral as appropriate, and cause each other Lien upon such Collateral to be (x) released, unless it is a Permitted Prior Lien, or (y) subordinated, whether by agreement or operation of law, to the Security Interests for the benefit of holders of the Secured Obligations if it is a Permitted Lien but not a Permitted Prior Lien, and deliver to the Collateral Agent one or more opinions of counsel reasonably satisfactory to the Collateral Agent with respect to lien perfection matters set forth in this clause (B) consistent with the opinions delivered on the Closing Date. (vi) The Borrower shall deliver to the Collateral Agent and each Agent, within 30 calendar days following the end of each calendar year beginning on January 1, 2005, an Officers' Certificate, or, if requested by the Collateral Agent, one or more opinions of counsel reasonably satisfactory to the Collateral Agent, to the effect that no Additional Documents are required to be executed or filed in order to duly perfect (and to maintain the perfection of) the Securities Interests as contemplated by this Agreement. (i) Power of Attorney. Each Borrower Party hereby irrevocably makes, constitutes, and appoints the Collateral Agent (and any of the Collateral Agent's officers, employees or agents designated by the Collateral Agent) as such Borrower Party's true and lawful attorney, with power to (i) if such Borrower Party refuses to, or fails timely to promptly execute and deliver any of the documents described in Section 2.01(h), sign the name of such Borrower Party on any of the documents described in Section 2.01(h), (ii) at any time that an Event of Default has occurred and is continuing, sign such Borrower Party's name on any invoice or bill of lading relating to the Collateral, draft against Account Debtors or notice of Account Debtors, (iii) send requests for verification of Accounts, (iv) endorse such Borrower Party's name on any Collection item that may come into the Secured Parties' possession, (v) any time that an Event of Default has occurred and is continuing, make, settle and adjust all claims under such Borrower Party's policies of insurance and make all determinations and decisions with respect to such policies of insurance and (vi) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts, chattel paper or General Intangibles directly with Account Debtors, for amounts and upon terms that the Collateral Agent determines to be reasonable, and the Collateral Agent may cause to be executed and delivered any documents and releases that the Collateral Agent determines to be necessary. The appointment of the Collateral Agent as 10 such Borrower Party's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Secured Obligations have been fully and finally repaid and performed and, to the extent applicable, the Secured Parties' obligations to extend credit thereunder are terminated. Notwithstanding the foregoing sentence, if at any time or times after the Final Termination Date, any Secured Party shall be required to repay any amount previously paid by or on behalf of the Borrower Parties by virtue of an order of any court having jurisdiction in the premises, including as a result of an adjudication that such amounts constituted preferential payments or fraudulent conveyances, then the power of attorney granted by this Section 2.01(i) shall be reinstated. (j) Right to Inspect. The Collateral Agent and each Secured Party (through any of their respective officers, employees or agents) shall have the right, upon notice to the Borrower, which notice shall not be required upon the occurrence and during the continuation of an Event of Default, from time to time hereafter to inspect the Books and to check, to test and appraise the Collateral and to review the Oil and Gas Properties of the Borrower Parties in order to verify any Borrower Party's financial condition or the amount, quality, value or condition of, or any other matter relating to, the Collateral. (k) Control Agreements. Each Borrower Party agrees that it will not transfer assets out of any Securities Accounts or DDA to another bank, other financial institution or securities intermediary, as applicable, unless each such Borrower Party, the Collateral Agent, and the substitute bank, other financial institution or securities intermediary have entered into a Control Agreement. Each Borrower Party hereby agrees to take any and all action that the Collateral Agent requests in order for the Collateral Agent to obtain control in accordance with the UCC, including Sections 9-104, 9-105, 9-106 and 9-107 of the UCC, as applicable, with respect to any Securities Accounts or other Investment Property, or any DDA, chattel paper or letter-of-credit rights. No arrangements contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other Investment Property, or any DDA, chattel paper or letter-of-credit rights shall be modified by any Borrower Party without the prior written consent of the Collateral Agent. During a Default Period, the Collateral Agent may notify any bank, other financial institution, securities intermediary or depository to liquidate the applicable Securities Account or DDA, or any Investment Property maintained or held thereby, and to remit the proceeds of the Securities Account or DDA to the Collateral Account. Notwithstanding anything to the contrary herein, the Secured Parties agree that the Borrower Parties shall not be required to deliver to the Collateral Agent Control Agreements in connection with any Securities Accounts or DDAs which have a balance of $25,000 or less, in the aggregate. Section 2.02. Sales and Dispositions of Collateral Without Release or Consent. (a) The Borrower Parties shall effect sales and other dispositions of Collateral, including Asset Sales, in strict accordance with the provisions of this Agreement, each of the other Financing Agreements and the Trust Indenture Act. (b) Subject to Section 2.03, the Borrower Parties may, to the extent permitted by Applicable Law, without any release or consent by the Collateral Agent, conduct ordinary course activities with respect to their properties, including the following activities, so long as they do not constitute Asset Sales and otherwise comply with the terms of this Agreement, each of the other Financing Agreements and the Trust Indenture Act: 11 (i) disposing of items of equipment and other assets included in the Collateral that have become worn out, defective or obsolete or not used or useful in the business of the applicable Borrower Party and which are, to the extent required by this Agreement or the other Security Documents, replaced by property of substantially equivalent or greater value which becomes subject to the Security Interests; (ii) selling, leasing or abandoning (A) any undeveloped oil and gas property subject to the Security Interests or (B) any other oil and gas property subject to the Security Interests, in each case of clauses (A) and (B), that is not capable of production in economic quantities; (iii) terminating, canceling, amending or otherwise modifying any contract subject to the Security Interests; (iv) surrendering or modifying any license or permit subject to the Security Interests; (v) altering, repairing, replacing, changing the location and position of and adding to the structures, equipment, fixtures and appurtenances on any property subject to the Security Interests; or (vi) selling hydrocarbons or other mineral products for value; provided, however, that, in each case, (x) no Event of Default and no "default" under any of the Financing Agreement has occurred and is continuing, (y) no Event of Default and no "default" under any of the Financing Agreements would result from any of the foregoing activities, individually or in the aggregate, which is proposed to be undertaken, and (z) any of the foregoing activities, individually or in the aggregate, which is proposed to be undertaken would not violate this Agreement and the other Security Documents. (c) The Borrower shall deliver to the Collateral Agent and each Agent, within 30 calendar days following the end of each six-month period beginning on December 1, 2004, an Officers' Certificate to the effect that all releases and withdrawals during the preceding six-month period with respect to which no release or consent of the Collateral Agent was obtained were in the ordinary course of the business of the Borrower Parties and were permitted by this Agreement, the other Financing Agreements and the Trust Indenture Act. Section 2.03. Assets Sales; Release of Affected Assets. (a) If a Borrower Party will be requesting that the Collateral Agent execute and deliver a Release, then, at least ten (10) Business Days prior to the date of the Authorized Asset Disposition to which such request relates, the Borrower and the applicable Borrower Party (if not the Borrower) shall deliver to the Collateral Agent and each Agent, a duly executed Authorized Asset Disposition Certificate in respect of such Authorized Asset Disposition, 12 indicating the Affected Assets subject to such Authorized Asset Disposition, and specifying the anticipated consummation date of such Authorized Asset Disposition, as applicable (the "Release Date"). (b) Subject to Section 2.03(c), following receipt by the Collateral Agent of an Authorized Asset Disposition Certificate from a Borrower Party, the Collateral Agent shall execute and deliver on or before the Release Date (subject to consummation of such Authorized Asset Disposition) such instruments of release from the Security Interests as the Borrower may reasonably request to effectuate the release of the Affected Assets (each, a "Release"), and any such Release so executed and delivered shall be fully binding on the Secured Parties and the Collateral Agent; provided, however, that the Collateral Agent shall not release any Collateral pursuant to this Section 2.03(b) if, prior to the Release Date, any Agent shall have delivered written notice to the Collateral Agent (with a copy to the Borrower) that the release of such Collateral is not in compliance in any material respect with the Financing Agreements to which such Agent is a party and until such notice is rescinded or withdrawn in writing by such Agent; provided, further, that none of the Secured Parties or the Collateral Agent shall be required to make any representations or warranties with respect to such release, and all such releases shall be made without recourse to any Secured Party or the Collateral Agent. (c) During a Default Period, the Collateral Agent shall not release any Collateral from the Security Interests, except for value in connection with the Collateral Agent's exercise of right and remedies under this Agreement and the other Financing Agreements. If instructed by the Control Party during a Default Period in accordance with this Agreement, the Collateral Agent shall execute and deliver such instruments as the Control Party may reasonably request to effectuate the sale of Collateral and the release of such Collateral so sold from the Security Interests, and any such instruments so executed and delivered shall be fully binding on the Borrower Parties, the Secured Parties and the Collateral Agent; provided, however, that none of the Secured Parties or the Collateral Agent shall be required to make any representations or warranties with respect to such sale and release, and all such sales and releases shall be made without recourse to any Secured Party or the Collateral Agent. Section 2.04. Termination of Security Interests. On the Final Termination Date, the Security Interests and the rights, remedies, powers, duties, authority and obligations conferred upon the Secured Parties and the Collateral Agent pursuant to this Agreement shall terminate and be of no further force and effect and all rights, remedies, powers, duties, authority and obligations of the Secured Parties and the Collateral Agent with respect to the Collateral shall be automatically released in favor of the Borrower Parties; provided, however, that each of the Secured Parties and the Collateral Agent, if requested in writing by the Borrower and at Borrower's expense, shall execute and deliver such instruments of release in favor of the Borrower Parties as the Borrower may reasonably request to effectuate such release, and any such instruments so executed and delivered shall be fully binding on the Secured Parties and the Collateral Agent; provided, further, however, that none of the Secured Parties or the Collateral Agent shall be required to make any representations or warranties with respect to such release, and all such releases shall be made without recourse to any Secured Party or the Collateral Agent. Section 2.05. No Alteration of Priority. The Lien and Security Interest priorities provided in this Article II shall not be altered or otherwise affected by any amendment, restatement, supplement, replacement, substitution, 13 renewal, refinancing, refunding, extension or other modification of the other Financing Agreements, nor by the time, order, method of attachment of the Security Interests upon any of the Collateral, nor by the time or order of filing or recording of financing statements or other documents to perfect any Security Interests in the Collateral, nor by the time of taking of possession or control over any Collateral, nor by the rules for determining priority under the UCC or any other Applicable Law governing the relative priorities of secured creditors, nor by any other action or inaction which any Agent or Secured Party may take or fail to take in respect of the Collateral. Each of the Secured Parties consents to the Borrower Parties' Granting to each other Secured Party the Liens and Security Interests provided for in this Article II. Section 2.06. Marshaling. None of the Secured Parties or the Collateral Agent shall be under any obligation to marshal any assets in favor of any Borrower Party or any other party or against or in payment of any or all of the Secured Obligations. Section 2.07. Maintenance of Properties. Each Borrower Party shall (i) maintain and preserve all of its properties which are necessary or useful in the proper conduct to its business in good working order and condition, ordinary wear and tear excepted, (ii) comply at all times with the Financing Agreements and the provisions of all leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder, (iii) cause to be done all things necessary to preserve and keep in good repair, working order and efficiency all the Oil and Gas Properties of such Borrower Party and other material assets including, without limitation, all equipment, machinery, facilities, and marketing, gathering, transportation and processing assets and (iv) from time to time, will make all the reasonably necessary repairs, renewals and replacements so that at all times the state and conditions of such Oil and Gas Properties and other material assets will be fully preserved and maintained, except to the extent a portion of such assets is no longer capable of producing Hydrocarbons in economically reasonable amounts. Section 2.08. Negative Covenants. Each Borrower Party covenants and agrees that, until the Final Termination Date, such Borrower Party will not do any of the following: (a) Change Name. Change any Borrower Party's name, organizational identification number, state of incorporation, FEIN, corporate structure, or identity, or add any new fictitious name; provided, however, that any Borrower Party may change its name upon at least 30 days' prior written notice to the Collateral Agent of such change and so long as, at the time of such written notification, such Borrower Party provides and files in the appropriate filing offices any financing statements or fixture filings necessary to perfect and continue perfected the Security Interests. (b) Change in Location of Chief Executive Office; Equipment with Bailees. Relocate its chief executive office to a new location without providing 30 days' prior written notification thereof to the Collateral Agent and so long as, at the time of such written notification, each Borrower Party provides and files in the appropriate filing offices any financing statements or fixture filings necessary to perfect and continue perfected the Security Interests and also provides to the Collateral Agent a Collateral Access Agreement with respect to such new location. The Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without appropriate actions 14 being taken to continue the perfection of the Security Interests in such equipment. ARTICLE III LEGENDS Section 3.01. Legends. (a) The Trustee and each Borrower Party will cause each Noteholder Document and any other instrument or agreement hereafter evidencing or guarantying any Noteholder Indebtedness to be indorsed with substantially the following legend: The indebtedness evidenced by this document is subject to the provisions of the Intercreditor, Security and Collateral Agency Agreement, dated as of October 28, 2004, among ABRAXAS PETROLEUM CORPORATION (the "Company"), the subsidiaries of the Company listed on Schedule I thereto, WELLS FARGO FOOTHILL, INC., in its capacity as agent for the lenders who are from time to time parties to a Loan Agreement dated as of October 28, 2004, U.S. BANK NATIONAL ASSOCIATION, in its capacities as trustee for the holders of the Company's Floating Rate Senior Secured Notes due 2009 issued under an Indenture dated as of October 28, 2004, and as collateral agent, and GUGGENHEIM CORPORATE FUNDING, LLC, in its capacity as agent for the lenders who are from time to time parties to a Loan Agreement dated as of October 28, 2004. (b) The Bridge Loan Administrative Agent and each Borrower Party will cause each Junior Document and any other instrument or agreement hereafter evidencing or guarantying any Junior Indebtedness to be indorsed with substantially the following legend: The indebtedness evidenced by this document is subordinated to the prior payment in full of the Senior Indebtedness (as defined in the Intercreditor, Security and Collateral Agency Agreement hereinafter referred to) pursuant to, and to the extent provided in, the Intercreditor, Security and Collateral Agency Agreement, dated as of October 28, 2004, among ABRAXAS PETROLEUM CORPORATION (the "Company"), the subsidiaries of the Company listed on Schedule I thereto, WELLS FARGO FOOTHILL, INC., in its capacity as agent for the lenders who are from time to time parties to a Loan Agreement dated as of October 28, 2004, U.S. BANK NATIONAL ASSOCIATION, in its capacities as trustee for the holders of the Company's Floating Rate Senior Secured Notes due 2009 issued under an Indenture dated as of October 28, 2004, and as collateral agent, and GUGGENHEIM CORPORATE FUNDING, LLC, in its capacity as agent for the lenders who are from time to time parties to a Loan Agreement dated as of October 28, 2004. (c) The Trustee, Junior Secured Parties and the Borrower Parties will (i) mark their books or accounts or take such other action as shall be effective to give reasonable notice of the effect of this Agreement and (ii) in the case of any Junior Indebtedness which is not evidenced by any instrument, upon the request of the Collateral Agent or any Senior Secured Party, cause such Junior Indebtedness to be evidenced by an appropriate instrument or instruments indorsed with the above legend. The Secured Parties and the Borrower Parties will, at the Borrower Parties' expense and at any time and from time to time, promptly execute and deliver all further instruments and other documents, and take all further action, that may be necessary or, in the opinion of the Collateral Agent or any Agent, desirable, in order to protect any right or 15 interest granted or purported to be granted hereby or by any other Security Document or to enable the Secured Parties to exercise and enforce their rights and remedies hereunder and thereunder. ARTICLE IV COLLATERAL AGENT ACCOUNTS Section 4.01. Establishment of the Collateral Agent Accounts. (a) On or prior to the execution and delivery of this Agreement, the Collateral Agent shall establish segregated demand deposit accounts, designated as: (i) the "Asset Sale Proceeds Account -- U.S. Bank, as Collateral Agent for the Abraxas Petroleum Corporation Secured Financing" (the "Asset Sale Proceeds Account"); (ii) the "Bridge Loan Asset Sale Proceeds Account -- U.S. Bank, as Collateral Agent for the Abraxas Petroleum Corporation Secured Financing" (the "Bridge Loan Asset Sale Proceeds Account"); and (iii) the "Collateral Account -- U.S. Bank, as Collateral Agent for the Abraxas Petroleum Corporation Secured Financing" (the "Collateral Account", and together with the Asset Sale Proceeds Account and the Bridge Loan Asset Sale Proceeds Account, the "Collateral Agent Accounts"). The Collateral Agent shall have sole control and dominion and the sole right of withdrawal over the Collateral Agent Accounts. The Collateral Agent Accounts and all balances on deposit therein, or otherwise to the credit thereof, shall be held by the Collateral Agent as provided in this Article IV. Funds in each Collateral Agent Account shall not be commingled with any other moneys. (b) Except as provided in this Agreement, the Collateral Agent shall make no withdrawal from or application of funds on deposit in, or otherwise to the credit of, any Collateral Agent Account. The Collateral Agent agrees to give the Borrower and the Agents notice as promptly as practicable if, to the actual knowledge of a Responsible Officer of the Collateral Agent, any Collateral Agent Account or any funds on deposit therein, or otherwise to the credit of the Collateral Agent Account, shall become subject to any writ, order, judgment, warrant of attachment, execution or similar process. Neither the Borrower Parties nor any other Person (other than the Collateral Agent on behalf of the Secured Parties) shall have any legal, equitable or beneficial interest in any Collateral Agent Account, except as provided in this Agreement. (c) The Collateral Agent and the Secured Parties hereby (i) acknowledge and agree to the terms of subordination and distribution provisions set forth in this Agreement and (ii) agree to enforce such provisions and cause all payments in respect of the Secured Obligations to be applied in accordance with the terms of this Agreement. (d) All payments to be made by the Collateral Agent hereunder shall be made only from amounts available in the applicable Collateral Agent Account. Each of the Secured Parties hereby agrees to look solely to such amounts to the extent available for distribution to it as provided in this Agreement, and that the Collateral Agent is not personally liable to any of them for any amounts payable or any liability under this Agreement or any other Financing Agreement, except (in the case of the Collateral Agent) as expressly provided herein. 16 Notwithstanding anything to the contrary contained in this Agreement, the Borrower Parties shall remain liable to the Collateral Agent and the Secured Parties for any deficiency. (e) Funds on deposit in each Collateral Agent Account shall be invested and reinvested by the Collateral Agent in Eligible Investments in accordance with written instructions of (i) at all times following and during the continuation of an Event of Default, the Control Party and (ii) at all other times, the Borrower. In the absence of written directions to the Collateral Agent, the funds shall be invested in investments described in clause (f) of the definition of Eligible Investments. Any investment earnings shall be deposited in the applicable Collateral Agent Account when received by the Collateral Agent and shall be applied by the Collateral Agent in the same manner as the other amounts on deposit in such Collateral Agent Account are to be applied. The Collateral Agent's reasonable fees and expenses in making such investments and any losses incurred in such investments shall be charged against the principal amount invested. The Collateral Agent shall not be liable for any loss resulting from any investment, reinvestment or liquidation required to be made under this Agreement other than by reason of its willful misconduct or gross negligence. Eligible Investments and any other investment required to be made hereunder shall be held to their maturities except that any such investment may be sold (without regard to its maturity) by the Collateral Agent without instructions whenever such sale is necessary to make a distribution required under this Agreement. Uninvested funds held hereunder shall not earn or accrue interest. Section 4.02. Funding of Asset Sale Proceeds Account and Bridge Loan Asset Sale Proceeds Account. (a) At all times other than during a Default Period, (i) the Borrower Parties agree that they will pay over to the Collateral Agent, for deposit in the Asset Sale Proceeds Account, all Net Cash Proceeds, all Net Loss Proceeds and any other Collections (in their original form) as received by such Borrower Party in connection with an Asset Sale or Event of Loss, as applicable, in each case immediately upon receipt thereof, and (ii) the Secured Parties agree that they will pay over to the Collateral Agent, for deposit in the Asset Sale Proceeds Account, all Net Cash Proceeds, all Net Loss Proceeds and any other Collections (in their original form) in connection with an Asset Sale or Event of Loss, as applicable, as received by such Secured Party, in each case, promptly following receipt thereof to the extent such amounts were not received from the Collateral Agent pursuant to the distribution provisions set forth in this Agreement. (b) At all times other than during a Default Period, (i) the Borrower Parties agree that they will pay over to the Collateral Agent, for deposit in the Bridge Loan Asset Sale Proceeds Account, all Net Cash Proceeds and any other Collections (in its original form) as received by such Borrower Party in connection with a Bridge Loan Asset Sale, in each case immediately upon receipt thereof, and (ii) the Secured Parties agree that they will pay over to the Collateral Agent, for deposit in the Bridge Loan Asset Sale Proceeds Account, all Net Cash Proceeds and any other Collections (in their original form) in connection with a Bridge Loan Asset Sale as received by such Secured Party, in each case, promptly following receipt thereof to the extent such amounts were not received from the Collateral Agent pursuant to the distribution provisions set forth in this Agreement. Upon receipt of funds in the Bridge Loan Asset Sale 17 Proceeds Account and from time to time thereafter, the Collateral Agent shall deliver Collateral Agent Notices to the Agents as provided in Section 4.05. (c) Notwithstanding anything to the contrary contained in this Agreement or any other Financing Agreements, all cash proceeds and other consideration, including Net Cash Proceeds, received by any Borrower Party, any Secured Party or the Collateral Agent in respect of any issuance, sale or other disposition of any Grey Wolf Capital Stock, whether or not such disposition constitutes an Asset Sale, will be required to be applied exclusively to the repayment of any Junior Indebtedness then outstanding. Section 4.03. Funding of Collateral Account. (a) At all times during a Default Period, but subject to Sections 4.02(c) (it being understood that Grey Wolf Capital Stock and proceeds thereof are not included in the Collateral) and 4.03(b), (i) the Borrower Parties agree that they will pay over to the Collateral Agent, for deposit in the Collateral Account, all Net Cash Proceeds, all Net Loss Proceeds and any other Collections (in their original form) as received by such Borrower Party in connection with any sale, disposition or loss of Collateral, including an Authorized Asset Disposition or Event of Loss, in each case immediately upon receipt thereof, (ii) the Borrower Parties agree to make all cash payments with respect to the Secured Obligations promptly to the Collateral Agent for deposit in the Collateral Account, and (iii) the Secured Parties agree that they will pay over to the Collateral Agent for deposit in the Collateral Account any proceeds of the Collateral, including any Net Cash Proceeds, Net Loss Proceeds and any other Collections (in their original form) as received by such Secured Party, in each case, promptly following receipt thereof to the extent such amounts were not received from the Collateral Agent pursuant to the distribution provisions set forth in this Agreement. In addition, all amounts received by the Collateral Agent and the Agents in connection with the exercise of remedies under this Agreement and the other Financing Agreements shall be promptly deposited in the Collateral Account. Upon receipt of funds in the Collateral Account and from time to time thereafter, the Collateral Agent shall deliver Collateral Agent Notices to the Agents as provided in Section 4.06. (b) Notwithstanding anything to the contrary contained in this Agreement or any other Financing Agreements, (i) Section 4.03(a) shall not apply to (x) any proceeds to be paid to any Secured Party in respect of any Secured Obligations out of the proceeds of any refinancing of such Secured Obligations permitted in accordance with Section 7.05, or (y) any proceeds to be paid to any Secured Party in respect of Secured Obligations existing prior to the commencement of a Bankruptcy Case out of the proceeds of any DIP Financing to the extent such payment is approved by the court having jurisdiction in such Bankruptcy Case, and (ii) a Default Period shall be deemed not to have occurred or exist if (x) holders of Junior Indebtedness are no longer prohibited by Section 7.01 from receiving any payments with respect to the Junior Indebtedness and (y) the only Event of Default then existing is an Event of Default resulting from the failure to make any payment with respect to Junior Indebtedness. 18 Section 4.04. Distribution of Amounts on Deposit in Asset Sale Proceeds Account and Bridge Loan Asset Sale Proceeds Account. (a) At all times other than during a Default Period, (i) funds in the Asset Sale Proceeds Account shall be distributed by the Collateral Agent from time to time to the Person or Persons entitled thereto following delivery by the Borrower of an Authorized Asset Proceeds Release Certificate, which certificate shall be delivered to the Collateral Agent (with a copy each Agent) not less than (5) Business Days prior to such distribution, and (ii) funds in the Bridge Loan Asset Sale Proceeds Account shall be distributed by the Collateral Agent from time to time to the Person or Persons entitled thereto as provided in Section 4.05; provided, however, that if an Asset Sale, Bridge Loan Sale or Event of Loss giving rise to Net Cash Proceeds or Net Loss Proceeds results in the Revolving Credit Facility Indebtedness being in excess of the Availability (as that term is defined in the Revolving Credit Facility in effect on the Closing Date), the Collateral Agent shall promptly distribute to the Revolving Credit Facility Administrative Agent, for the benefit of the Revolving Lenders, an amount equal to such excess from such Net Cash Proceeds or Net Loss Proceeds to the extent available; provided, further, that the Collateral Agent shall not release any funds pursuant to this Section 4.04 if any Agent shall have delivered written notice to the Collateral Agent (with a copy to the Borrower) that the release of such funds is not in compliance in any material respect with the Financing Agreements to which such Agent is a party and until such notice is rescinded or withdrawn in writing by such Agent. Except as expressly permitted by Sections 4.02(c) (to the extent that any proceeds of Grey Wolf Capital Stock are deposited in any such account, it being understood that Grey Wolf Capital Stock and proceeds thereof are not included in the Collateral) and 4.04(b), no funds shall be released, withdrawn or transferred from the Asset Sale Proceeds Account or the Bridge Loan Asset Sale Proceeds Account during a Default Period. (b) Promptly following the commencement of a Default Period, the Collateral Agent shall transfer into the Collateral Account all of the funds then on deposit in the Asset Sale Proceeds Account and the Bridge Loan Asset Sale Proceeds Account. (c) No Borrower Party shall deliver an Authorized Asset Proceeds Release Certificate at any time following the occurrence and during the continuation of an Event of Default. Section 4.05. Distribution of Amounts on Deposit in Bridge Loan Asset Proceeds Account. (a) No later than 3:00 P.M. on the fifth (5th) Business Day after receipt by an Agent of written notice (a "Collateral Agent Notice") from the Collateral Agent from time to time (a "Receipt of Notice Day"), each of the following Persons shall deliver to the Collateral Agent a written notice setting forth the following information as at the close of business on the applicable Receipt of Notice Day: (i) With respect to the Revolving Credit Facility Documents, if any amount thereunder is outstanding, the Revolving Credit Facility Administrative Agent shall separately set forth the amounts to be paid (including a per diem calculation) in accordance with clauses "first", "third" and "fourth" of Section 4.05(b); 19 (ii) With respect to the Noteholder Documents, if any are then outstanding, the Trustee shall separately set forth the amounts to be paid in accordance with clauses "second" and "fifth" of Section 4.05(b); and (iii) With respect to the Junior Documents, if any amount thereunder is outstanding, the Bridge Loan Administrative Agent shall separately set forth the amounts to be paid in accordance with clauses "sixth" and "seventh" of Section 4.05(b). Each Collateral Agent Notice shall set forth the amount to be paid to the Collateral Agent and each Agent as of the day of such notice prior to distribution of Net Cash Proceeds pursuant to Section 4.05(b). A Collateral Agent Notice delivered pursuant this Section 4.05 shall state that such notice is being delivered pursuant to this Section 4.05. (b) All Net Cash Proceeds from a Bridge Loan Asset Sale shall be distributed by the Collateral Agent from time to time promptly following such Bridge Loan Asset Sale in the following order of priority, to the extent available: first, such amount as shall be required to pay the Revolving Credit Facility Administrative Agent, for the benefit of the Revolving Lenders, all interest then due and payable under the Revolving Credit Facility Documents until such amount shall have been paid in full; second, such amount as shall be required to pay the Trustee, for the benefit of the Noteholders, all interest then due and payable under the Noteholder Documents until such amount shall have been paid in full; third, such amount as shall be required to pay the Revolving Credit Facility Administrative Agent, for the benefit of the Revolving Lenders, all accrued and unpaid interest under the Revolving Credit Facility Documents that was not paid under clause "first" of this paragraph until such amount shall have been paid in full; fourth, such amount as shall be required to pay the Revolving Credit Facility Administrative Agent, for the benefit of the Revolving Lenders, for all principal outstanding under the Revolving Credit Facility Documents until such amount shall have been paid in full; fifth, if the amount of such Net Cash Proceeds remaining after any payment made pursuant to clause "first," "second," "third" or "fourth" of this paragraph, together with any Net Cash Proceeds in the Bridge Loan Asset Sale Proceeds Account from previous Bridge Loan Asset Sales, exceeds $5,000,000, such aggregate amount of Net Cash Proceeds shall be used to make a Net Proceeds Offer as if such aggregate amount of Net Cash Proceeds are "Excess Proceeds" within the meaning of the Indenture (and if such aggregate amount of Net Cash Proceeds does not exceed $5,000,000, the amount of Net Cash Proceeds from such Bridge Loan Asset Sale remaining after payments made pursuant to clause "first," "second," "third" and "fourth" of this paragraph shall be deposited into the Bridge Loan Asset Sale Proceeds Account; 20 sixth, after the payment of all amounts required by a Net Proceeds Offer made in accordance with clause "fifth" of this paragraph, such amount as shall be required to pay the Bridge Loan Administrative Agent, for the benefit of the Bridge Lenders, all accrued and unpaid interest under the Junior Documents until such amount shall have been paid in full; seventh, such amount as shall be required to pay the Bridge Loan Administrative Agent, for the benefit of the Bridge Lenders, for all principal outstanding under the Junior Documents until such amount shall have been paid in full; and eighth, such other amounts as shall be required to pay each of the Secured Parties for all other amounts outstanding under the Secured Documents until the Secured Obligations shall have been paid in full, pro rata on the basis of all such amounts. For the purposes of the foregoing, "paid in full" means, with reference to any amounts or obligations owing under the Financing Agreements, payment of all such amounts or obligations owing under such Financing Agreements in accordance with the terms thereof (which may include the cash collateralization of any contingent obligations), including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Bankruptcy Case), default interest, interest on interest, and expense reimbursements, except to the extent that default or overdue interest (but not any other interest) and loan fees, each arising from or related to a default, are disallowed in any Bankruptcy Case. (c) To the extent there exists any excess monies or property in the Bridge Loan Asset Proceeds Account after the Final Termination Date, the Collateral Agent shall return such excess amounts to the Borrower. (d) In the event the Collateral Agent shall not receive from any Person any information set forth in Section 4.05(a) that is required to enable the Collateral Agent to make a distribution to such Person pursuant to Section 4.05(b), the Collateral Agent shall not make such distribution to such Person. In such event, the Collateral Agent shall make distributions pursuant to other clauses of Section 4.05(b) to the extent it shall have sufficient information to enable it to make such distributions, and shall continue to hold any funds remaining, after making such distributions, until the Collateral Agent shall receive all necessary information to enable it to distribute any funds so withheld, and upon receipt of the information necessary to distribute any funds so withheld, the Collateral Agent shall distribute such funds accordingly. Section 4.06. Distribution of Amounts on Deposit in Collateral Account During Default Period. (a) No later than 3:00 P.M. on the fifth (5th) Business Day after receipt by an Agent of a Collateral Agent Notice from the Collateral Agent from time to time, each of the following Persons shall deliver to the Collateral Agent a written notice setting forth the following information as at the close of business on the applicable Receipt of Notice Day: (i) Each Agent shall set forth the amounts to be paid to such Person in accordance with clause "second" and "third" of Section 4.06(b); 21 (ii) With respect to the Revolving Credit Facility Documents, if any amount thereunder is outstanding, the Revolving Credit Facility Administrative Agent shall separately set forth the amounts to be paid (including a per diem calculation) in accordance with clauses "fourth" and "sixth" of Section 4.06(b); (iii) With respect to the Noteholder Documents, if any are then outstanding, the Trustee shall separately set forth the amounts to be paid in accordance with clauses "fifth", "seventh" and "eighth" of Section 4.06(b); and (iv) With respect to the Junior Documents, if any amount thereunder is outstanding, the Bridge Loan Administrative Agent shall separately set forth the amounts to be paid in accordance with clauses "ninth" and "tenth" of Section 4.06(b). Each Collateral Agent Notice shall set forth the amount to be paid to the Collateral Agent as of the day of such notice in accordance with clause "first" of Section 4.06(b). (b) During a Default Period, all funds in the Collateral Account shall be distributed by the Collateral Agent from time to time, and in any event upon the earlier of (i) the first Business Day of each calendar month and (ii) promptly following such time as the aggregate amount of such funds in the Collateral Account shall exceed $250,000, in the following order of priority: first, such amount as shall be required to reimburse the Collateral Agent for any reasonable out-of-pocket costs and expenses actually incurred by it (to the extent not previously reimbursed) in the protection of, or the realization of the value of, any Collateral, shall be applied by the Collateral Agent in reimbursement of such costs and expenses; second, such amount as shall be required to reimburse the following amounts to the indicated Party to the extent such costs and expenses were incurred while the indicated Party was the Control Party, in each such case pro rata on the basis of all such amounts: (i) the Revolving Credit Facility Administrative Agent for any reasonable out-of-pocket costs and expenses actually incurred by it (to the extent not previously reimbursed) in the protection of, or the realization of the value of, any Collateral, shall be distributed to the Revolving Credit Facility Administrative Agent; (ii) the Trustee for any reasonable out-of-pocket costs and expenses actually incurred by it (to the extent not previously reimbursed) in the protection of, or the realization of the value of, any Collateral, shall be distributed to the Trustee; and (iii) the Bridge Loan Administrative Agent for any reasonable out-of-pocket costs and expenses actually incurred by it (to the extent not previously reimbursed) in the protection of, or the realization of the value of, any Collateral, shall be distributed to the Bridge Loan Administrative Agent; 22 third, such amount as shall be required to reimburse the following amounts to the indicated Party to the extent such costs and expenses were incurred while the indicated Party was not the Control Party, in each such case pro rata on the basis of all such amounts: (i) the Revolving Credit Facility Administrative Agent for any reasonable out-of-pocket costs and expenses actually incurred by it (to the extent not previously reimbursed) in the protection of, or the realization of the value of, any Collateral, shall be distributed to the Revolving Credit Facility Administrative Agent; (ii) the Trustee for any reasonable out-of-pocket costs and expenses actually incurred by it (to the extent not previously reimbursed) in the protection of, or the realization of the value of, any Collateral, shall be distributed to the Trustee; and (iii) any Revolving Lender, Noteholder or Bridge Lender for payments, if any, made by such Person to the Collateral Agent or any of the Agents (to the extent not previously reimbursed) in the protection of, or the realization of the value of, any Collateral, shall be distributed to the applicable Agent for the account of such Noteholder, Revolving Lender or Bridge Lender, as the case may be; provided, that no Person shall be entitled to payment pursuant to this clause -------- (iii) to the extent such payments were made to Collateral Agent or any of the Agents with respect to costs and expenses incurred while such Person was not a member of the Secured Party that was the Control Party; fourth, such amount as shall be required to pay the Revolving Credit Facility Administrative Agent, for the benefit of the Revolving Lenders, all accrued and unpaid interest, and thereafter, commitment fees, under the Revolving Credit Facility Documents (at the rate provided in the Revolving Credit Facility Documents) until such amount shall have been paid in full; fifth, if, immediately after the making of any payment contemplated by this clause "fifth", the Collateral Coverage Ratio is at least 3.0 to 1.0, such amount as shall be required to pay the Trustee, for the benefit of the Noteholders, all accrued and unpaid interest under the Noteholder Documents (at the rate provided in the Noteholder Documents) until such amount shall have been paid in full; sixth, such amount as shall be required to pay the Revolving Credit Facility Administrative Agent, for the benefit of the Revolving Lenders, for all principal (and, thereafter, any other amounts, including any fees, expenses, premiums and reimbursement obligations) outstanding under the Revolving Credit Facility Documents until such amount shall have been paid in full; seventh, if (i) the Collateral Coverage Ratio is less than 3.0 to 1.0 and (ii) no payment was made pursuant to clause "fifth" above, such amount as shall be required to pay the Trustee, for the benefit of the Noteholders, all accrued and unpaid interest under the Noteholder Documents (at the rate provided in the 23 Noteholder Documents) until such amount shall have been paid in full, including all interest accrued thereon after the commencement of a Bankruptcy Case at the rate; eighth, such amount as shall be required to pay the Trustee, for the benefit of the Noteholders, for all principal (and, thereafter, any other amounts) outstanding under the Noteholder Documents until such amount shall have been paid in full; ninth, such amount as shall be required to pay the Bridge Loan Administrative Agent, for the benefit of the Bridge Lenders, all accrued and unpaid interest under the Junior Documents (at the rate provided in the Junior Documents) until such amount shall have been paid in full, including all interest accrued thereon after the commencement of a Bankruptcy Case at the rate; tenth, such amount as shall be required to pay the Bridge Loan Administrative Agent, for the benefit of the Bridge Lenders, for all principal (and, thereafter any other amounts) outstanding under the Junior Documents until such amount shall have been paid in full; and eleventh, such other amounts as shall be required to pay each of the Secured Parties for all other amounts outstanding under the Secured Documents until the Secured Obligations shall have been paid in full, pro rata on the basis of all such amounts. For the purposes of the foregoing, "paid in full" means, with reference to any amounts or obligations owing under the Financing Agreements, payment of all such amounts or obligations owing under such Financing Agreements in accordance with the terms thereof (which may include the cash collateralization of any contingent obligations), including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Bankruptcy Case), default interest, interest on interest, and expense reimbursements, except to the extent that default or overdue interest (but not any other interest) and loan fees, each arising from or related to a default, are disallowed in any Bankruptcy Case. (c) To the extent there exists any excess monies or property in the Collateral Account after the Final Termination Date, the Collateral Agent shall return such excess amounts to the Borrower. (d) In the event the Collateral Agent shall not receive from any Person any information set forth in Section 4.06(a) that is required to enable the Collateral Agent to make a distribution to such Person pursuant to Section 4.06(b), the Collateral Agent shall not make such distribution to such Person. In such event, the Collateral Agent shall make distributions pursuant to other clauses of Section 4.06(b) to the extent it shall have sufficient information to enable it to make such distributions, and shall continue to hold any funds remaining, after making such distributions, until the Collateral Agent shall receive all necessary information to enable it to distribute any funds so withheld, and upon receipt of the information necessary to distribute any funds so withheld, the Collateral Agent shall distribute such funds accordingly. Section 4.07. Payments Under Debt Documents Not During Default Period. At all times other than during a Default Period, the Borrower Parties shall be 24 entitled (i) to receive proceeds of Collateral in accordance with the Debt Documents and (ii) to pay, and shall pay, the Secured Obligations due and payable to each Secured Party in accordance with the terms of the Debt Documents even if such payments are made using the proceeds of Collateral. To the extent there exists any monies or property in the Collateral Account after the discontinuation of a Default Period, the Borrower Parties shall be entitled to receive and disburse such funds in accordance with the provisions of this Section 4.07. Section 4.08. Payments Not in Compliance with this Article IV. If any payment or distribution of property or assets of any Borrower Party, whether in cash, securities or other property, shall be received by the Secured Parties and such payment or distribution was not in compliance with the provisions of this Article IV, such payment or distribution shall be held in trust for the benefit of and shall be paid over to or delivered to the Collateral Agent for distribution pursuant to this Article IV until all Senior Indebtedness shall have been Paid in Full. ARTICLE V THE COLLATERAL AGENT Section 5.01. Appointment and Powers. Subject to the terms and conditions hereof, each of the Secured Parties hereby appoints U.S. Bank National Association as the Collateral Agent and U.S. Bank National Association hereby accepts such appointment and agrees to act as Collateral Agent for the Secured Parties and to perform the duties of the Collateral Agent in accordance with the provisions of this Agreement. Each Secured Party hereby authorizes the Collateral Agent to take such action on its behalf and to exercise such rights, remedies, powers and privileges hereunder as are specifically authorized to be exercised by the Collateral Agent by the terms hereof, together with such rights, remedies, powers and privileges as are reasonably incidental thereto. Section 5.02. Performance of Duties. (a) If the Collateral Agent receives a request to take action or consent under any of the Financing Agreements that is not expressly authorized, permitted or required by this Agreement, the Collateral Agent shall immediately request direction from the Control Party. Except as specifically provided in this Agreement, the Collateral Agent shall not take any action under this Agreement or any other Financing Agreement without the direction of the Control Party. (b) The Collateral Agent may perform any of its duties hereunder directly or by or through agents or employees and shall be entitled to consult with counsel and to act in reliance upon the advice of such counsel concerning matters pertaining to the agencies created hereby and its duties hereunder, and shall not be liable for any action taken or omitted to be taken by it in good faith and in reasonable reliance upon and in accordance with the advice of counsel selected by it. The Collateral Agent undertakes to perform only such duties as are expressly set forth herein, and no implied covenants or obligations shall be read into this Agreement against the Collateral Agent. No provision of this Agreement shall be construed to relieve the Collateral Agent from liability to the Secured Parties, or any of them, or the Borrower for its 25 own gross negligence or willful misconduct, provided that: (i) the Collateral Agent shall not be liable with respect to any action taken, suffered or omitted by it in good faith (A) reasonably believed by it to be authorized or within the discretion or rights or powers conferred on it by this Agreement, or (B) in accordance with any written direction or request of the Secured Parties (other than those that require the consent of other parties and such consent has been withheld), unless in either case the Collateral Agent was grossly negligent in ascertaining the pertinent facts or grossly negligent in determining the requirements imposed by this Agreement or such written direction or request; and (ii) the Collateral Agent shall not be liable for any error of judgment made in good faith by any of its officers or employees, unless the Collateral Agent was grossly negligent in ascertaining the pertinent facts or in determining the requirements imposed by this Agreement. (c) Anything in this Agreement to the contrary notwithstanding, in no event shall the Collateral Agent be liable under or in connection with this Agreement for indirect, special, incidental, punitive or consequential losses or damages of any kind whatsoever, including, but not limited to lost profits, whether or not foreseeable, even if the Collateral Agent has been advised of the possibility thereof and regardless of the form of action in which such damages are sought; provided, however, that this clause shall not be deemed to apply in the event of a finding by a court of competent jurisdiction of gross negligence or willful misconduct on the part of the Collateral Agent. Section 5.03. Reliance Upon Documents. (a) In the absence of bad faith on its part, the Collateral Agent (i) may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any note, notice, resolution, consent, certificate, affidavit, letter, telegram, teletype message, statement, order or other document reasonably believed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons, (ii) shall not be obligated to make any investigation into facts or matters stated in any such document or instrument and (iii) shall have no liability in acting, or in omitting to act, where such action or omission to act is in reliance upon any statement or opinion contained in any such document or instrument. The Collateral Agent assumes no responsibility or liability for (i) the correctness of the recitals to this Agreement, or (ii) the validity, execution (except its own execution), effectiveness, value, sufficiency, enforceability or legality of this Agreement, or the other Financing Agreements or of the Collateral (or any part thereof). The Collateral Agent shall have no responsibility for maintaining the value of the Collateral or, ensuring that any Collateral is properly delivered to it, provided that the Collateral Agent shall be responsible for holding the Collateral in accordance with the provisions hereof. The Collateral Agent shall take or cause to be taken all action recommended pursuant to any Opinion of Counsel received by the Collateral Agent as may be necessary or appropriate to perfect and protect the Security Interests granted hereby. (b) Notwithstanding any provision to the contrary contained in Article V, in performing its obligations to transfer amounts and make payments to any Person in accordance with Article IV, the Collateral Agent is entitled to rely upon the information furnished to it by the Agents pursuant to Sections 4.05(a) and 4.06(a). Section 5.04. Successor Collateral Agent. 26 (a) Merger. Any Person into whom the Collateral Agent may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its trust business and assets as a whole or substantially as a whole, or any Person resulting from any such conversion, sale, merger, consolidation or transfer to which the Collateral Agent is a party, shall (provided it is otherwise qualified to serve as the Collateral Agent hereunder) be and become a successor Collateral Agent hereunder and be vested with all of the title to the Collateral and all of the trusts, powers, discretions, immunities, privileges and other matters as was its predecessor without the execution or filing of any instrument or any further act, deed or conveyance on the part of any of the parties hereto, anything herein to the contrary notwithstanding. (b) Resignation. The Collateral Agent and any successor Collateral Agent may at any time resign by giving 60 days' written notice by registered, certified or express mail to each Agent, the Borrower and each Guarantor; provided, that such resignation shall take effect only upon the date which is the later of the effective date of the appointment of a successor Collateral Agent pursuant to paragraph (d) below and the acceptance in writing by such successor Collateral Agent of such appointment and of its obligation to perform its duties hereunder in accordance with the provisions hereof. Subject to the preceding sentence, if on the 60th day after written notice of resignation is delivered by a resigning Collateral Agent as described above no successor Collateral Agent or temporary successor Collateral Agent has been appointed in accordance herewith, the resigning Collateral Agent may petition a court of competent jurisdiction in New York City for the appointment of a successor. (c) Removal. At any time other than after the occurrence and during the continuation of an Event of Default (but not more than once in any twelve (12) month period), the Borrower may remove the Collateral Agent, with or without cause, by an instrument delivered to the Collateral Agent and the Agents. At any time after the occurrence and during the continuation of an Event of Default, the Control Party may remove the Collateral Agent, with or without cause, by an instrument delivered to the Borrower, the other Agents and the Collateral Agent. A temporary successor may be removed at any time to allow a successor Collateral Agent to be appointed pursuant to paragraph (d) below. Any removal pursuant to the provisions of this paragraph (c) shall take effect only upon the date which is the latest of the effective date of the appointment of a successor Collateral Agent appointed pursuant to paragraph (d) below and the acceptance in writing by such successor Collateral Agent of such appointment and of its obligation to perform its duties hereunder in accordance with the provisions hereof. (d) Acceptance by Successor. Any successor Collateral Agent shall be a bank or trust company (i) having its principal office in New York, New York, or such other jurisdiction as the Secured Parties may approve by Majority Vote, and (ii) having a shareholders' or owners' equity of at least $500,000,000 as of the effective date of appointment. No successor Collateral Agent can be an Agent. The Secured Parties by Majority Vote shall have the sole right to appoint each successor Collateral Agent, subject only to the requirements set forth in the preceding sentence. If the Secured Parties shall not have agreed by Majority Vote within ten days as to the selection of a successor Collateral Agent, the Control Party shall have the right to appoint a temporary successor to act as the Collateral Agent. If by the 90th day after appointment of such temporary successor Collateral Agent, the Secured Parties by Majority Vote shall have remained unable to agree by Majority Vote as to the selection of a successor Collateral Agent, such temporary successor shall automatically become the successor Collateral Agent hereunder. Every temporary or permanent successor 27 Collateral Agent appointed hereunder shall execute, acknowledge and deliver to its predecessor and to the Agents and the Borrower an instrument in writing accepting such appointment hereunder and the relevant predecessor shall execute, acknowledge and deliver such other documents and instruments as will effectuate such appointment, whereupon such successor, without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, duties and obligations of its predecessors. Section 5.05. Indemnification. The Borrower Parties shall, jointly and severally, indemnify the Collateral Agent and the Control Party, each of its officers, employees and its agents for, and hold the Collateral Agent and each of its officers, employees and its agents harmless against, any loss, liability, damage, claim, action, demand or expense (including the costs and expenses of defending against any claim of liability) arising out of or in connection with the performance of its duties hereunder, except such loss, liability, damage, claim, action, demand or expense as shall result from their gross negligence or willful misconduct. The obligation of the Borrower Parties under this Section shall survive the termination of this Agreement and the resignation or removal of the Collateral Agent. Section 5.06. Compensation and Reimbursement. The Borrower agrees (a) to pay to the Collateral Agent from time to time, reasonable compensation (as separately agreed between the Borrower and Collateral Agent) for all services rendered by it hereunder, and (b) to reimburse the Collateral Agent upon its request for all reasonable expenses, disbursements and advances incurred or made by the Collateral Agent in accordance with any provision of, or carrying out its duties and obligations under, this Agreement (including the reasonable compensation and fees and the expenses and disbursements of its agents, any certified public accountants and legal counsel), except any expense, disbursement or advance as may be attributable to gross negligence, bad faith or willful misconduct on the part of the Collateral Agent. Section 5.07. Representations and Warranties of the Collateral Agent. The Collateral Agent represents and warrants to each Borrower Party and to each Secured Party as follows: (a) Due Organization. The Collateral Agent is a national banking association, organized, validly existing and in good standing under the laws of the United States of America and is duly authorized and licensed under Applicable Law to conduct its business as presently conducted. (b) Power. The Collateral Agent has all requisite right, power and authority to execute and deliver this Agreement and to perform all of its duties as Collateral Agent hereunder. (c) Due Authorization. The execution and delivery of this Agreement by the Collateral Agent, and the performance by the Collateral Agent of its duties hereunder, have been duly authorized by all necessary proceedings and no further approvals or filings (other than financing statements and other Additional Documents), including any approvals by any Governmental Authority, are required for the valid execution and delivery by the Collateral Agent, or the performance by the Collateral Agent, of this Agreement and the other Financing Agreements to which it is or may be party. 28 (d) Valid and Binding Agreement. The Collateral Agent has duly executed and delivered this Agreement, and assuming due execution and delivery by the other parties hereto, this Agreement constitutes the legal, valid and binding obligation of the Collateral Agent, enforceable against the Collateral Agent in accordance with its terms, except as such enforceability may be limited (i) by bankruptcy, insolvency, reorganization and similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Other Intercreditor Agreement. The Collateral Agent has not entered into any subordination agreement or intercreditor agreement with respect to the Collateral other than this Agreement. Section 5.08. Representations and Warranties of each Borrower Party. Each Borrower Party jointly and severally represents and warrants to the Collateral Agent and each Secured Party as follows, and such representations and warranties shall survive the execution and delivery of this Agreement: (a) Due Organization. Each Borrower Party is a limited liability company or a corporation, as the case may be, duly organized or incorporated and validly existing and in good standing under the laws of the its respective state of organization or incorporation, and is duly authorized and licensed under Applicable Law to conduct its business as presently conducted. (b) Power. Each Borrower Party has all requisite right, power and authority to execute and deliver this Agreement and to perform all of its duties hereunder. (c) Due Authorization. The execution and delivery of this Agreement by each Borrower Party, and the performance by each Borrower Party of its duties hereunder, have been duly authorized by all necessary proceedings. Other than the filing of financing statements and informational filings with the Securities and Exchange Commission, fixture filings, and recording of Mortgages, the execution, delivery, and performance by each Borrower Party of this Agreement does not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (d) Valid and Binding Agreement. Each Borrower Party has duly executed and delivered this Agreement, and assuming due execution and delivery by the other parties hereto, this Agreement constitutes the legal, valid and binding obligation of each Borrower Party, enforceable against each Borrower Party in accordance with its terms, except as such enforceability may be limited by general principles of equity regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) Perfection and Priority of Liens. The Security Interests in favor of the Senior Secured Parties are validly created and perfected shared first priority Liens and security interests, and the Security Interests in favor of the Junior Secured Parties are validly created and perfected second priority Liens and security interests, in each case, subject only to Permitted Liens; provided, however, that such representation with respect to perfection and priority does not apply with respect to (i) Securities Accounts and DDA's to the extent that a Control Agreement is necessary to perfect a security interest in 29 such Securities Accounts or DDA's and any such Securities Accounts or DDA's have balances of $25,000 or less in the aggregate, (ii) other Personal Property Collateral that has a value of $100,000 in the aggregate, and (iii) any Oil and Gas Properties which, together with any other Oil and Gas Properties not securing the Secured Obligations, do not at any time have either an aggregate "PV-10" (as that term is defined in the Indenture in effect on the Closing Date) or an aggregate fair market acreage value exceeding $250,000. (f) No Other Intercreditor Agreement. No Borrower Party has entered into any subordination agreement or intercreditor agreement with respect to the Collateral other than this Agreement that is still in effect. This Agreement is intended to be a subordination agreement with respect to the Junior Secured Parties and the Junior Indebtedness within the meaning of section 510(a) of the Bankruptcy Code. (g) No Encumbrances. Each Borrower Party has good and indefeasible title to the Personal Property Collateral and the Real Property (other than Oil and Gas Properties constituting Real Property) owned by such Borrower Party or good and defensible title to Oil and Gas Properties constituting Real Property, owned by such Borrower Party free and clear of Liens except for Permitted Liens. (h) Location of Chief Executive Office; FEIN; Commercial Tort Claims. The chief executive office of each of the Borrower Parties is located at the address indicated in Schedule III and such Borrower Parties' FEIN is identified in Schedule III. Each Borrower Parties' organizational identification number is identified in Schedule III. No Borrower Party holds any commercial tort claims as of the date hereof. Section 5.09. Representations and Warranties of each Secured Party. Each Secured Party severally but not jointly represents and warrants to the Collateral Agent as follows: (a) Due Organization. Such Secured Party is a limited liability company or a corporation, as the case may be, duly organized or incorporated and validly existing and in good standing under the laws of its respective state of organization or incorporation, and is duly authorized and licensed under Applicable Law to conduct its business as presently conducted. (b) Power. Such Secured Party has all requisite right, power and authority to execute and deliver this Agreement and to perform all of its duties hereunder. (c) Due Authorization. The execution and delivery of this Agreement by such Secured Party, and the performance by such Secured Party of its duties hereunder, have been duly authorized by all necessary proceedings and no further approvals or filings, including any approvals by any Governmental Authority, are required for the valid execution and delivery by such Secured Party, or the performance by such Secured Party, of this Agreement. (d) Valid and Binding Agreement. Such Secured Party has duly executed and delivered this Agreement, and assuming due execution and delivery by the other parties hereto, this Agreement constitutes the legal, valid and binding obligation of such Secured Party, enforceable against such Secured Party in accordance with its terms, except as such enforceability may be limited by 30 general principles of equity regardless of whether such enforceability is considered in a proceeding in equity or at law. Section 5.10. Waiver of Setoffs. The Collateral Agent hereby expressly waives any and all rights of setoff that the Collateral Agent may otherwise at any time have under Applicable Law with respect to any account and agrees that amounts in the Collateral Account shall at all times be held and applied in accordance with the provisions of Article IV. ARTICLE VI CONTROL PARTY; REMEDIES Section 6.01. Exercise of Remedies; Management of Collateral. Notwithstanding anything to the contrary contained in any of the Financing Agreements: (a) The Control Party shall have the exclusive right to direct the Collateral Agent to manage, perform and enforce the terms of the Security Documents with respect to the Collateral and to exercise and enforce all privileges and rights thereunder in their sole discretion, including (i) taking or retaking control or possession of Collateral, (ii) holding, preparing for sale, processing, selling, leasing, disposing of and liquidating Collateral, (iii) commencing, or joining with any other creditor in commencing, any Bankruptcy Case, (iv) enforcing or settling any insurance claims with respect to the Collateral, and (v) exercising the rights and remedies described in Section 6.03, provided that, if the Collateral Agent is directed to exercise any rights and remedies in accordance with this Agreement, the Collateral Agent shall diligently pursue in good faith the exercise and enforcement of its rights or remedies against such Collateral in a commercially reasonable manner designed to maximize the value to be obtained from such Collateral and in any sale or other disposition of any of such Collateral by the Collateral Agent, the Collateral Agent shall conduct such sale or other disposition in a commercially reasonable manner. Except as provided in this Agreement, no other parties to the Financing Agreements shall have the right to exercise or to instruct the Collateral Agent to exercise any rights or remedies under the Security Documents or with respect to Collateral or commence, or join with any other creditor in commencing, any Bankruptcy Case. (b) Except as provided in this Agreement, any and all proceeds of Collateral which shall come into the possession, control or custody of any Borrower Party or any Secured Party will be deemed to have been received for the account of the Collateral Agent on behalf of the Secured Parties and shall be immediately paid to the Collateral Agent for deposit into the applicable Collateral Agent Account for distribution pursuant to Article IV. (c) The Secured Parties, by their extension of financing to the Borrower evidenced by the Financing Agreements, each hereby agree that, with respect to any Financing Agreement at any time during a Default Period, the Agents will each be directed in exercising, or refraining from exercising, any action under such applicable Financing Agreement with respect to the Collateral, including exercising remedies of a secured party thereunder, by the Collateral Agent as directed by the Control Party. 31 (d) The rights and priorities set forth in this Agreement shall remain binding irrespective of the terms of any plan of reorganization in a Bankruptcy Case or other provisions of the Bankruptcy Code or any similar federal or state statute. Section 6.02. Control Party. (a) At all times other than during a Default Period, the "Control Party" shall be the Senior Secured Parties acting by Majority Vote. (b) Upon the commencement of a Default Period and for a period of 240 days following such commencement (the "Initial Control Period"), the Control Party shall be the Junior Secured Parties acting by Majority Vote. If, by the last Business Day during the Initial Control Period, the Senior Indebtedness shall not have been Paid in Full, the Control Party shall be the Senior Secured Parties acting by Majority Vote; provided, however, that if, within 15 days prior to the end of the Initial Control Period, the Junior Secured Parties pay or cause to be paid to the Senior Secured Parties an amount equal to the outstanding Senior Indebtedness (and cause the Senior Indebtedness to be Paid in Full), then the Junior Secured Parties shall remain the Control Party and the Junior Secured Parties will be subrogated to all of the rights of the Senior Secured Parties, including the right to payment on the Senior Indebtedness; provided further, that the Initial Control Period shall be tolled during such time as the Collateral Agent is stayed from enforcing its Liens on a material portion of the Collateral to the extent the Collateral Agent, on behalf of the Control Party, used reasonable efforts to attempt to vacate such stay or made a reasonable determination that any such action to vacate such stay would have been without merit. (c) After the Senior Indebtedness shall have been Paid in Full, the Control Party shall at all times be the Junior Secured Parties acting by Majority Vote. (d) The Collateral Agent shall give written notice to all of the other parties to this Agreement promptly upon a change in the identity of the Control Party. Each of the parties hereto agrees that it shall not exercise any of the rights of the Control Party at such time as it is not the Control Party hereunder. In the absence of bad faith on its part, the Collateral Agent may conclusively rely, and will be fully protected in so relying, on (i) statements as to the identity of the Control Party and (ii) on any direction, waiver or consent of the Control Party. (e) This Article VI shall not be construed in any way to limit or impair the right of any Secured Party to bid for and purchase Collateral at any private or judicial foreclosure upon such Collateral initiated by any Secured Party. Section 6.03. Rights and Remedies. (a) Remedies Under the Debt Documents. The Control Party shall direct the Collateral Agent, which in turn shall direct the Agents under each Debt Document, in the exercise of remedies available pursuant to such Debt Document. (b) Remedies Under the Security Documents. At all times during a Default Period, the Control Party may authorize and instruct the Collateral Agent to do any one or more of the following on behalf of the Secured Parties (and Collateral Agent, acting upon the instructions of the Control Party, shall do 32 the same on behalf of the Secured Parties), all of which are authorized by the Borrower Parties: (i) enforce, settle or adjust disputes and claims (including insurance claims) directly with Account Debtors for amounts and upon terms which Collateral Agent considers advisable, and in such cases, Collateral Agent will credit the Borrower Parties with respect to obligations under the Financing Agreements with only the net amounts received by Collateral Agent in payment of such disputed Accounts after deducting all expenses incurred or expended by the Secured Parties in connection therewith; (ii) without notice to or demand upon any Borrower Party, make such payments and do such acts as the Collateral Agent considers necessary or reasonable to protect the Security Interests (and each of the Borrower Parties (x) hereby agrees to assemble the Personal Property Collateral if the Collateral Agent so requires, and to make the Personal Property Collateral available to the Collateral Agent at a place that the Collateral Agent may reasonably designate, (y) hereby authorizes the Collateral Agent to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in the Collateral Agent's determination appears to conflict with the Security Interests and to pay all reasonable expenses incurred in connection therewith and to charge the Borrower Parties' therefor and (z) with respect to any owned or leased premises occupied by such Borrower Party, hereby Grants the Collateral Agent a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of the Secured Parties' rights or remedies provided herein, in the other Financing Agreements, at law, in equity or otherwise); (iii) without notice to any Borrower Party (such notice being expressly waived), and without constituting a retention of any Collateral in satisfaction of an obligation, set off and apply to the Secured Obligations any and all (x) balances and deposits of any Borrower Party held by any Secured Party or (y) Indebtedness at any time owing to or for the credit or the account of any Borrower Party held by any Secured Party; (iv) hold, as cash Collateral, any and all balances and deposits of the Borrower Parties furnished as security to the Secured Parties to secure the full and final repayment of all of the Secured Obligations and apply, to the extent permitted by Applicable Law, such cash Collateral to repay the Secured Obligations; (v) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale and sell (in the manner provided for herein) the Personal Property Collateral (and each of the Borrower Parties hereby Grants to the Collateral Agent a license or other right to use, without charge, such Borrower Party's labels, patents, copyrights, trade secrets, trade names, trademarks, service marks and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale, and selling any Personal Property Collateral, and such Borrower Party's rights under 33 all licenses and all franchise agreements shall inure to the Collateral Agent's benefit on behalf of the Secured Parties); or (vi) sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including any Borrower Parties' premises) as the Collateral Agent determines is commercially reasonable (it being understood that it is not necessary that the Personal Property Collateral be present at any such sale); (vii) give notice of the disposition of the Personal Property Collateral as follows: (x) the Collateral Agent shall give the Borrower Parties a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Personal Property Collateral, the time on or after which the private sale or other disposition is to be made; and (y) the notice shall be personally delivered or mailed, postage prepaid, to the Borrower Parties as provided in Section 8.02, at least 10 days before the earliest time of disposition set forth in thenn notice; it being understood that no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; (viii) seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by Applicable Law, seek the appointment of such a receiver without the requirement of prior notice or a hearing; (ix) seek relief from the automatic stay of Section 362 of the Bankruptcy Code (or any other stay) in any Bankruptcy Case in respect of any portion of the Collateral on which the Collateral Agent then has a Lien, or seek to dismiss any Bankruptcy Case or to convert a Bankruptcy Case under chapter 11 of the Bankruptcy Code to a Bankruptcy Case under chapter 7 of the Bankruptcy Code; (x) foreclose any or all of the Mortgages and sell the Real Property or cause the Real Property to be sold in accordance with the provisions of the Mortgages and Applicable Law, and exercise any and all other rights or remedies available to the Collateral Agent, on behalf of the Secured Parties, under the Mortgages, any of the other Financing Agreements, at law or in equity with respect to the Collateral encumbered by the Mortgages; (xi) exercise on behalf of the Secured Parties all other rights and remedies with respect to any and all of the Collateral available at law or in equity or pursuant to any other Financing Agreement; and (xii) demand and receive payment from the Borrower Parties for any deficiency that exists after disposition of the Collateral (as provided above), and the Borrower Parties jointly and severally agree to immediately pay such deficiency. Section 6.04. Bankruptcy Issues. 34 (a) This Agreement shall continue in full force and effect after the commencement of a Bankruptcy Case (all references herein to Borrower Parties being deemed to apply to Borrower Parties as debtor-in-possession and to a trustee for Borrower Parties' estate in a Bankruptcy Case), and shall apply with full force and effect with respect to all Collateral acquired by such Borrower Parties, and to all Secured Obligations incurred by Borrower Parties subsequent to such commencement (it being understood that the relative rights of the Secured Parties in or to any distributions from or in respect of any Collateral or proceeds of Collateral as provided in this Agreement shall continue after the commencement of a Bankruptcy Case on the same basis as prior to the date of such commencement), subject to any court order approving the financing of, or use of cash collateral by, the Borrower or any Obligor as debtor-in-possession. In furtherance of the foregoing, the Junior Secured Parties acknowledge and agree that, in the event of a distribution of debt or equity securities under a plan of reorganization under any Bankruptcy Case in satisfaction of Secured Obligations (such securities, "Reorganization Securities") to each of the Senior Secured Parties and the Junior Secured Parties, such Reorganization Securities received by the Junior Secured Parties shall be subordinated to the Reorganization Securities received by the Senior Secured Parties to the same extent that the Junior Indebtedness is subordinated to the Senior Indebtedness pursuant to the terms of this Agreement. (b) If any Borrower Party shall become subject to a Bankruptcy Case and if as debtor-in-possession moves for approval to obtain financing (a "DIP Financing") to be provided in good faith by the parties to the Revolving Credit Facility (the "DIP Lender") under Section 364 of the Bankruptcy Code (including the use of cash collateral with the consent of the DIP Lender), the other Secured Parties agree that (i) adequate notice to the other Secured Parties shall be deemed to have been provided for such DIP Financing if the other Secured Parties receive notice thereof in a manner prescribed in Section 8.02 prior to any hearing on a request to approve such DIP Financing and (ii) no objection shall be raised by it to any such DIP Financing on the grounds of a failure to provide "adequate protection" for its Liens so long as (A) the Collateral Agent for the benefit of the Secured Parties retains a Lien on the Collateral (including proceeds thereof arising after the commencement of such proceeding) with the same priority as existed prior to the commencement of such Bankruptcy Case, (B) the Collateral Agent for the benefit of the Secured Parties receives a replacement Lien on post-petition assets to the same extent granted to the DIP Lender, with the same priority as existed prior to the commencement of such Bankruptcy Case, (C) the aggregate principal amount of the DIP Financing (which shall have a superpriority administrative expense claim status and first lien priority) will not exceed the lesser of (x) the Maximum Revolver Amount, plus any Related Revolving Credit Facility Indebtedness, and (y) the outstanding pre-petition Revolving Credit Facility Indebtedness (including any obligations outstanding under Bank Product Agreements) plus $5,000,000, (D) the Collateral Agent for the benefit of each of the Secured Parties shall receive superpriority administrative expense claim status to the extent of any diminution of value of the Collateral available to such Secured Party, subordinated to the superpriority administrative expense claim status of the DIP Lender and with the same priority among the Secured Parties as existed prior to the commencement of the Bankruptcy Case, and (E) such DIP Financing is subject to the terms of this Agreement. Nothing contained herein shall be deemed to limit the rights of the other Secured Parties to object to the DIP Financing or use of cash collateral on any grounds other than the failure to provide "adequate protection" for its Liens. 35 (c) Each of the Secured Parties shall not, directly or indirectly, (i) challenge or contest the validity or enforceability of this Agreement or any of the Financing Agreements, (ii) challenge or contest the exercise of any rights, remedies or duties of the Control Party in accordance with this Agreement and the applicable Financing Agreements, or (ii) take any action that would reasonably be expected to restrain, hinder, limit, delay or otherwise interfere in any material respect with the exercise of the rights or duties of the Collateral Agent in accordance with this Agreement. Section 6.05. Notice of Default and Certain Events. (a) The Borrower Parties shall promptly send to the Collateral Agent and each Agent written notice of any default under any of the Financing Agreements or any Event of Default, and shall promptly provide to the Collateral Agent and each Agent copies of any notices (other than periodic reports and advance requests) received from or delivered by any Borrower Party to any Secured Party in connection with any of the Financing Agreements. (b) The Collateral Agent will promptly provide to the Agents written notice of any action taken by the Collateral Agent with respect to its obligations or duties under this Agreement, including action taken at the instruction of the Control Party, and shall promptly provide the Agents with copies of any notices received from or delivered to any Borrower Party in connection with this Agreement. Section 6.06. Remedies Cumulative. Subject always to the terms and conditions hereof, each and every right, power and remedy given to the Secured Parties, the Collateral Agent and the Control Party specifically or otherwise in this Agreement or the other Financing Agreements shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by any Agent, the Secured Parties, the Collateral Agent or the Control Party, as appropriate, and the exercise or the beginning of the exercise of any right, power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No delay or omission by any Agent, the Secured Parties, the Collateral Agent or the Control Party in the exercise of any right, remedy or power or in the pursuit of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default or to be an acquiescence therein. Section 6.07. The Collateral Agent's and Secured Parties' Liability for Collateral. The Borrower Parties hereby agree that (a) the Collateral Agent and the Secured Parties shall not in any way or manner be liable or responsible for (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency or other Person, and (b) all risk of loss, damage or destruction of the Collateral shall be borne jointly and severally by the Borrower Parties. 36 Section 6.08. Amounts Collected. Any and all proceeds collected by the Collateral Agent in the exercise of remedies under this Article VI shall be deposited in the Collateral Account and distributed pursuant to Section 4.06. Section 6.09. Appraisals. At the request of the Control Party, the Collateral Agent may from time to time during a Default Period commission an appraisal with respect to the Collateral or any portion thereof. The Collateral Agent shall not be required to commission such appraisal unless there are sufficient funds in the Collateral Account to cover the cost of such appraisal or, if such funds are not sufficient, the Control Party (or any other Secured Party) shall have agreed to reimburse the Collateral Agent for the cost of such appraisal. Section 6.10. Reinstatement. If any Senior Secured Party is required in any Bankruptcy Case or otherwise to turn over or otherwise pay any amount (a "Recovery") to the estate or to any creditor or representative of a Borrower Party or any other Person, then the Senior Indebtedness shall be reinstated to the extent of such Recovery. If this Agreement shall have been terminated prior to such Recovery, this Agreement shall be reinstated in full force and effect, and such prior termination shall not diminish, release, discharge, impair, or otherwise affect the obligations of the parties hereto from such date of reinstatement. All rights, interests, agreements and obligations of the Secured Parties under this Agreement shall remain in full force and effect, and shall continue irrespective of the commencement of, or any discharge, confirmation, conversion, or dismissal of any Bankruptcy Case by or against any Borrower Party or any other Person and irrespective of any other circumstance which otherwise might constitute a defense available to, or a discharge of any Borrower Party or any other Person in respect of the Senior Indebtedness. No priority or right of the Senior Secured Parties or any other holder of Senior Indebtedness shall at any time be prejudiced or impaired in any way by any act or failure to act on the part of any Borrower Party or any other Person or by the noncompliance by any Person with the terms, provisions, or covenants of the Financing Agreements, regardless of any knowledge thereof which the Senior Secured Parties or any holder of Senior Indebtedness may have. Section 6.11. Trust Indenture Act. Notwithstanding any other provision of this Article VI, the right of any Noteholder to receive payment of the principal of and interest on the Notes, on or after the respective due dates expressed in the Notes, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder. ARTICLE VII SUBORDINATION; FINANCING AGREEMENTS Section 7.01. Blockage of Payments to the Junior Secured Parties. Until all Senior Indebtedness shall have been Paid in Full, no payment in cash, securities or other property (excluding (i) securities that are subordinated to the Senior Indebtedness to the same extent as, or more deeply than, the Junior Indebtedness is subordinated to the Senior Indebtedness pursuant to this Agreement and (ii) Grey Wolf Capital Stock or any proceeds thereof) shall be made by or on behalf of the Borrower Parties with respect to any Junior Indebtedness and, except as 37 provided in this Agreement, the Junior Secured Parties will not ask, demand, sue for, take or receive any such payment, directly or indirectly, out of the proceeds of the Collateral from or on behalf of the Borrower Parties, if at the time of such payment or immediately after giving effect thereto there shall have occurred and be continuing an Event of Default with respect to any of the Senior Documents which arises out of the failure to make any payment with respect to any Senior Indebtedness. If at any time following a blockage of payments pursuant to this Section 7.01 holders of Junior Indebtedness are no longer prohibited by this Section 7.01 from receiving any payments with respect to the Junior Indebtedness, such holders shall be entitled to receive, and the Borrower Parties shall pay, all payments with respect to the Junior Indebtedness that have been blocked together with any default interest to the extent provided for in the Junior Documents. Section 7.02. Payments Held in Trust/Turnover. If, notwithstanding Section 7.01, any payment or distribution of assets of any Borrower Party, whether in cash, securities or other property, shall be received by the Junior Secured Parties in violation of Section 7.01 such payment or distribution shall be held in trust for the benefit of and shall be paid over to or delivered to the Collateral Agent for distribution pursuant to Section 4.06, until all Senior Indebtedness shall have been Paid in Full. Section 7.03. Collateral Agent to Effectuate Subordination. Each Secured Party by its acceptance hereof authorizes and directs the Collateral Agent on its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Agreement and appoints the Collateral Agent its attorney-in-fact for any and all such purposes. Section 7.04. No Waiver of Subordination Provisions. No right of the Senior Secured Parties or the Collateral Agent to enforce the subordination of the Junior Indebtedness as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of any Borrower Party or any of the Senior Secured Parties or the Collateral Agent or by any non-compliance by any Borrower Party with the terms, provisions and covenants of this Agreement or any other Financing Agreement. Section 7.05. Modification of Financing Agreements. Notwithstanding anything to the contrary contained in any of the other Financing Agreements: (a) None of the Junior Documents may be amended, restated, supplemented, replaced, substituted, renewed, refinanced, refunded, extended or otherwise modified without the prior consent of the Senior Secured Parties by Majority Vote; provided, that, without the consent of the Senior Secured Parties, the Junior Documents may be: (i) amended, restated or supplemented at any time in order (A) to cure any ambiguity or omission or to correct any mistake, (B) to conform to the description of the Junior Documents contained in the Offering Memorandum or (C) to make any other provision in regard to matters or questions (other than those described in clause (ii) below) that will not adversely affect the interests of the Senior Secured Parties in any material respect; and 38 (ii) amended, restated, supplemented, replaced, substituted, renewed, refunded, extended or otherwise modified in connection with any refinancing of Junior Indebtedness (each, for purposes of this clause, a "refinancing") so long as (A) such new Indebtedness shall be in a principal amount that does not exceed the principal amount of the Indebtedness being refinanced (or, if such Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) plus the amount of accrued interest thereon plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness being refinanced or the amount of any premium reasonably determined by the Borrower Parties as necessary to accomplish such refinancing, plus the amount of expenses of the Borrower Parties incurred in connection with such refinancing, (B) the Lien securing such new Indebtedness is limited to all or part of the same property that was or would have been encumbered by the Lien securing the Indebtedness being refinanced, (C) such new Indebtedness has an Average Life equal to or greater than the Average Life of the Indebtedness being refinanced and a final Stated Maturity not earlier than the final Stated Maturity of the Indebtedness being refinanced, (D) such new Indebtedness is incurred by either the Borrower or another Borrower Party that is the obligor of the Indebtedness being refinanced, and (E) such new Indebtedness, including the Lien securing such new Indebtedness, is subject to the provisions of this Agreement to the same extent as the Indebtedness being refinanced. (b) None of the Revolving Credit Facility Documents may be amended, restated, supplemented, replaced, substituted, renewed, refinanced, refunded, extended or otherwise modified without the prior consent of the other Senior Secured Parties and the Junior Secured Parties, each voting separately as a class, by Majority Vote; provided, that, without the consent of the other Senior Secured Parties and the Junior Secured Parties, the Revolving Credit Facility Documents may be: (i) amended, restated or supplemented at any time in order (A) to cure any ambiguity or omission or to correct any mistake, (B) to conform to the description of the Revolving Credit Facility Documents contained in the Offering Memorandum or (C) to make any other provision in regard to matters or questions (other than those described in clause (ii) below) that will not adversely affect the interests of the other Senior Secured Parties and the Junior Secured Parties in any material respect; or (ii) amended, restated, supplemented, replaced, substituted, renewed, refunded, extended or otherwise modified in connection with any refinancing of Indebtedness under the Revolving Credit Facility Documents (each, for purposes of this clause, a "refinancing") so long as (A) any such refinancing shall be in a principal amount that does not exceed the Maximum Revolver Amount, plus any Related Revolving Credit Facility Indebtedness, (B) such new Indebtedness shall not bear interest at a rate in excess of that payable on the Indebtedness being refinanced (or in the case of refinanced Indebtedness that was subject to a floating interest rate, a rate based on the same financial terms (including base rate and spread, as the refinanced Indebtedness) or require the payment of any premium in connection with any subsequent refinancing of such new Indebtedness in an 39 amount in excess of that payable on the Indebtedness being refinanced, (C) the Lien securing such new Indebtedness is limited to all or part of the same property that was or would have been encumbered by the Lien securing the Indebtedness being refinanced, (D) such new Indebtedness has a final Stated Maturity not earlier than the final Stated Maturity of the Indebtedness being refinanced, (E) such new Indebtedness is incurred by either the Borrower or another Borrower Party who is the obligor of the Indebtedness being refinanced, and (F) such new Indebtedness, including the Lien securing such new Indebtedness, is subject to the provisions of this Agreement to the same extent as the Indebtedness being refinanced. (c) None of the Noteholder Documents may be amended, restated, supplemented, replaced, substituted, renewed, refinanced, refunded, extended or otherwise modified without the prior consent of the other Senior Secured Parties and the Junior Secured Parties, each voting separately as a class, by Majority Vote; provided, that, without the consent of the other Senior Secured Parties and the Junior Secured Parties, the Noteholder Documents may be: (i) amended, restated or supplemented at any time in order (A) to cure any ambiguity or omission or to correct any mistake, (B) to conform to the description of the Noteholder Documents contained in the Offering Memorandum or (C) to make any other provision in regard to matters or questions (other than those described in clause (ii) below) that will not adversely affect the interests of the other Senior Secured Parties and the Junior Secured Parties in any material respect; or (ii) amended, restated, supplemented, replaced, substituted, renewed, refunded, extended or otherwise modified in connection with any refinancing of Indebtedness under the Noteholder Documents (each, for purposes of this clause, a "refinancing") so long as (A) such new Indebtedness shall be in a principal amount that does not exceed the principal amount of the Indebtedness being refinanced (or, if such Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) plus the amount of accrued interest thereon plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness being refinanced or the amount of any premium reasonably determined by the Borrower Parties as necessary to accomplish such refinancing, plus the amount of expenses of the Borrower Parties incurred in connection with such refinancing, (B) such new Indebtedness shall not bear interest at a rate in excess of a rate based on the same financial terms (including base rate and spread, as the refinanced Indebtedness) or require the payment of any premium in connection with any subsequent refinancing of such new Indebtedness in an amount in excess of that payable on the Indebtedness being refinanced, (C) the Lien securing such new Indebtedness is limited to all or part of the same property that was or would have been encumbered by the Lien securing the Indebtedness being refinanced, (D) such new Indebtedness has an Average Life equal to or greater than the Average Life of the Indebtedness being refinanced and a final Stated Maturity not earlier than the final Stated Maturity of the Indebtedness being refinanced, (E) such new Indebtedness is incurred by either the Borrower or another Borrower Party that is the obligor of the Indebtedness being refinanced, and (F) such new Indebtedness, including the Lien securing such new Indebtedness, is subject 40 to the provisions of this Agreement to the same extent as the Indebtedness being refinanced. ARTICLE VIII MISCELLANEOUS Section 8.01. Amendments. This Agreement may be amended, changed, modified, altered or terminated only by written instrument or written instruments signed by each of the Agents, the Collateral Agent and the Borrower; provided, that the consent of the Borrower shall not be required if such amendment, change, modification, alteration or termination does not have a material adverse effect on the Borrower Parties, taken as a whole. Section 8.02. Notices. (a) All notices, certificates, directions, reports or other communications required or permitted hereunder shall be in writing addressed to the appropriate Notice Address and shall be sufficiently given or made (and shall be deemed received or made) (i) upon delivery to such Notice Address by hand or nationally recognized overnight courier service, on the date such delivery is made, or (ii) upon receipt of confirmation of transmission by the sender's facsimile machine, on the date such transmission is made if made during normal business hours on a Business Day and otherwise on the Business Day next succeeding the date of transmission (provided that a copy of such transmission is delivered by hand or nationally recognized overnight courier service for receipt on the Business Day next succeeding the date of transmission). Each party hereto may, by notice given in accordance herewith to each of the other parties hereto, designate any further or different address to which subsequent notices, certificates, directions, reports or other communications shall be sent. (b) Upon receipt of a Default Notice, the Collateral Agent shall (i) have the right at the direction of the Control Party to exercise any and all rights and remedies (x) granted to a secured party by the UCC or otherwise allowed at law and (y) otherwise provided by this Agreement and (ii) give prompt notice thereof to the Agents (other than any Agent from which the Collateral Party received such Default Notice). Section 8.03. Severability. In the event that any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. The parties hereto further agree that the holding by any court of competent jurisdiction that any remedy pursued by the Collateral Agent or any Secured Party hereunder is unavailable or unenforceable shall not affect in any way the ability of the Collateral Agent or such Secured Party or any other Secured Party to pursue any other remedy available to it. Section 8.04. Term of this Agreement. This Agreement shall take effect on the Closing Date and shall continue in effect until the Final Termination Date. On the Final Termination Date, this Agreement shall terminate, all outstanding obligations of the parties hereunder shall cease and terminate and the Collateral, if any, held hereunder and not to be used or applied in discharge of 41 any obligations of the Borrower Parties in respect of the Secured Obligations or otherwise under this Agreement, shall be released to and in favor of the Borrower Parties; provided that the provisions of Sections 5.05, 5.06, 8.06, 8.07, 8.08 and 8.09 shall survive any termination of this Agreement and the release of the Collateral upon such termination. Notwithstanding the foregoing, if (i) after the termination of this Agreement or (ii) at any time or times subsequent to the payment of all or any part of the Secured Obligations, any Secured Party shall be required to repay any amounts previously paid by or on behalf of the Borrower Parties in reduction thereof by virtue of an order of any court having jurisdiction in the premises, including as a result of an adjudication that such amounts constituted preferential payments or fraudulent conveyances, then this Agreement and the obligations of the Borrower Parties hereunder shall be reinstated and the Borrower Parties unconditionally agree to pay, jointly and severally, to the Collateral Agent upon demand a sum in cash equal to the amount of any such repayment, together with interest on such amount from the date of such repayment by such Secured Party to the date of payment to such Secured Party at the prevailing interest rate established pursuant to the terms of the applicable Debt Document. The Collateral Agent shall pay any amount received by it as aforesaid to such Secured Party, subject to the provisions of this Agreement. Section 8.05. Assignments. This Agreement shall (i) be a continuing obligation of the Borrower Parties, (ii) be binding upon each of the Borrower Parties, the Secured Parties, the Collateral Agent, and upon their respective successors, transferees and assigns, and (iii) inure to the benefit of and be enforceable by each of the Borrower Parties, the Secured Parties and the Collateral Agent, and by their respective successors, permitted transferees and permitted assigns. The Borrower Parties may not transfer or assign any of its rights under this Agreement, or transfer or delegate any of its duties hereunder, without the prior written consent of each of the Collateral Agent and the Agents, and any such attempted assignment or delegation shall be null and void; provided, however, that no such consent shall be required in connection with any transfer, assignment or delegation (including by merger, by consolidation or by sale of all or substantially all of the Borrower's assets) that is expressly permitted under this Agreement and each of the Financing Agreements so long as the transferee, assignee or delegate expressly agrees to be bound by the terms of this Agreement as the Borrower or a Borrower Party, as applicable. Subject to any restrictions on transfer or assignment in any of the other Financing Agreements, nothing contained herein shall restrict any Secured Party from transferring or assigning to any Person any or all of its rights under this Agreement or with respect to any real or personal property or other interests pledged to such Secured Party or in which such Secured Party has a Security Interest. Section 8.06. TRIAL BY JURY WAIVED. EACH OF THE PARTIES HERETO WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING INDIRECTLY OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, ANY OF THE OTHER FINANCING AGREEMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREUNDER OR THEREUNDER. EACH OF THE PARTIES HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, 42 EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER FINANCING AGREEMENTS TO WHICH IT IS A PARTY BY, AMONG OTHER THINGS, THIS WAIVER. Section 8.07. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. Section 8.08. Consents to Jurisdiction. Each of the parties hereto irrevocably submits to the jurisdiction of the United States District Court for the Southern District of New York and the Supreme Court of the State of New York in New York County, and any appellate court therefrom, in any action, suit or proceeding brought against it and related to or in connection with this Agreement, the other Financing Agreements or the transactions contemplated hereunder or thereunder or for recognition or enforcement of any judgment. Each of the parties hereto agrees that a final judgment in any such action, suit 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. To the extent permitted by Applicable Law, each of the parties hereby waives and agrees not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this agreement or any of the other financing documents or the subject matter hereof may not be litigated in or by such courts. Section 8.09. Time of Essence. The Borrower Parties, the Collateral Agent and the Agents agree that time shall be of the essence in respect of the performance by the Borrower Parties and the Collateral Agent of their respective obligations hereunder. Section 8.10. Counterparts. This Agreement may be executed in any number of counterparts by the parties hereto, each of which shall be an original, and all such counterparts shall constitute one and the same instrument. Section 8.11. Integration. This Agreement, together with the schedules and appendices hereto (which schedules and annexes are deemed a part of this Agreement) and the other Financing Agreements, constitute the entire agreement and understanding among the parties hereto, and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. No prior drafts of this Agreement and no words or phrases from any such prior drafts shall be admissible into evidence in any action or proceeding involving this Agreement. Section 8.12. Headings. The headings of Articles, Sections and subsections herein are for convenience of reference only and shall not affect the interpretation hereof. Section 8.13. Full Recourse. Notwithstanding any provisions of this Agreement to the contrary, the payment obligations of the Borrower Parties set forth under this Agreement and the other Financing Agreements shall be full recourse obligations of the Borrower Parties. Upon the exhaustion of the Collateral, all further liability of the Borrower Parties shall continue and shall not be extinguished until the Final Termination Date. 43 Section 8.14. Collateral Agent and its Affiliates. U.S. Bank National Association and any of its affiliates providing services in connection with the transactions contemplated in the other Financing Agreements shall have only the duties and responsibilities expressly provided in each capacity and shall not, by virtue of its or any Affiliate acting in any other capacity be deemed to have duties or responsibilities or be deemed to be held to a standard of care other than as expressly provided with respect to each such capacity. U.S. Bank National Association (or its Affiliates) in its and their various capacities in connection with the transactions contemplated in the Financing Agreements, including as Collateral Agent, may enter into business transactions from which it and/or such Affiliates may derive revenues and profits in addition to the fees stated in the various Financing Agreements, without any duty to account therefor. 44 IN WITNESS WHEREOF the Borrower Parties, the Agents and the Collateral Agent have duly executed this Agreement as of the date first set forth above. BORROWER: ABRAXAS PETROLEUM CORPORATION, as the Borrower By:___________________________________ Title: GUARANTORS: EASTSIDE COAL COMPANY, INC., as Guarantor By:___________________________________ Title: SANDIA OIL & GAS CORPORATION, as Guarantor By:___________________________________ Title: SANDIA OPERATING CORP., as Guarantor By:___________________________________ Title: WAMSUTTER HOLDINGS INC., as Guarantor By:___________________________________ Title: WESTERN ASSOCIATED ENERGY CORPORATION, as Guarantor By:___________________________________ Title: 45 REVOLVING CREDIT FACILITY ADMINISTRATIVE AGENT: WELLS FARGO FOOTHILL, INC., as Revolving Credit Facility Administrative Agent By:_________________________ Title: TRUSTEE AND U.S. BANK NATIONAL ASSOCIATION COLLATERAL AGENT: as Trustee and Collateral Agent By:________________________ Title: BRIDGE LOAN GUGGENHEIM CORPORATE FUNDING, ADMINISTRATIVE AGENT: LLC, as Bridge Loan Administrative Agent By:________________________ Title: 46 INDEX Appendices Appendix A Definitions Schedules Schedule I List of Guarantors Schedule II Collateral Schedule III Representations and Warranties Exhibits Exhibit A Form of Authorized Asset Disposition Certificate Exhibit B Form of Authorized Asset Proceeds Release Certificate i Appendix A Defined Terms Capitalized terms used in this Agreement have the following meanings: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, "chattel paper" (as that term is defined in the UCC) or a General Intangible. "Accounts" means all of each Borrower Parties' now owned or hereafter acquired right, title, and interest with respect to "accounts" (as that term is defined in the UCC), and any and all supporting obligations in respect thereof. "Additional Documents" has the meaning set forth in Section 2.01(h)(iii). "Affected Assets" means any portion of the Collateral that is subject to an Authorized Asset Disposition. "Affiliate" of any specified Person means (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any other Person who is a director, executive officer, trustee, partner, member or comparable manager of (x) such specified Person or (y) any Person described in the preceding clause (i). For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "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 or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Agents" means, collectively, the Trustee, the Revolving Credit Facility Administrative Agent and the Bridge Loan Administrative Agent. "Applicable Law" means all applicable provisions of any constitution, statute, rule, regulation or order of any governmental or non-governmental body (including any Governmental Authority), all applicable government approvals and all applicable orders, judgments, writs or decrees of any court or arbitrator of competent jurisdiction. "Asset Sale" means an "Asset Sale" as defined in the Indenture in effect on the Closing Date. "Asset Sale Proceeds Account" has the meaning set forth in Section 4.01(a). "Authorized Asset Disposition" means (i) any Asset Sale and (ii) any other sale or disposition of Collateral, in each case of clauses (i) and (ii), that is not prohibited by the terms of any of the Financing Agreements. "Authorized Asset Disposition Certificate" means an Officers' Certificate of the Borrower, in form and substance as attached hereto as Exhibit A-1 A, certifying that the applicable sale or disposition of Collateral is authorized under this Agreement and the other Financing Agreements and that all requirements under this Agreement and the other Financing Agreements have been satisfied to allow for such sale or disposition, receipt of which Officers' Certificate has been acknowledged in writing by the Collateral Agent and provided to each of the Agents. "Authorized Asset Proceeds Release Certificate" means an Officers' Certificate of the Borrower, in substance as attached hereto as Exhibit B, certifying that the applicable release of proceeds from the Asset Sale Proceeds Account is authorized under this Agreement and the other Financing Agreements and that all requirements under this Agreement and the other Financing Agreements have been satisfied to allow for such release, receipt of which Officers' Certificate has been acknowledged in writing by the Collateral Agent and provided to each of the Agents. "Average Life" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing (i) the sum of the product of (x) the number of years (and any portion thereof rounded up to the nearest month) from the date of determination to the date or dates of each successive scheduled principal payment (including any sinking fund or mandatory redemption payment requirements) of such Indebtedness multiplied by (y) the amount of each such payment by (ii) the sum of all such payments. "Bank Product Agreement" means those certain agreements entered into from time to time by any Borrower Party for any service or facility extended to any Borrower Party by the Revolving Credit Facility Administrative Agent or any Affiliate of the Revolving Credit Facility Administrative Agent, including (i) credit cards, (ii) credit card processing services, (iii) debit cards, (iv) purchase cards, (v) cash management or related services (including the Automated Clearing House processing of electronic funds transfers through the direct Federal Reserve Fedline system), (vi) cash management, including controlled disbursement, accounts or services or (vii) any Currency Exchange Contract, Interest Rate Protection Obligation or Oil and Gas Hedging Contracts (as such terms used in this definition are defined in the Indenture in effect on the Closing Date). "Bankruptcy Case" means any proceeding commenced by or against any Borrower Party, under any provision of the Bankruptcy Code or under any other federal, provincial or state bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, liquidation or other similar relief, and all converted or succeeding cases in respect thereof. "Bankruptcy Code" means (i) the United States Bankruptcy Code (11 U.S.C. ss. 101, et seq.), as amended, and any successor statute, or (ii) the Bankruptcy and Insolvency Act (Canada) and any successor statute, or (iii) the Companies' Creditors Arrangement Act (Canada), as applicable, or (iv) any similar legislation in a relevant jurisdiction and any successor statute, in each case as in effect from time to time. "Books" means any Borrower Parties' now owned or hereafter acquired books and records (including all of its Records indicating, summarizing, or evidencing its assets (including the Collateral) or liabilities, all of its Records relating to its business operations or financial condition, and all of its goods or General Intangibles related to such information). Appendix A-2 "Borrower" has the meaning set forth in the Preamble to this Agreement. "Borrower Parties" means, collectively, the Borrower and each Guarantor and each other Person who becomes a Borrower or a Guarantor under the Financing Agreements. "Borrower Security Documents" has the meaning set forth in the Recitals to this Agreement. "Bridge Lenders" has the meaning set forth in the Preamble to this Agreement. "Bridge Loan" has the meaning set forth in the Recitals to this Agreement and includes any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of the Bridge Loan to the extent not prohibited by Section 7.05. "Bridge Loan Administrative Agent" has the meaning set forth in the Preamble to this Agreement. "Bridge Loan Asset Sale" means an "Agent Directed Asset Sale" as that term is defined in Section 6.20(a) of the Bridge Loan in effect on the Closing Date. "Bridge Loan Asset Sale Account" has the meaning set forth in Section 4.01(a). "Bridge Loan Guaranty" has the meaning set forth in the Recitals to this Agreement and includes any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of a Bridge Loan Guaranty to the extent not prohibited by Section 7.05. "Business Day" means any day other than a Saturday, Sunday, or a day on which bank institutions in The City of New York, Minneapolis, Minnesota, or San Antonio, Texas are authorized or required by law, regulation or executive order to remain closed. "Capital Stock" has the meaning set forth in the Indenture in effect on the Closing Date. "Cash Management Agreements" means the cash management service agreements, in form and substance as is customary each of which is among the applicable Borrower Party, the Collateral Agent and a bank providing cash management services acceptable to the Collateral Agent. "Closing Date" means October 28, 2004, or such other date as the Borrower and the Agents shall agree upon. "Collateral" means, collectively, all of the property and assets of each Borrower Party described on Schedule II attached hereto; provided, however, that no Grey Wolf Capital Stock (or any proceeds thereof) shall constitute part of the Collateral. "Collateral Access Agreement" means a landlord waiver, bailee letter, or acknowledgement agreement of any lessor, warehouseman, processor, consignee, Appendix A-3 or other Person in possession of, having a Lien upon, or having rights or interests in the Books and Records, the Equipment or Inventory, but excluding Oil and Gas Properties, in each case, in form and substance as is customary. "Collateral Account" has the meaning set forth in Section 4.01(a). "Collateral Agent" has the meaning set forth in the Preamble to this Agreement. "Collateral Agent Accounts" has the meaning set forth in Section 4.01(a). "Collateral Agent Notice" has the meaning set forth in Section 4.05(a). "Collateral Coverage Ratio" means, as of any date of determination, the ratio of (i) the aggregate PV-10 of the Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves of the Borrower, provided, that the aggregate amount attributable to the PV-10 of Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves shall not exceed the aggregate PV-10 of the Proved Developed Producing Reserves multiplied by 1.2222 (so that for the purposes of such calculation the amount attribution to the PV-10 of the Proved Developed Producing Reserves shall be at least 45% of the aggregate amount attributable to this clause (i)) to (ii) the aggregate amount of Revolving Credit Facility Indebtedness then outstanding, as determined in good faith by Revolving Credit Facility Administrative Agent. "Collections" means all cash, checks, notes, instruments and other items of payment (including insured proceeds, proceeds of cash sales, rental proceeds and tax refunds) of any Borrower Party. "Commercial Tort Claim Assignment" has the meaning set forth in Section 2.01(h)(ii). "Control Agreement" means a control agreement, in form and substance as is customary, executed and delivered by the applicable Borrower Party, the Collateral Agent and the applicable securities intermediary with respect to a Securities Account or bank with respect to a DDA or other deposit account, other than DDAs or other deposit accounts that are subject to a Cash Management Agreement. "Control Party" has the meaning set forth in Section 6.02. "Corporate Trust Office" means the office of the Collateral Agent located in St. Paul, Minnesota, at which at any particular time its corporate trust business shall be administered. The Collateral Agent shall notify the Agents of any change in the location of such principal office prior to any such change. "DDA" means any checking or other demand deposit account maintained by any Borrower Party. "Debt Documents" means collectively, the Revolving Credit Facility, the Notes, the Indenture and the Bridge Loan. Appendix A-4 "Default Notice" means written notice of an Event of Default from the Borrower or from any Secured Party. "Default Period" means the period commencing on the date that a Default Notice is received or deemed received by the Collateral Agent, the Borrower and each of the other Agents in a manner prescribed in Section 8.02 and ending at such time as the Event of Default specified in such Default Notice shall no longer be continuing. "DIP Financing" has the meaning set forth in Section 6.04(b). "DIP Lender" has the meaning set forth in Section 6.04(b). "Dollar" or "$" means a dollar or other equivalent unit in such coin or currency of the United States as at the time shall be legal tender for all debts, public and private. "Equipment" means all of Borrower Parties' now owned or hereafter acquired right, title, and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), vessels, tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "Eligible Account" means either (i) a segregated account with an Eligible Institution or (ii) a segregated trust account with the corporate trust department of a depository institution organized under the laws of the United States or any one of the states thereof or the District of Columbia (or any United States branch of a foreign bank), having corporate trust powers and acting as trustee for funds deposited in such account, so long as any of the securities of such depository institution has a long-term unsecured debt rating of at least A3 or its equivalent by Moody's or at least A- or its equivalent by S&P. An Eligible Account may be maintained with the Collateral Agent so long as the Collateral Agent is an Eligible Institution; provided that the Collateral Agent, in its individual capacity, shall have waived all rights of set-off and counterclaim with respect to such account. "Eligible Institution" means the corporate trust department of the Collateral Agent or a depository institution organized under the laws of the United States of America or any state thereof or the District of Columbia (or any U.S. branch of a foreign bank), which has a long-term unsecured debt rating of at least A3 or its equivalent by Moody's or a long-term issuer credit rating of at least A- or its equivalent by S&P. "Eligible Investments" means investments in (a) obligations of the United States government or agencies thereof, or obligations guarantied by the United States government, (b) open market commercial paper of any corporation incorporated under the laws of the United States or any state thereof rated at least P-1 or its equivalent by Moody's or at least A-1 or its equivalent by S&P, (c) interest-bearing time deposits or certificates of deposit issued by commercial banks organized under the laws of the United States or of any political subdivision thereof (or any United States branch of a foreign bank) having a combined capital and surplus in excess of $500,000,000 which banks or their holding companies have a rating of A or its equivalent by Moody's or A or its equivalent by S&P, provided, however, that the aggregate amount at any one time invested in certificates of deposit issued by any one bank shall not be in Appendix A-5 excess of 5% of such bank's capital and surplus, (d) Dollar denominated offshore certificates of deposit issued by, or offshore time deposits with, any commercial bank described in (c) or any subsidiary thereof, (e) repurchase agreements with any financial institution having combined capital and surplus of at least $500,000,000 with any of the obligations described in clauses (a) through (d) as collateral so long as such investment is held by a third party custodian also qualifying as an Eligible Institution, and (f) Dollar denominated investments in money market funds substantially all of whose assets comprise securities of the types described in clauses (a) through (d), including funds managed or offered by the Collateral Agent. All Eligible Investments must be held in an Eligible Account. If any Eligible Investment was deposited in an account which, at the time of the deposit, was an Eligible Account but subsequently ceases to qualify as an Eligible Account, the Collateral Agent must immediately transfer the Eligible Investment to an Eligible Account. "Event of Default" means (i) any material breach, violation or default in the observance or performance of any representation, warranty or covenant of any Borrower Party contained in this Agreement or (ii) any "Event of Default" as defined in any other Financing Agreement. "Event of Loss" means any "Event of Loss" as defined in the Indenture in effect on the Closing Date. "Farmout Agreement" has the meaning set forth in the Indenture in effect on the Closing Date. "Farmout Property" has the meaning set forth in the Indenture in effect on the Closing Date. "FEIN" means Federal Employer Identification Number. "Final Termination Date" means the date on which all obligations of the Borrower Parties under the Financing Agreements, including all Secured Obligations, shall have been Paid in Full. "Financing Agreements" means, collectively, the Senior Documents and the Junior Documents. "General Intangibles" means all of each Borrower Party's now owned or hereafter acquired right, title, and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, judgments, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, designs, inventions, trade names, trade secrets, d/b/a's, Internet domain names, logos, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), and any and all supporting obligations in respect thereof, and any other personal property other than goods, Accounts, Investment Property and Negotiable Collateral. Appendix A-6 "Governmental Authority" means any federal (including the federal government of Canada), state, local, provincial or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body. "Grant" means to grant, bargain, sell, warrant, alienate, premise, release, convey, assign, transfer, mortgage, pledge, create and grant a security interest in and right of setoff against, deposit, set over and confirm. "Grey Wolf Capital Stock" means capital stock of Grey Wolf Exploration Inc. or any successor. "Guarantee" means any obligation, contingent or otherwise, of any Person guaranteeing Indebtedness of another Person (including obligations, agreements to purchase assets, securities or services, to take-or-pay such Indebtedness of another Person or to maintain financial statement conditions, or similar arrangements or agreements, in each case entered into for the purpose of assuring the obligee of such Indebtedness of the payment thereof, including the foregoing, the payment of amounts drawn down by letters of credit, or to protect such obligee against loss in respect thereof, in whole or in part), but excluding (i) endorsements of negotiable instruments for collection or deposit in the ordinary course of business, and (ii) contingent obligations in connection with the sale or discount of accounts receivable and similar paper; provided, however, that a Guarantee by any Person shall not include a contractual commitment by one Person to invest in another Person; and provided, further, that such Investment is otherwise permitted by the Noteholder Documents. When used as a verb, "Guarantee" shall have a corresponding meaning. "Guarantors" has the meaning set forth in the Preamble to this Agreement, and shall include any Person that becomes a guarantor of the Senior Indebtedness or the Junior Indebtedness after the Closing Date. "Guaranty Security Documents" has the meaning set forth in the Recitals to this Agreement. "Hydrocarbon Interests" means all rights, titles, interests and estates now owned or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, oil, gas and casinghead gas leases, or other liquid or gaseous hydrocarbon leases, mineral fee, term or lease interests, farm-outs, overriding royalty and royalty interests, net profit interests, oil payments, production payment interests and similar mineral interests, including any reserved or residual interest of whatever nature. "Hydrocarbons" means oil, gas, coal seam gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, all products and byproducts refined, separated, settled and dehydrated therefrom and all products and byproducts refined therefrom, including kerosene, liquefied petroleum gas, refined lubricating oils, diesel fuel, drip gasoline, natural gasoline, helium, sulfur, geothermal steam, water, carbon dioxide, and all other minerals. "Indebtedness" has the meaning set forth in the Indenture in effect on the Closing Date. Exhibit A-7 "Indenture" has the meaning set forth in the Recitals to this Agreement and, except as otherwise provided in this Agreement, includes any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of the Indenture to the extent not prohibited by Section 7.05. "Initial Control Period" has the meaning set forth in Section 6.02(b). "Inventory" means all of each Borrower Parties' now owned or hereafter acquired right, title, and interest with respect to "inventory" (as that term is defined in the UCC), including extracted Hydrocarbons and other goods held for sale or lease or to be furnished under a contract of service, goods that are leased by any Borrower Party as lessor, goods that are furnished by any Borrower Party under a contract of service, and raw materials, work in process, or materials used or consumed in any Borrower Party business. "Investment Property" means all of each Borrower Parties' now owned or hereafter acquired right, title and interest with respect to "investment property" (as that term is defined in the UCC), and any and all supporting obligations in respect thereof. "Junior Documents" means the Bridge Loan, each Bridge Loan Guaranty, and any other document, instrument, mortgage or agreement (including each Security Document) now existing or in the future entered into evidencing, documenting, securing or otherwise relating to the Bridge Loan, any Bridge Loan Guaranty, together with, to the extent not prohibited by Section 7.05, any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of the Bridge Loan, a Bridge Loan Guaranty or any such other document, instrument, mortgage or agreement. "Junior Indebtedness" means any and all presently existing or hereafter arising Indebtedness, reimbursement obligations, claims, debts, liabilities, expenses, fees, indemnities or other obligations (including any prepayment premium) of the Borrower Parties owing under the Junior Documents, whether direct or indirect, whether contingent or of any other nature, character, or description (including all interest and other amounts accruing after commencement of any Bankruptcy Case, and any interest and other amounts that, but for the provisions of the Bankruptcy Code, would have accrued and become due or otherwise would have been allowed). "Junior Majority Vote" means, as of a particular date of determination, the affirmative vote or consent of the holders of at least a majority in aggregate unpaid principal amount of all Junior Indebtedness as of such date, voting as a single class. "Junior Secured Parties" means (i) the Bridge Loan Administrative Agent, individually and on behalf of the Bridge Loan Lenders, and (ii) each party to a Financing Agreement with respect to the Junior Indebtedness due to it. "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance or similar agreement or preferential arrangement of any kind or nature whatsoever serving to provide security for an obligation, whether or not filed, recorded or otherwise perfected under applicable law (including any agreement to give or Grant a lien or any lease, conditional sale, title retention or similar agreement having substantially the Appendix A-8 same economic effect as any of the foregoing) upon or with respect to any property of any kind. A Person shall be deemed to own subject to a Lien any property that such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Majority Vote" means, as applicable, a Senior Majority Vote or Junior Majority Vote, or, in the case of the Secured Parties collectively, the affirmative vote or consent of the holders of at least a majority in aggregate unpaid principal amount of all Secured Obligations as of such date, voting as a single class. "Maximum Revolver Amount" means $15,000,000, less the aggregate amount of permanent reductions of the Revolving Lenders' commitments under the Revolving Credit Facility. "Moody's" means Moody's Investors Service, Inc., a Delaware corporation, and its successors and assigns. "Mortgages" means, individually and collectively, one or more mortgages, deeds of trust, debentures or deeds to secure debt, executed and delivered by any Borrower Party in favor of the Collateral Agent, for the benefit of the Secured Parties, in form and substance satisfactory to the Collateral Agent, that encumber the Real Property Collateral, the Oil and Gas Properties and the related improvements thereto. "Negotiable Collateral" means all of each Borrower Party's now owned and hereafter acquired right, title, and interest with respect to letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "Net Cash Proceeds" has the meaning set forth in the Indenture in effect on the Closing Date. "Net Loss Proceeds" has the meaning set forth in the Indenture in effect on the Closing Date. "Net Proceeds Offer" has the meaning set forth in the Indenture in effect on the Closing Date. "Noteholders" has the meaning set forth in the Preamble to this Agreement, including their respective successor and assigns. "Noteholder Documents" means, collectively, the Indenture, the Notes, each Noteholder Guaranty and any other document, instrument, mortgage or agreement (including any Security Document) now existing or in the future entered into evidencing, documenting, securing or otherwise relating to the Indenture, the Notes and the Noteholder Guaranties, together with, to the extent not prohibited by Section 7.05, any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of the Indenture, the Notes, a Noteholder Guaranty, and any such other document, instrument, mortgage or agreement. Appendix A-9 "Noteholder Guaranty" has the meaning set forth in the Recitals to this Agreement and includes any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of a Noteholder Guaranty to the extent not prohibited by Section 7.05. "Noteholder Indebtedness" means any and all presently existing or hereafter arising Indebtedness, reimbursement obligations, claims, debts, liabilities, expenses, fees, indemnities or other obligations (including any prepayment premium) of the Borrower Parties owing under the Noteholder Documents, whether direct or indirect, whether contingent or of any other nature, character, or description (including all interest and other amounts accruing after commencement of any Bankruptcy Case, and all interest and other amounts that, but for the provisions of the Bankruptcy Code, would have accrued and become due or otherwise would have been allowed). "Notes" has the meaning set forth in the Recitals to this Agreement and includes any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of the Notes to the extent not prohibited by Section 7.05. "Notice Address" means: (a) as to the Borrower Parties: ABRAXAS PETROLEUM CORPORATION 500 North Loop 1604 East, Suite 100 San Antonio, Texas 78232 Attention: Robert Carington Telecopier: (210)-490-8816 with a copy to: COX SMITH MATTHEWS INCORPORATED 112 East Pecan Street, Suite 1800 San Antonio, Texas 78205 Attention: Steven R. Jacobs, Esq. Telecopier: (210) 226-8395 (b) as to the Trustee and the Collateral Agent: U.S. BANK NATIONAL ASSOCIATION EP-MN-W53C 60 Livingston Avenue St. Paul, Minnesota 55107 Attention: Corporate Trust Administration Telecopier: (651) 495-8097 (c) as to the Revolving Credit Facility Administrative Agent: Appendix A-10 WELLS FARGO FOOTHILL, INC. 2450 Colorado Avenue Suite 3000 West Santa Monica, California 90404 Attention: Business Finance Division Manager Telecopier: (310) 478-9788 with a copy to: SCHULTE ROTH & ZABEL LLP 919 Third Avenue New York, New York 10022 Attention: Kirby Chin, Esq. Telecopier: (212) 593-5955 (d) as to the Bridge Loan Administrative Agent: GUGGENHEIM CORPORATE FUNDING, LLC 135 East 57th Street New York, NY 10022 Attention: Managing Director - Abraxas Telecopier: (212) 644-8396 "Offering Memorandum" means the Offering Memorandum of the Borrower dated October 21, 2004, relating to the Notes. "Oil and Gas Business" means (i) the acquisition, exploration, exploitation, development, operation and disposition of interests in Oil and Gas Properties and Hydrocarbons, (ii) the gathering, marketing, treating, processing, storage, selling and transporting of any production from such interests or properties, including the marketing of Hydrocarbons obtained from unrelated Persons, (iii) any business relating to or arising from exploration for or development, production, treatment, processing, storage, transportation or marketing of oil, gas and other minerals and products produced in association therewith, (iv) any business relating to oilfield sales and service, and (v) any activity that is ancillary or necessary or desirable to facilitate the activities described in clauses (i) through (iv) of this definition. "Oil and Gas Hedging Contracts" means any agreement or arrangement, or any combination thereof, relating to hydrocarbon prices, transportation or basis costs or differentials or other similar financial factors, that is customary in the Oil and Gas Business and is entered into in the ordinary course of business for the purpose of limiting or managing risks associated with fluctuations in such prices, costs, differentials or similar factors and not for the purpose of speculation. "Oil and Gas Properties" means all Hydrocarbon Interests; personal property and/or real property now or hereafter pooled or unitized with Hydrocarbon Interests; presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including all units created under orders, regulations and rules of any Governmental Authority having jurisdiction) which may affect all or any portion Appendix A-11 of the Hydrocarbon Interests; pipelines, gathering lines, compression facilities, tanks and processing plants; oil and wells, gas wells, water well, injection wells, platforms, spars or other offshore facilities, casings, rods, tubing, pumping units and engines, Christmas trees, derricks, separators, gun barrels, flow lines, gas systems (for gathering, treating and compression), and water systems (for treating, disposal and injection); interests held in royalty trusts whether presently existing or hereafter created; Hydrocarbons in and under and which may be produced, saved, processed or attributable to the Hydrocarbon Interests, the lands covered thereby and all Hydrocarbons in pipelines, gathering lines, tanks and processing plants and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests; all tenements, hereditaments, appurtenances and personal property and/or real property in any way appertaining, belonging, affixed or incidental to the Hydrocarbon Interests, and all rights, titles, interests and estates described or referred to above, including any and all real property, now owned or hereafter acquired, used or held for use in connection with the operating, working or development of any of such Hydrocarbon Interests or personal property and/or Real Property and including any and all surface leases, rights-of-way, easements and servitude together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing; oil, gas and mineral leasehold, fee and term interests, overriding royalty interests, mineral interests, royalty interests, net profits interests, net revenue interests, oil payments, production payments, carried interests, leases, subleases, farmouts and any and all other interests in Hydrocarbons; in each case whether now owned or hereafter acquired directly or indirectly. "Opinion of Counsel" means a written opinion of counsel who shall be acceptable to the Collateral Agent and the Agents. "Paid in Full" means, with reference to any amount or obligations due and payable under any of the Financing Agreements, the final payment in full in cash of such amount or obligations (or cash collateralization in respect of any contingent obligations) in accordance with the applicable Financing Agreement and, in each case, such payment shall not be subject to disgorgement, repayment or return for any reason whatsoever and the Secured Parties' obligations to extend credit under the Financing Agreements shall have been terminated. "Permitted Farmout Agreement" has the meaning set forth in the Indenture in effect on the Closing Date. "Permitted Liens" has the meaning set forth in the Indenture in effect on the Closing Date. "Permitted Prior Liens" has the meaning set forth in the Indenture in effect on the Closing Date. "Person" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Personal Property Collateral" means all Collateral other than Real Property. Appendix A-12 "PV-10" has the meaning set forth in the Revolving Credit Facility in effect on the Closing Date. "Proved Developed Non-Producing Reserves" means those Oil and Gas Properties designated as "proved developed non-producing" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Proved Developed Producing Reserve" means those Oil and Gas Properties designated as "proved developed producing" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Proved Undeveloped Reserves" means those Oil and Gas Properties designated as "proved undeveloped" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Real Property" means all present and future interests of any Borrower Party as owner, lessee, or otherwise, in real property, with respect to which any Secured Party, has been or is in the future granted a Lien or Security Interest, including all rents, issues, and profits or other proceeds arising therefrom, including insurance proceeds, any interest arising from an option to purchase or lease any such assets, and all of such Borrower Parties' Books and Records relating thereto. "Receipt of Notice Day" has the meaning set forth in Section 4.05(a). "Record" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "Recovery" has the meaning set forth in Section 6.10. "Related Revolving Credit Facility Indebtedness" means (i) Indebtedness under the Revolving Credit Facility related to any fees and expenses incurred by any Borrower Party in connection with the Revolving Credit Facility (including those owed to any Person not an Affiliate of a Borrower Party) in connection with any permitted amendment (including any amendment and restatement thereof), supplement, replacement, restatement or other modification from time to time, including any permitted agreements (and related instruments and documents) extending the maturity of, refinancing, replacement or other restructuring of all or any portion of the Indebtedness under the Revolving Credit Facility (and related instruments and documents) or any successor or replacement agreements (and related instruments and documents) and (ii) any capitalized interest, fees, or other expenses incurred by any Borrower Party whether or not charged to a loan account or any similar account created under the Revolving Credit Facility. "Release" has the meaning set forth in Section 2.03(b). "Release Date" has the meaning set forth in Section 2.03(a). Appendix A-13 "Reorganization Securities" has the meaning set forth in Section 6.04(a). "Reserve Report" has the meaning set forth in the Revolving Credit Facility in effect on the Closing Date. "Responsible Officer" means any officer within the Corporate Trust Office (or any successor group of the Collateral Agent) including any vice president, assistant vice president, assistant secretary. "Restricted Subsidiary" has means a subsidiary of any Borrower Party that is a "Restricted Subsidiary" under each of the Financing Agreements in effect on the Closing Date. "Revolving Lenders" has the meaning set forth in the Preamble to this Agreement. "Revolving Credit Facility Administrative Agent" has the meaning set forth in the Preamble to this Agreement. "Revolving Credit Facility" has the meaning set forth in the Recitals to this Agreement and includes any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of the Revolving Credit Facility to the extent not prohibited by Section 7.05. "Revolving Credit Facility Documents" means, collectively, the Revolving Credit Facility, each Revolving Credit Facility Guaranty, each Bank Product Agreement, if any, and any other document, instrument, mortgage or agreement (including each Security Agreement) now existing or in the future entered into evidencing, documenting, securing or otherwise relating to the Revolving Credit Facility and the Revolving Credit Facility Guaranties, together with, to the extent not prohibited by Section 7.05, any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of the Revolving Credit Facility, a Revolving Credit Facility Guaranty, a Bank Product Agreement and any such other document, instrument, mortgage or agreement. "Revolving Credit Facility Guaranty" has the meaning set forth in the Recitals to this Agreement and includes any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of any Revolving Credit Facility Guaranty to the extent not prohibited by Section 7.05. "Revolving Credit Facility Indebtedness" means any and all presently existing or hereafter arising Indebtedness, reimbursement obligations, claims, debts, liabilities, expenses, fees, indemnities or other obligations (including any prepayment premium and obligations under Bank Product Agreements) of the Borrower Parties owing under the Revolving Credit Facility Documents, whether direct or indirect, whether contingent or of any other nature, character, or description (including all interest and other amounts accruing after commencement of any Bankruptcy Case, and all interest and other amounts that, but for the provisions of the Bankruptcy Code, would have accrued and become due or otherwise would have been allowed). "Secured Obligations" means, collectively, the Senior Indebtedness and the Junior Indebtedness. Appendix A-14 "Secured Parties" means, collectively, the Senior Secured Parties and the Junior Secured Parties. "Securities Account" means a "securities account" (as that term is defined in the UCC). "Security Documents" means, collectively, the Borrower Security Documents, the Guaranty Security Documents and any other document, instrument, mortgage or agreement now existing or in the future entered into securing obligations under any Debt Document, together with, to the extent not prohibited by Section 7.05, any amendment, restatement, supplement, replacement, substitution, renewal, refinancing, refunding, extension or other modification of any Borrower Security Document, any Guaranty Security Document or any such other document, instrument, mortgage or agreement; provided, however, that the Security Documents shall not include any pledge of Grey Wolf Capital Stock (or any proceeds thereof) securing the Junior Indebtedness. "Security Interest" means each security interest and Lien granted by any Borrower Party to the Collateral Agent for the benefit of the Secured Parties pursuant to this Agreement and the other Security Documents. "Senior Documents" means, collectively, (i) the Revolving Credit Facility Documents and (ii) the Noteholder Documents. "Senior Indebtedness" means, collectively, (i) the Revolving Credit Facility Indebtedness and (ii) the Noteholder Indebtedness. "Senior Majority Vote" means, as of a particular date of determination, the affirmative vote or consent of the holders of at least a majority in aggregate unpaid principal amount of all Senior Indebtedness (which for the purposes of this definition shall include the outstanding unfunded commitments of such holders) as of such date, voting as a single class. "Senior Secured Parties" means, collectively, (i) the Trustee, individually and on behalf of the Noteholders, (ii) the Revolving Credit Facility Administrative Agent, individually and on behalf of the Revolving Lenders, and (iii) each party to a Financing Agreement with respect to the Senior Indebtedness owed to it. "S&P" means Standard & Poor's Ratings Services, a division of McGraw-Hill Companies, Inc. and any successor thereto. "Stated Maturity" means, when used with respect to any Indebtedness or any installment of interest thereon, means the date specified in the instrument evidencing or governing such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of interest is due and payable. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "Trustee" has the meaning set forth in the Preamble to this Agreement. Appendix A-15 "UCC" means the Uniform Commercial Code as adopted in the State of New York, or in such other jurisdiction as governs the perfection of the liens and security interests in the Collateral for the purposes of the provisions hereof relating to such perfection or effect of perfection, as in effect from time to time. "United States" means the United States of America (including the states and the District of Columbia), its territories and possessions. Appendix A-16 EX-10 6 purchaseagreement.txt PURCHASE AGREEMENT EXHIBIT 10.1 ABRAXAS PETROLEUM CORPORATION $125,000,000 Floating Rate Senior Secured Notes due 2009 PURCHASE AGREEMENT October 21, 2004 Guggenheim Capital Markets, LLC 135 East 57th Street 8th Floor New York, New York 10022 Ladies and Gentlemen: Abraxas Petroleum Corporation, a Nevada corporation (the "Company"), proposes to issue and sell $125,000,000 aggregate principal amount of its Floating Rate Senior Secured Notes due 2009 (the "Notes"). The Notes will be issued pursuant to an Indenture (the "Indenture") to be dated as of the Closing Date (as defined below) among the Company, Eastside Coal Company, Inc., Sandia Oil & Gas Corporation, Sandia Operating Corp., Wamsutter Holdings, Inc. and Western Associated Energy Corporation (each of the foregoing subsidiaries of the Company, a "Guarantor" and collectively, the "Guarantors"; the Guarantors, together with the Company, being herein referred to as the "Company Persons") and U.S. Bank, N.A., as trustee (the "Trustee"). The Notes will be guaranteed by a guarantee of each of the Guarantors (each, a "Guarantee" and collectively with the Guarantee of each of the other Guarantors, the "Guarantees"; the Guarantees, together with the Notes, being herein referred to as the "Securities"). The Company hereby confirms its agreement with Guggenheim Capital Markets, LLC (the "Initial Purchaser") concerning the purchase of the Securities from the Company Persons by the Initial Purchaser. Each capitalized term used but not defined herein shall have the meaning given to such term in the "Description of the Notes" section of the Offering Memorandum (as defined below). The Securities will be offered and sold to the Initial Purchaser without being registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon an exemption therefrom. A preliminary offering memorandum, dated October 7, 2004 (the "Preliminary Offering Memorandum"), and an offering memorandum, dated the date hereof (the "Offering Memorandum"), each setting forth information concerning the Company Persons and the Securities, have been prepared in connection with the offering of the Securities. Copies of the Offering Memorandum will be delivered by the Company to the Initial Purchaser pursuant to the terms of this Agreement. Any reference herein to the Offering Memorandum shall be deemed to include all amendments and supplements thereto prepared in accordance with the terms of this Agreement, unless otherwise noted. The Company hereby confirms that it has authorized the use of the Offering Memorandum in connection with the offering and resale of the Securities by the Initial Purchaser in accordance with Section 3 hereof. Holders of the Securities (including the Initial Purchaser and its direct and indirect transferees) will be entitled to the benefits of an Exchange and Registration Rights Agreement, in a form reasonably satisfactory to the Initial Purchaser (the "Registration Rights Agreement"), pursuant to which the Company Persons will agree to file with the Securities and Exchange Commission (the "Commission") a registration statement under the Securities Act (the "Exchange Offer Registration Statement") registering an issue of Floating Rate Senior Secured Notes due 2009 (the "Exchange Notes") of the Company and a guarantee of the Exchange Notes by each of the Guarantors (the "Exchange Guarantees", and together with the Exchange Notes, the "Exchange Securities") that are identical in all material respects to the Securities (except that the Exchange Securities will not contain terms with respect to transfer restrictions) and, under certain circumstances, a shelf registration statement pursuant to Rule 415 under the Securities Act (the "Shelf Registration Statement"). Simultaneously with the issuance of the Securities pursuant to the Indenture, (i) the Company proposes to borrow an aggregate amount of $25,000,000 (the "Bridge Loan") pursuant to a $25,000,000 term loan agreement, to be dated as of the Closing Date (the "Bridge Loan Agreement"), among the Company Persons, certain lenders party thereto and an affiliate of the Initial Purchaser, as administrative agent (the "Bridge Loan Administrative Agent"), (ii) Grey Wolf Exploration Inc., an Alberta corporation and wholly-owned subsidiary of the Company ("Grey Wolf"), proposes to borrow an aggregate amount of $35,000,000 (the "Grey Wolf Term Loan" and together with the Bridge Loan, the "Term Loans") pursuant to a $35,000,000 term loan agreement, to be dated as of the Closing Date (the "Grey Wolf Loan Agreement" and together with the Bridge Loan Agreement, the "Term Loan Agreements"), among Grey Wolf, certain lenders party thereto and an affiliate of the Initial Purchaser, as administrative agent, and (iii) the Company proposes to enter into a $15,000,000 senior secured revolving credit facility, to be dated as of the Closing Date (the "New Credit Facility Agreement"), among the Company Persons, certain lenders party thereto and Wells Fargo Foothill, Inc., as administrative agent (the "New Credit Facility Administrative Agent"). The Term Loan Agreements, together with the New Credit Facility Agreement, are herein referred to as the "Loan Documents"; it being understood and agreed that neither the Initial Purchaser nor any of its affiliates is, as of the date of this Agreement (or by virtue of the Initial Purchaser entering into this Agreement), obligated to enter into the Loan Documents or to provide any funding thereunder. The proceeds of the sale of the Securities, together with the proceeds from the Term Loans, will be used (i) to repay all outstanding amounts under and terminate the Loan and Security Agreement, dated as of January 22, 2003 (the "Existing Credit Agreement"), among the Company, the subsidiaries of the Company party thereto, the lenders thereunder, Wells Fargo Foothill, Inc., as agent thereunder (the "Existing Credit Agreement Agent"), and Guggenheim Corporate Funding, LLC, as the specified appointee thereunder (the "Existing Credit Agreement Specified Appointee"), and (ii) to redeem all of the Company's 11 1/2% Secured Notes due 2007 (the "Existing Notes") in accordance with the Indenture, dated as of January 23, 2003 (the "Existing Notes Indenture"), among the Company, the subsidiary guarantors party thereto and U.S. Bank, N.A., as trustee thereunder (the "Existing Notes Indenture Trustee"). The termination and repayment of the Existing Credit Agreement and the redemption by the Company of 2 the Existing Notes, each with the proceeds from the sale of the Securities and borrowings under the Term Loans, are herein referred to collectively as the "Refinancing Transaction". The Company Persons will agree to secure (i) the Securities and their obligations under the New Credit Facility Agreement and guarantees thereof by granting to the Collateral Agent (as defined below), for the benefit of the holders of the Securities, the Trustee, the lenders under the New Credit Facility Agreement and the New Credit Facility Administrative Agent (collectively, the "Senior Secured Parties"), shared first priority liens on all of their material property and assets, excluding shares of Grey Wolf held by the Company Persons, and (ii) their obligations under the Bridge Loan Agreement and guarantees thereof by granting to the Collateral Agent, for the benefit of the lenders under the Bridge Loan Agreement and the Bridge Loan Administrative Agent (collectively, the "Junior Secured Parties", and together with the Senior Secured Parties, the "Secured Parties"), a second priority lien on all of their material property and assets, excluding shares of Grey Wolf held by the Company Persons, as evidenced by the Intercreditor, Security and Collateral Agency Agreement, to be dated as of the Closing Date (the "Intercreditor Agreement"), among the Company Persons, the Trustee, the Bridge Loan Administrative Agent, the New Credit Facility Administrative Agent and U.S. Bank, N.A., as collateral agent (the "Collateral Agent"). The Company Persons will also agree to secure their obligations under the Bridge Loan Agreement and guarantees thereof by granting to the Bridge Loan Administrative Agent, for the benefit of the Junior Secured Parties, a first priority lien on all of the shares of Grey Wolf held by the Company Persons. The Intercreditor Agreement, together with the mortgages, deeds of trust, pledge agreements, account control agreements and other security instruments being executed and delivered by the Company Persons in respect of the liens securing the indebtedness under the Loan Documents, are herein referred to as the "Security Documents". 1. Representations, Warranties and Agreements of the Company Persons. The Company Persons, jointly and severally, represent and warrant to, and agree with, the Initial Purchaser on and as of the date hereof and at the Closing Time (as defined below) as follows: (a) The Preliminary Offering Memorandum did not as of its date, and the Offering Memorandum will not at the Closing Time, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company Persons make no representation or warranty as to any information contained in or omitted from the Preliminary Offering Memorandum or the Offering Memorandum in reliance upon and in conformity with information relating to the Initial Purchaser furnished in writing to the Company by or on behalf of the Initial Purchaser expressly for use therein as specified in Section 16 hereof (the "Initial Purchaser's Information"). (b) Assuming the accuracy of the representations and warranties of the Initial Purchaser contained in Section 3 hereof and its compliance with the agreements set forth therein, it is not necessary, in connection with the issuance, offer, sale and delivery of the Securities to the Initial Purchaser, and the offer, resale and delivery of the Securities by the Initial Purchaser, in the manner contemplated by this Agreement and the Offering Memorandum, to 3 register the Securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). (c) Each of the Company Persons has been duly organized and is a validly existing corporation in good standing under the laws of its jurisdiction of incorporation, and has the requisite corporate power and authority necessary to own, lease and operate its properties and to conduct its business as currently conducted and as proposed to be conducted as described in the Offering Memorandum. Each of the Company Persons is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which its ownership, lease or operation of property or the conduct of its business or proposed conduct of its business as described in the Offering Memorandum requires such qualification, except where the failure to be so qualified or in good standing, individually or in the aggregate, has not had and could not reasonably be expected to have, a material adverse effect on (i) the ability of a Company Person to perform its obligations under, and consummate the transactions (including the Refinancing Transaction) contemplated by, this Agreement, the Indenture, the Calculation Agent Agreement (as defined in the Indenture), the Securities, the Exchange Securities, the Registration Rights Agreement, any Loan Document or any Security Document (collectively, the "Transaction Documents"), as applicable, (ii) the condition (financial or otherwise), results of operations, earnings, business affairs, management or business prospects of the Company and its subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, or (iii) the value of the Collateral or the validity or enforceability of the Security Documents or any lien purporting to be created thereby or any right or remedy arising thereunder (each, a "Material Adverse Effect"). (d) The Guarantors and Grey Wolf are the only subsidiaries of the Company. Grey Wolf has been duly organized and is a validly existing corporation in good standing under the laws of its jurisdiction of incorporation, and has the requisite corporate power and authority necessary to own, lease and operate its properties and to conduct its business as currently conducted and as proposed to be conducted as described in the Offering Memorandum. Grey Wolf is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which its ownership, lease or operation of property or the conduct of its business or proposed conduct of its business as described in the Offering Memorandum requires such qualification, except where the failure to be so qualified or in good standing, individually or in the aggregate, has not had and could not reasonably be expected to have, a Material Adverse Effect. (e) The Company has an authorized capitalization as set forth in the Offering Memorandum, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable. All of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of any security interest, mortgage, pledge, lien, hypothecation, claim, restriction upon voting or transfer, charge or other encumbrance of any kind (other than those imposed by the Securities Act or the securities or "Blue Sky" laws of any state) (each, a "Lien") other than the Liens granted to the Existing Notes Indenture Trustee and the Existing Credit Agreement Agent to secure the Existing Notes and the Existing Credit Agreement, respectively. All of such shares of capital stock will be owned directly or indirectly by the Company, free and clear of all Liens, at the Closing Time upon the discharge of the 4 Existing Notes and the termination and discharge of the Existing Credit Agreement. (f) Each Company Person has the requisite corporate power and authority to execute and deliver this Agreement and each of the other Transaction Documents to which it is a party and to perform its obligations hereunder and thereunder. Each Company Person has duly and validly taken all corporate action required to be taken by it for the due and proper (i) authorization, execution and delivery of each Transaction Document to which it is a party, and the performance of its obligations thereunder, (ii) issuance, authentication, offer, sale, resale and delivery, as applicable, of the Securities and the Exchange Securities and the use of the Offering Memorandum in any jurisdiction, in each case as contemplated by this Agreement and the Offering Memorandum and assuming the accuracy of the representations of, and the compliance with the agreements by, the Initial Purchaser contained in Section 3 hereof, (iii) grant and perfection of security interests in the Collateral pursuant to the Security Documents and (iv) consummation of the transactions contemplated by the Transaction Documents, including the Refinancing Transaction. (g) This Agreement has been duly authorized, executed and delivered by each Company Person and constitutes a valid and legally binding agreement of such Company Person, enforceable against such Company Person in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as any right to indemnification or contribution hereunder may be limited by federal or state securities laws and public policy considerations. (h) The Registration Rights Agreement has been duly authorized by each Company Person, and at the Closing Time, will be duly executed and delivered by such Company Person. The Registration Rights Agreement, when duly executed and delivered by each Company Person and each other party thereto, will constitute a valid and legally binding agreement of such Company Person, enforceable against such Company Person in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as any right to indemnification or contribution thereunder may be limited by federal or state securities laws and public policy considerations. (i) The Indenture has been duly authorized by each Company Person and, at the Closing Time, will be duly executed and delivered by such Company Person. The Indenture, when duly executed and delivered by each Company Person and the Trustee, will constitute a valid and legally binding agreement of such Company Person, enforceable against such Company Person in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). At the Closing Time, the 5 Indenture will conform in all material respects to the requirements of the Trust Indenture Act and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. (j) The Notes have been duly authorized by the Company and, at the Closing Time, will be duly executed, issued and delivered by the Company and authenticated by the Trustee in accordance with to the Indenture. The Notes, when duly executed by the Company and authenticated by the Trustee in accordance with the Indenture, and delivered against payment therefor, will be duly and validly issued and outstanding and will constitute valid and legally binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (k) The Guarantee of each Guarantor has been duly authorized by such Guarantor and, at the Closing Time, will be duly executed and delivered by such Guarantor in accordance with the Indenture. Each Guarantee, when duly executed and delivered by the respective Guarantor in accordance with the Indenture and the Securities have been paid for as provided herein, will constitute a valid and legally binding obligation of such Guarantor, entitled to the benefits of the Indenture and enforceable against such Guarantor in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (l) The Exchange Notes have been duly authorized by the Company and, at the time(s) provided for in the Registration Rights Agreement, will be duly executed, issued and delivered by the Company and authenticated by the Trustee in accordance with the Indenture. The Exchange Notes, when duly executed and delivered by the Company and authenticated by the Trustee in accordance with the Indenture, will be duly and validly issued and outstanding and will constitute valid and legally binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (m) The Exchange Guarantee of each Guarantor has been duly authorized by such Guarantor and, at the time(s) provided for in the Registration Rights Agreement, will be duly executed and delivered by such Guarantor in accordance with the Indenture. Each Exchange Guarantee, when duly executed and delivered by the respective Guarantor in accordance with the Indenture, will constitute a valid and legally binding obligation of such Guarantor, entitled to the benefits of the Indenture and enforceable against such Guarantor in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting 6 creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (n) Each of the Transaction Documents not referred to in the preceding clauses (g) through (p) has been duly authorized by each Company Person that is a party thereto and, at the Closing Time, will be duly executed and delivered by each Company Person that is a party thereto. Each such Transaction Document, when duly executed and delivered by each Company Person that is a party thereto, will constitute a valid and legally binding agreement of such Company Person, enforceable against such Company Person in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (o) The Transaction Documents will conform in all material respects to the descriptions thereof in the Offering Memorandum. (p) None of (i) the execution and delivery by a Company Person of each Transaction Document to which it is a party, and the performance of its obligations thereunder, (ii) the issuance, authentication, offer, sale, resale and delivery of the Securities and the Exchange Securities and the use of the Offering Memorandum in any jurisdiction, in each case as contemplated by this Agreement and the Offering Memorandum and assuming the accuracy of the representations and warranties of, and the compliance with the agreements by, the Initial Purchaser contained in Section 3 hereof, (iii) the grant and perfection of security interests in the Collateral pursuant to the Security Documents or (iv) the consummation by the Company Persons of the transactions contemplated by the Transaction Documents, including the Refinancing Transaction, will (A) result in any violation of the provisions of the charter or by-laws (or other comparable organizational documents) of the Company or any of its subsidiaries, (B) result in any violation of the provisions of any law, statute, rule or regulation (other than the securities or "Blue Sky" laws of any state) ("Law") or any judgment, injunction, ordinance, order or decree (including any stop order) of any court, arbitrator or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets ("Order"), (C) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of their respective properties or assets may be subject (each, a "Contract"), or which, with notice or lapse of time or both, would constitute such a breach, violation or default or (D) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any property or asset of the Company or any of its subsidiaries pursuant to any Contract (other than a Transaction Document), except in the case of clauses (B), (C) and (D) for such conflicts, breaches, violations, defaults or Liens that, individually or in the aggregate, have not had and could not reasonably be expected to have a Material Adverse Effect. (q) Each of BDO Seidman LLP ("BDO Seidman") and Deloitte & Touche, LLP ("D&T"), which has certified certain financial statements of the 7 Company and its subsidiaries, are independent public accountants within the meaning of the Code of Professional Conduct of the American Institute of Certified Public Accountants and its interpretations and rulings thereunder and as required by the Securities Act and the rules and regulations of the Commission thereunder. (r) The historical financial statements, including the notes thereto, contained in the Offering Memorandum comply as to form in all material respects with the accounting requirements of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder applicable to a registration statement on Form S-1 under the Securities Act (except that certain supporting schedules are omitted), and present fairly in all material respects the financial position of the Company and its consolidated subsidiaries and the other entities for which financial statements are included in the Offering Memorandum as of the dates indicated and the results of operations and cash flows for the periods indicated; such financial statements have been prepared in conformity with United States generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods covered. The other historical financial and statistical information and data contained in the Offering Memorandum are prepared on a basis consistent with the financial statements contained in the Offering Memorandum and the books and records of the Company and present fairly in all material respects the information purported to be shown thereby. (s) The pro forma financial information contained in the Offering Memorandum has been prepared on a basis consistent with the historical financial statements contained in the Offering Memorandum (except for the pro forma adjustments specified therein), and complies as to form in all material respects with the applicable accounting requirements of the Securities Act, the Exchange Act and the rules and regulations of the Commission thereunder (including all material adjustments to the historical financial information required by Rule 11-02 of Regulation S-X under the Securities Act and by the Exchange Act to reflect the transactions described in the Offering Memorandum), gives effect to assumptions made on a reasonable basis and presents fairly in all material respects the historical financial information and proposed transactions contemplated by the Offering Memorandum and the Transaction Documents, including the Refinancing Transaction. (t) The financial information contained in the Offering Memorandum under the headings "Summary-Summary Historical Consolidated and Pro Forma Statement of Operations", "Summary--Summary Historical and Pro Forma Operating Data", "Capitalization", "Ratio of Earnings to Fixed Charges", "Unaudited Pro Forma Financial Information", "Selected Historical Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the consolidated financial statements of the Company contained in the Offering Memorandum, are derived from the accounting records of the Company and its subsidiaries and present fairly in all material respects the information purported to be shown thereby. (u) Except as otherwise disclosed in the Offering Memorandum, there are no legal or governmental proceedings pending to which the Company (including any predecessor entity) or any of its subsidiaries is a party or of which any property or asset of the Company or any of its subsidiaries is the subject that, individually or in the aggregate, has had and, if determined 8 adversely to the Company or any of its subsidiaries could reasonably be expected to have, a Material Adverse Effect, and to the best knowledge of the Company Persons, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (v) No Law has been, or to the best knowledge of the Company Persons has been proposed to be, enacted, adopted or issued, and no Order has been, or has been proposed to be, issued, which would suspend or prevent the issuance, authentication, offer, sale, resale or delivery of the Securities or the Exchange Securities or the use of the Offering Memorandum in any jurisdiction, in each case, as contemplated by this Agreement and the Offering Memorandum. No action, suit or proceeding is pending against or, to the best knowledge of the Company Persons, threatened against or affecting the Company or any of its subsidiaries before any court or arbitrator or any governmental agency, body or official, domestic or foreign, that could reasonably be expected to (i) interfere with or adversely affect the issuance, authentication, offer, sale, resale or delivery of the Securities or the Exchange Securities or the use of the Offering Memorandum in any jurisdiction, in each case, as contemplated by this Agreement and the Offering Memorandum and assuming the accuracy of the representations and warranties of, and the compliance with the agreements by, the Initial Purchaser contained in Section 3 hereof or (ii) in any manner draw into question the validity or enforceability of this Agreement or any of the other Transaction Documents or any action taken or to be taken pursuant to the terms hereof or thereof. The Company has complied with any and all requests by any securities authority in any jurisdiction for additional information to be included in the Offering Memorandum. (w) Neither the Company nor any of its subsidiaries is, or with notice or lapse of time or both would be, (i) in violation of the provisions of its charter or by-laws (or other comparable organizational documents), (ii) in violation of the provisions of any Law or (iii) in breach or violation of any of the provisions of, or in default under, any Contract, except in the case of clauses (ii) and (iii) for such violations, breaches or defaults that, individually or in the aggregate, have not had and could not reasonably be expected to have a Material Adverse Effect. (x) No consent, authorization, approval, license, order, registration, qualification or decree of, or filing with, any court or governmental authority or agency is necessary or required for (i) the execution and delivery by a Company Person of each Transaction Document to which it is a party, and the performance of its obligations thereunder, (ii) the issuance, authentication, offer, sale, resale and delivery of the Securities and the Exchange Securities and the use of the Offering Memorandum in any jurisdiction, in each case as contemplated by this Agreement and the Offering Memorandum and assuming the accuracy of the representations and warranties of, and the compliance with the agreements by, the Initial Purchaser contained in Section 3 hereof, (iii) the grant and perfection of security interests in the Collateral pursuant to the Security Documents or (iv) the consummation by the Company Persons of the transactions contemplated by the Transaction Documents, including the Refinancing Transaction, except for (A) with respect to the performance by the Company of its obligations under the Registration Rights Agreement, the registration with the Commission of the Securities under the Shelf Registration Statement and/or the registration of the Exchange Offer with the Commission, (B) the registration or qualification of the Securities under applicable securities 9 or "Blue Sky" laws of the various states in connection with the purchase and distribution of the Securities by the Initial Purchaser as contemplated by this Agreement and the Offering Memorandum, (C) the filings required to release existing Liens on the Collateral, (D) the filings required to perfect the Collateral Agent's security interests granted pursuant to the Security Documents, (E) those required in connection with the qualification of the Indenture under the Trust Indenture Act and (F) those required in connection with arranging for the Securities to be designated eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") Market or for the Securities and the Exchange Securities to be eligible for clearance and settlement through The Depository Trust Company ("DTC"). (y) The Company and each of its subsidiaries possess all licenses, certificates, authorizations and permits issued by, and have made all declarations and filings with, the appropriate federal, state or foreign regulatory agencies or bodies that are necessary or desirable for the ownership of their respective properties or the conduct of their respective businesses or the proposed conduct thereof as described in the Offering Memorandum, except where the failure to possess or make the same, individually or in the aggregate, has not had and could not reasonably be expected to have a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received notification of any revocation or modification of any such license, certificate, authorization or permit or has received notification that any such license, certificate, authorization or permit will not be renewed in the ordinary course. (z) The Company and each of its subsidiaries have filed all federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof and have paid all taxes due thereon other than those being contested in good faith and for which reserves have been provided in accordance with GAAP and those currently payable without penalty or interest or the nonpayment of which would not have a Material Adverse Effect, and no tax deficiency has been determined adversely to the Company or any of its subsidiaries that has had, nor does the Company or any of its subsidiaries have any knowledge of any tax deficiency that, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (aa) Neither the Company nor any of its subsidiaries is, or after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Offering Memorandum under the heading "Use of Proceeds", will be, (i) an "investment company" or a company "controlled by" an investment company within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), or (ii) a "holding company" or a "subsidiary company" of a holding company or an "affiliate" thereof within the meaning of the Public Utility Holding Company Act of 1935, as amended ("PUHCA"). (bb) The Company is subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act. (cc) The Company and each of its subsidiaries make and keep accurate books and records, and maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of financial 10 statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any difference. (dd) Except as otherwise disclosed in the Offering Memorandum, the Company and each of its subsidiaries have insurance covering their respective properties, operations, personnel and businesses, which insurance is in amounts and insures against such losses and risks as are standard in the oil and gas industry for similarly situated companies. Neither the Company nor any of its subsidiaries has received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance. (ee) The Company and each of its subsidiaries own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses and know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) necessary for the conduct of their respective businesses or the proposed conduct thereof as described in the Offering Memorandum, and, to the best knowledge of the Company Persons, the conduct of their respective businesses will not conflict in any material respect with, and the Company and its subsidiaries have not received any notice of any claim of conflict with, any such rights of others. (ff) The Company and each of its subsidiaries have good and defensible title to, or have valid rights to lease or otherwise use, all items of real and personal property which are material to the business of the Company and its subsidiaries, in each case free and clear of all Liens and other defects and imperfections of title, except for (i) the Liens granted to the Existing Notes Indenture Trustee and the Existing Credit Agreement Agent to secure the Existing Notes and the Existing Credit Agreement, respectively, and (ii) such Liens and other defects or impefections of title that, individually or in the aggregate, (A) do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries or (B) have not had and could not reasonably be expected to have a Material Adverse Effect. All of the Liens granted to the Existing Notes Indenture Trustee and the Existing Credit Agreement Agent to secure the Existing Notes and the Existing Credit Agreement, respectively, will be fully and completely released and discharged at the Closing Time upon the discharge of the Existing Notes and the termination and discharge of the Existing Credit Agreement. (gg) No labor disturbance by or dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is contemplated or threatened. Neither the Company nor any of its subsidiaries is party to a collective bargaining agreement and there are no unfair labor practice complaints pending against the Company or any of its subsidiaries or, to the knowledge of the Company Persons, threatened against any of them. (hh) No "prohibited transaction" (as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or 11 Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code")) or "accumulated funding deficiency" (as defined in Section 302 of ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than events with respect to which the 30-day notice requirement under Section 4043 of ERISA has been waived) has occurred with respect to any "employee benefit plan" (as defined in Section 3(3) of ERISA) of the Company or any of its subsidiaries or any employee benefit plan of any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate") which could reasonably be expected to have a Material Adverse Effect; each such employee benefit plan is in compliance in all material respects with its provisions and applicable law, including ERISA and the Code; neither the Company nor any ERISA Affiliate has participated in any multiemployer plan (as defined in Section 3(37) of ERISA); neither the Company nor any ERISA Affiliate has incurred or could reasonably expect to incur any liability under Title IV of ERISA with respect to the termination of, or withdrawal from, any "pension plan" (as defined in Section 3(2) of ERISA) for which the Company or any of its subsidiaries could have any liability; and each such pension plan that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which could reasonably be expected to cause the loss of such qualification. (ii) The Company and its subsidiaries (i) are in material compliance with any and all applicable foreign, federal, state and local laws, regulations, rules, ordinances, codes, policies, rules of common law, judicial or administrative orders, consents, decrees and judgments relating to pollution, the protection of human health and safety, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) and wildlife, the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials"), and the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (ii) have received and are in material compliance with all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) have not received notice of any actual or potential liability for any (A) actual or alleged violation of Environmental Laws or (B) investigation or other action (including, but not limited to, remediation) in response to, or personal injury (including death) or property damage in connection with, any actual or alleged disposal or release of Hazardous Materials, except where such notice has been resolved or is no longer outstanding or where the actual or potential liability could not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its subsidiaries has been named as a "potentially responsible party" under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. ss.ss. 9601 et seq., as amended. The Company and its subsidiaries have not entered into any agreement, and are not subject to any order, pursuant to which they currently have any ongoing obligation to investigate or take any other action (including, but not limited to, remediation) in response to any disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants. (jj) Neither the Company nor any of its subsidiaries nor, to the best knowledge of the Company, any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries (i) has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity or 12 made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, or failed to disclose fully any contribution in violation of law, (ii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (kk) Each Company Person is and, immediately after the Closing Time (after giving effect to the sale of the Securities pursuant to this Agreement and the consummation of the other transactions contemplated by the Transaction Documents, including the Refinancing Transaction) will be, Solvent. As used in this paragraph, the term "Solvent" means, with respect to a Company Person on a particular date, that on such date (i) the present fair market value (or present fair saleable value) of the assets of such Company Person is not less than the total amount required to pay the probable liabilities of such Company Person on its total existing debts and liabilities (including contingent liabilities) as they become absolute and mature, (ii) such Company Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and commitments as they mature and become due in the normal course of business, (iii) such Company Person is not incurring debts or liabilities beyond its ability to pay as such debts and liabilities mature and (iv) such Company Person is not engaged in any business or transaction, and is not about to engage in any business or transaction, for which its property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Company Person is engaged. In computing the amount of such contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. No Company Person is incurring obligations or making transfers under any evidence of indebtedness with the intent to hinder, delay or defraud any entity to which it is or will become indebted. (ll) As of the Closing Time, the Company Persons will own the Collateral free and clear of all Liens (other than Permitted Prior Liens and the Liens granted to the Existing Notes Indenture Trustee and the Existing Credit Agreement Agent to secure the Existing Notes and the Existing Credit Agreement, respectively), and no Financing Statement (as defined below) in respect of any property or asset of any Company Person will be on file in favor of any person other than those (i) for which a termination statement has been properly filed and (ii) in respect of (A) Permitted Prior Liens and (B) Liens granted to the Existing Notes Indenture Trustee and the Existing Credit Agreement Agent to secure the Existing Notes and the Existing Credit Agreement, respectively. (mm) When executed and delivered to the Collateral Agent at the Closing Time, the Security Documents will grant and create, in favor of the Collateral Agent (i) for the benefit of the Senior Secured Parties, valid and enforceable shared first priority security interests in the Collateral and (ii) for the benefit of the Junior Secured Parties, valid and enforceable shared second priority security interests in the Collateral, subject in each case to the discharge of the Existing Notes and the termination and discharge of the Existing Credit Agreement at the Closing Time. 13 (nn) When executed at the Closing Time, each Mortgage will be delivered, duly acknowledged and, if required for recordation, attested and otherwise will be in recordable form, and when such Mortgage is filed for record and recorded in the filing office identified therein, the security interest of the Collateral Agent in the real property described therein will be duly perfected. (oo) Each Company Person is a "registered organization" (as defined in Article 9 of the Uniform Commercial Code (the "UCC")) under the law of the state in which it is identified as being incorporated on Schedule 1 attached hereto, and at the Closing Time all security interests granted under the Security Documents in Collateral consisting of personal property or fixtures will be duly perfected to the extent such security interests may be perfected by filing upon the filing of the Financing Statements. (pp) At the Closing Time, (i) all Collateral consisting of Capital Stock of the Guarantors will be represented by certificated securities and (ii) all such certificated securities and all promissory notes and other instruments then evidencing or representing any Collateral will be delivered to the Collateral Agent in pledge for the benefit of the Secured Parties as security for all of the Secured Obligations. (qq) Neither the Company nor any of its subsidiaries owns any "margin securities" as that term is defined in Regulations T and U of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), and the issuance, offer and sale of the Securities and the application of the net proceeds therefrom will not violate Regulation T, U or X of the Federal Reserve Board. (rr) Except for this Agreement, neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person that would give rise to a valid claim against the Company or the Initial Purchaser for a brokerage commission, finder's fee or like payment in connection with the offering and sale of the Securities or the Exchange Securities. (ss) The Securities satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. The Offering Memorandum contains all of the information that, if requested by a prospective purchaser of the Securities, would be required to be provided to such prospective purchaser pursuant to Rule 144A(d)(4) under the Securities Act. (tt) None of the Company Persons, any of their respective affiliates (as defined in Rule 501(b) under the Securities Act) or any other person acting on behalf of the Company Persons or such affiliates (other than the Initial Purchaser, as to whom the Company Persons make no representation or warranty) has, directly or indirectly, (i) sold, offered for sale, solicited offers to buy, or otherwise negotiated in respect of, any security (as such term is defined in the Securities Act) which is or may be integrated (within the meaning of Rule 502 under the Securities Act) with the Securities in a manner that would require the registration under the Securities Act of the Securities or render invalid the exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof, Rule 144A thereunder ("Rule 144A"), Regulation S thereunder ("Regulation S") or otherwise in connection with (A) the offer and sale of the Securities by the Company Persons to the Initial 14 Purchaser hereunder, (B) the resale of the Securities by the Initial Purchaser to subsequent purchasers as contemplated by this Agreement and the Offering Memorandum or (C) the resale of the Securities by such subsequent purchasers to others as contemplated by the Offering Memorandum or (ii) with respect to any Securities being (A) offered or sold in the United States, engaged in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act or any public offering within the meaning of Section 4(2) of the Securities Act and (B) offered or sold outside the United States in reliance upon Regulation S, engaged in any "directed selling efforts" (within the meaning of Regulation S) in the United States. (uu) When the Securities are issued and delivered to the Initial Purchaser pursuant to this Agreement, none of the Securities will be of the same class (within the meaning of Rule 144A) as securities of any of the Company Persons which are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted on a U.S. automated inter-dealer quotation system. No securities of the same class as the Securities have been issued by the Company Persons or their affiliates within the six-month period immediately prior to the date hereof. (vv) The Securities will be debt securities of a reporting issuer (within the meaning of Regulation S) when issued, and the Securities will continue to be at all times debt securities of a reporting issuer (within the meaning of Regulation S) until the expiration of the Distribution Compliance Period (as defined below). The Company Persons, each of their respective affiliates and any person acting on behalf of the Company Persons or such affiliates (other than the Initial Purchaser, as to whom the Company Persons make no representation or warranty) have complied and will comply with the offering restriction requirements of Regulation S. The sale of the Securities pursuant to Regulation S is not part of a plan or scheme to evade the registration provisions of the Securities Act. (ww) Neither the Company nor any of its affiliates has taken, nor will the Company or any such affiliate take, directly or indirectly, any action which is designed to stabilize or manipulate, or which has constituted or which would be expected to cause or result in stabilization or manipulation of, the price of any security of the Company to facilitate the sale or resale of the Securities or the Exchange Securities. (xx) No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Offering Memorandum has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith. (yy) Since the date as of which information is given in the Offering Memorandum (exclusive of amendments or supplements thereto), except as otherwise stated or contemplated therein, (i) there has been no material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or in the earnings, business affairs, management or business prospects of the Company and its subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, (ii) neither the Company nor any of its subsidiaries has incurred any material liability or obligation, direct or contingent, other than in the ordinary course of business, (iii) neither the Company nor any of its subsidiaries has entered 15 into any material transaction other than in the ordinary course of business and (iv) there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries, or any dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock, or any redemption in respect thereof. (zz) The oil and gas reserve estimates of the Company and its subsidiaries contained in the Offering Memorandum have been prepared or reviewed by independent petroleum engineers, in each case in accordance with the Commission guidelines applied on a consistent basis throughout the periods involved, and the Company does not have any reason to believe that such estimates do not fairly reflect the oil and gas reserves of the Company and its subsidiaries at the dates indicated in the Offering Memorandum. Each of DeGolyer and MacNaughton and McDaniel and Associates Consultants Ltd. is an independent petroleum engineering firm with respect to the Company. 2. Purchase of the Securities. On the basis of the representations, warranties and agreements set forth herein, and subject to the terms and conditions set forth herein, the Company Persons agree to issue and sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase from the Company Persons, an aggregate principal amount of $125,000,000 of the Securities at a purchase price equal to 96.75% of the principal amount thereof. 3. Resale of the Securities. The Initial Purchaser has advised the Company that it proposes to offer the Securities for sale upon the terms and conditions set forth in this Agreement and the Offering Memorandum, and the Initial Purchaser hereby represents and warrants to, and agrees with, the Company that: (a) it is a "qualified institutional buyer" (a "QIB") within the meaning of Rule 144A and it has not offered or sold the Securities to any person other than, and it will offer and sell the Securities only, (i) in the United States to (A) persons who it reasonably believes are QIBs in transactions meeting the requirements of Rule 144A, (B) institutional investors that qualify as an accredited investor as defined under Rule 501(a)(1), (2), (3), (7) or (8) under the Securities Act and which, prior to their purchase of the Securities, deliver to the Initial Purchaser a letter substantially in the form of Annex A to the Offering Memorandum, and (C) a limited number of individual investors that qualify as an accredited investor as defined under Rule 501(a)(4), (5) or (6) under the Securities Act and which, prior to their purchase of the Securities, deliver to the Initial Purchaser a letter substantially in the form of Annex A to the Offering Memorandum, and (ii) outside the United States in reliance on Regulation S; (b) it has not solicited offers for, offered or sold, and will not solicit offers for, offer or sell, the Securities by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act; (c) it will take reasonable steps to inform persons acquiring Securities from it that the Securities (i) have not been and, except as may be required by the Registration Rights Agreement, will not be registered under the Securities Act, (ii) are being sold to them without registration under the Securities Act in reliance on Rule 144A (if applicable) and (iii) may not be 16 offered, sold or otherwise transferred except (A) to the Company or (B) in accordance with (I) Rule 144A to a person whom the seller reasonably believes is a QIB that is purchasing such Securities for its own account or for the account of a QIB to whom notice is given that the offer, sale and transfer is being made in reliance on Rule 144A, (II) in accordance with Regulation S or (III) pursuant to another available exemption from registration under the Securities Act, and in each case subject to the transfer restrictions described in the Offering Memorandum under the heading "Transfer Restrictions"; (d) it will, prior to or simultaneously with the confirmation of sale by it to any purchaser of any of the Securities purchased hereunder, furnish to that purchaser a copy of the Offering Memorandum (and any amendment or supplement thereto that the Company shall have furnished to it prior to the date of such confirmation of sale); and (e) with respect to the transactions described in subsection (a)(ii) of this Section 3, (i) it has complied, and will comply, with all applicable laws and regulations in each jurisdiction in which it offers, sells or delivers the Securities, (ii) it has not offered or sold the Securities, and it will not offer or sell the Securities, (A) as part of its distribution at any time and (B) otherwise until 40 days after the later of the commencement of the offering and the Closing Date (the "Distribution Compliance Period"), except in accordance with Rule 903 of Regulation S, and (iii) neither it, nor any of its affiliates, nor any person acting on behalf of it or such affiliates, has engaged or will engage in any "directed selling efforts" (within the meaning of Regulation S) in the United States with respect to the Securities, and each such person has complied, and will comply, with all applicable "offering restrictions" (with the meaning of Regulation S). 4. Delivery of and Payment for the Securities. (a) Delivery of and payment for the Securities shall be made at the offices of Sidley Austin Brown & Wood llp, 787 Seventh Avenue, New York, New York, or at such other place as shall be agreed upon by the Initial Purchaser and the Company (the "Closing Location"), at 10:00 A.M., New York City time, on October 28, 2004, or at such other time or date as shall be agreed upon by the Initial Purchaser and the Company (such date of payment and delivery being herein referred to as the "Closing Date" and such time of payment and delivery on the Closing Date being herein referred to as the "Closing Time"). A meeting will be held at the Closing Location at 5:00 p.m., New York City time, on the New York Business Day next preceding the Closing Date (or at such other location, time or date as shall be agreed upon by the Initial Purchaser and the Company), at which meeting the final drafts of the Transaction Documents and other documents to be delivered pursuant to Section 6 hereof will be available for review by the parties hereto. For the purposes of this Section 4(a), "New York Business Day" shall mean each day other than a Saturday, Sunday or other day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. (b) At the Closing Time, payment of the purchase price for the Securities shall be made to the Company by wire or book-entry transfer of same-day funds to such account or accounts as the Company shall specify prior to the Closing Date or by such other means as the parties hereto shall agree prior to the Closing Date against delivery to the Initial Purchaser of the certificates evidencing the Securities. Time shall be of the essence, and 17 delivery of such certificates at the time and place specified pursuant to this Agreement is a further condition of the obligations of the Initial Purchaser hereunder. Upon delivery, the Securities will be represented by one or more definitive global securities in book-entry form registered in such names and in such denominations as the Initial Purchaser shall have requested in writing not less than two full business days prior to the Closing Date. The Company agrees to make one or more global certificates evidencing the Securities available for inspection by the Initial Purchaser in New York, New York at least 24 hours prior to the Closing Time. 5. Further Agreements of the Company Persons. Each Company Person agrees with the Initial Purchaser: (a) to prepare the Offering Memorandum in a form approved by the Initial Purchaser; prior to making any amendment or supplement to the Offering Memorandum, to furnish a copy thereof to the Initial Purchaser and its counsel and to make no amendment or any supplement to the Offering Memorandum which shall be reasonably disapproved by Initial Purchaser or its counsel promptly after a reasonable period of review; and to promptly furnish to the Initial Purchaser and counsel for the Initial Purchaser, without charge, such number of copies of the Offering Memorandum (and any amendment or supplement thereto) as may be reasonably requested; (b) to advise the Initial Purchaser promptly and, if requested, confirm such advice in writing, of the occurrence of any event or the existence of any condition which makes any statement of a material fact made in the Offering Memorandum untrue or which requires any addition or change to the Offering Memorandum in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (c) if, at any time prior to the completion of the resale of all of the Securities by the Initial Purchaser hereunder, any event shall occur or condition exist as a result of which it is necessary, in the opinion of the Initial Purchaser or its counsel, or of counsel for the Company, to amend or supplement the Offering Memorandum so that the Offering Memorandum (i) will not contain an untrue statement of a material fact or (ii) will not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made at the time the Offering Memorandum is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Offering Memorandum to comply with applicable law, to promptly prepare such amendment or supplement as may be necessary to correct such untrue statement or omission or so that the Offering Memorandum, as so amended or supplemented, will comply with applicable law; (d) to not, and to cause its affiliates (as defined in Rule 501(b) under the Securities Act) and any other person acting on its or their behalf not to, directly or indirectly, (i) sell, offer for sale, solicit any offer to buy, or otherwise negotiate in respect of, any security (as such term is defined in the Securities Act) which is or may be integrated (within the meaning of Rule 502 under the Securities Act) with the Securities in a manner that would require the registration under the Securities Act of the Securities or render invalid the exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof, Rule 144A, Regulation S or 18 otherwise in connection with (A) the offer and sale of the Securities by the Company Persons to the Initial Purchaser hereunder, (B) the resale of the Securities by the Initial Purchaser to subsequent purchasers as contemplated by this Agreement and the Offering Memorandum or (C) the resale of the Securities by such subsequent purchasers to others as contemplated by the Offering Memorandum, (ii) with respect to the Securities being offered or sold (A) in the United States, engage in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act or any public offering within the meaning of Section 4(2) of the Securities Act and (B) and outside the United States in reliance upon Regulation S, engage in any "directed selling efforts" (within the meaning of Regulation S) in the United States or (iii) offer, sell, contract to sell or otherwise dispose of, directly or indirectly, any securities under circumstances where such offer, sale, contract or disposition would cause the exemption afforded by Section 4(2) of the Securities Act to cease to be applicable to the offering and sale of the Securities as contemplated by this Agreement and the Offering Memorandum; (e) at any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act and the Securities are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, to furnish at its expense to holders of the Securities and prospective purchasers of the Securities designated by such holders, upon request of such holders or such prospective purchasers, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act (the foregoing agreement being for the benefit of the holders from time to time of the Securities and prospective purchasers of the Securities designated by such holders); (f) to promptly notify the Initial Purchaser if the Securities cease to be debt securities of a reporting issuer (within the meaning of Regulation S) at any time before the expiration of the Distribution Compliance Period. (g) to promptly take from time to time such actions as the Initial Purchaser may reasonably request to qualify the Securities for offer and sale (or obtain an exemption from registration) under the securities or "Blue Sky" laws of such jurisdictions as the Initial Purchaser may designate and to continue such qualifications in effect for so long as required for the resale of the Securities; and to arrange for the determination of the eligibility for investment of the Securities under the laws of such jurisdictions as the Initial Purchaser may reasonably request; provided, however, that the Company and its subsidiaries shall not be obligated to qualify as foreign corporations in any jurisdiction in which they are not so qualified or to file a general consent to service of process in any jurisdiction; (h) to use its reasonable best efforts to cause the Securities to be designated PORTAL Market securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. ("NASD") relating to trading in the PORTAL Market and for the Securities and the Exchange Securities to be eligible for clearance and settlement through DTC; (i) to comply with all agreements set forth in the representation letters of the Company to DTC relating to the approval of the Securities by DTC for "book entry" transfer; 19 (j) for a period of 180 days from the Closing Date, to not offer for sale, sell, contract to sell or otherwise dispose of, directly or indirectly, or file a registration statement for, or announce any offer, sale, contract for sale of or other disposition of any debt securities issued or guaranteed by the Company or any of its subsidiaries (other than the Securities) without the prior written consent of the Initial Purchaser, except for the Exchange Securities in connection with the Exchange Offer; (k) until consummation of the Exchange Offer, without the prior written consent of the Initial Purchaser, to not, and to not permit any of its affiliates (as defined in Rule 144 under the Securities Act) to, resell any of the Securities that have been reacquired by them; (l) in connection with the offering of the Securities, until the Initial Purchaser shall have notified the Company (which it shall do as soon as reasonably practicable) of the completion of the distribution of all of the Securities contemplated hereby, to not, and to cause its affiliated purchasers (as defined in Regulation M under the Exchange Act) not to, either alone or with one or more other persons, bid for or purchase, for any account in which it or any of its affiliated purchasers has a beneficial interest, any Securities, or attempt to induce any person to purchase any Securities; and to not, and to cause its affiliated purchasers not to, make bids or purchase for the purpose of creating actual or apparent active trading in the Securities or for the purpose of raising the price of the Securities; provided, however, that notwithstanding any other provision of this Agreement, the Initial Purchaser shall not be prohibited from market-making, stabilization, covering or overallotment transactions as contemplated by the Offering Memorandum; (m) in connection with the offering of the Securities, to make its officers, employees, independent accountants, independent petroleum engineers and legal counsel reasonably available upon request by the Initial Purchaser; (n) to furnish to the Initial Purchaser on the date hereof a copy of each independent accountants' report included in the Offering Memorandum signed by the accountants rendering such report; (o) to do and perform all things required to be done and performed by it under this Agreement that are within its control prior to or after the Closing Time, and to use its reasonable efforts to satisfy all conditions precedent on its part to the delivery of the Securities; (p) to not take any action prior to the execution and delivery of the Indenture which, if taken after such execution and delivery, would have violated any of the covenants contained in the Indenture; (q) to not take any action, prior to the Initial Purchaser notifying the Company (which it shall do as soon as reasonably practicable) of the completion of the distribution of all of the Securities contemplated hereby, which would require the Offering Memorandum to be amended or supplemented pursuant to Section 5(c) hereof; 20 (r) prior to the Closing Time, to not issue any press release or other communication directly or indirectly or hold any press conference with respect to the Company, its condition, financial or otherwise, or earnings, business affairs or business prospects (except for routine oral marketing communications in the ordinary course of business and consistent with the past practices of the Company and of which the Initial Purchaser is notified), without consulting and obtaining the consent of the Initial Purchaser, unless in the judgment of the Company and its counsel, and after notification to the Initial Purchaser, such press release or communication is required by law; (s) to apply the net proceeds from the sale of the Securities as set forth in the Offering Memorandum under the heading "Use of Proceeds"; (t) to take all actions necessary (i) to cause the Existing Notes Indenture, and the "Guarantees" and the "Security Documents" (as such terms are defined in the Existing Notes Indenture), to be discharged and of no further effect in accordance with Section 8.01 of the Existing Notes Indenture prior to or concurrently with the purchase of the Securities by the Initial Purchaser hereunder, including, without limitation, causing the Existing Notes Payout Amount (as defined below) to be paid to the Existing Notes Indenture Trustee prior to or concurrently with the purchase of the Securities by the Initial Purchaser hereunder, and (ii) to cause the Existing Notes Indenture Trustee to acknowledge, prior to or concurrently with the purchase of the Securities by the Initial Purchaser hereunder, in writing its receipt of the Existing Notes Indenture Payout Amount and such discharge of the Company's obligations under the Existing Notes Indenture as provided in Section 8.05 thereof; (u) to take all actions necessary (i) to cause the Existing Credit Agreement Payout Amount (as defined below) to be paid to the Existing Credit Agreement Agent prior to or concurrently with the purchase of the Securities by the Initial Purchaser hereunder and (ii) to cause the Existing Credit Agreement Agent to acknowledge, prior to or concurrently with the purchase of the Securities by the Initial Purchaser hereunder, in writing its receipt of the Existing Credit Agreement Payout Amount, the termination of the Existing Credit Agreement and the release and discharge of all Liens securing obligations thereunder to the Collateral Agent for the benefit of the Secured Parties; and (v) to take such steps as shall be necessary to ensure that neither the Company nor any of its subsidiaries shall become an "investment company" or a company "controlled by" an investment company within the meaning of the Investment Company Act or a "holding company" or a "subsidiary company" of a holding company or an "affiliate" thereof within the meaning of PUHCA. 6. Conditions of Initial Purchaser Obligations. The obligations of the Initial Purchaser hereunder are subject, in its discretion, to the accuracy, on and as of the date hereof and at the Closing Time, of the representations and warranties of the Company Persons contained herein, to the accuracy of the statements of the Company Persons and their respective officers made in any certificates delivered pursuant hereto, to the performance by the Company Persons of their respective obligations hereunder, and to each of the following additional conditions: 21 (a) The Offering Memorandum (and any amendment or supplement thereto) shall have been printed and copies distributed to the Initial Purchaser as promptly as practicable on or following the date of this Agreement (or at such other date and time as to which the Initial Purchaser may agree). If any event shall have occurred that requires the Company under Section 5(c) hereof to prepare an amendment or supplement to the Offering Memorandum, such amendment or supplement shall have been prepared, the Initial Purchaser shall have been given a reasonable opportunity to comment thereon, and copies thereof shall have been delivered to the Initial Purchaser reasonably in advance of the Closing Date. (b) No Law shall have been, or shall have been proposed to be, enacted, adopted or issued, and no Order shall have been, or shall have been proposed to be, issued, which would suspend or prevent the issuance, authentication, offer, sale, resale or delivery of the Securities or the Exchange Securities or the use of the Offering Memorandum in any jurisdiction, in each case, as contemplated by this Agreement and the Offering Memorandum. (c) There shall not have occurred any invalidation of Rule 144A, Regulation S or Regulation D under the Securities Act by any court or any withdrawal or proposed withdrawal of any rule or regulation under the Securities Act or the Exchange Act by the Commission or any amendment or proposed amendment thereof by the Commission which in the judgment of the Initial Purchaser would materially impair the ability of the Initial Purchaser to purchase, hold or effect resales of the Securities contemplated hereby. (d) Each Transaction Document, in form and substance satisfactory to the Initial Purchaser, shall have been duly executed and delivered by an authorized officer of each party thereto, and shall have been delivered to the Initial Purchaser. (e) The Notes, in form and substance satisfactory to the Initial Purchaser, shall have been duly executed and delivered by an authorized officer of the Company and duly authenticated by an authorized officer of the Trustee. (f) The Securities shall have been approved by the NASD for trading in the PORTAL Market. (g) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement and each of the other Transaction Documents and the Offering Memorandum, and all other legal matters relating to this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby (including the Refinancing Transaction), shall be satisfactory in all material respects to the Initial Purchaser, and the Company shall have furnished to the Initial Purchaser all documents and information that it or its counsel may reasonably request to enable such counsel to pass upon such matters. (h) The Initial Purchaser shall not have either discovered or disclosed to the Company prior to the Closing Time that the Offering Memorandum (or any amendment or supplement thereto) (i) contains an untrue statement of a fact which, in the opinion of the Initial Purchaser or its counsel, is material or (ii) omits to state any fact which, in the opinion of the Initial Purchaser or such counsel, is material and is required to be stated therein or is 22 necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (i) The Initial Purchaser shall have received from each of (i) Cox Smith Matthews Incorporated, counsel for the Company, and (ii) Bryan Cave LLP, special New York counsel for the Company, a written opinion, addressed to the Initial Purchaser and dated the Closing Date, in form and substance reasonably satisfactory to the Initial Purchaser. (j) The Initial Purchaser shall have received from Sidley Austin Brown & Wood LLP, counsel for the Initial Purchaser, such opinion or opinions, dated the Closing Date, with respect to such matters as the Initial Purchaser may reasonably require, and the Company shall have furnished to such counsel such documents and information as they may request for the purpose of enabling them to pass upon such matters. (k) The Company shall have furnished to the Initial Purchaser letters of BDO Seidman and D&T, addressed to the Initial Purchaser, dated the date hereof and the Closing Date, in form and substance reasonably satisfactory to the Initial Purchaser. (l) The Company shall have furnished to the Initial Purchaser letters of DeGolyer and MacNaughton and McDaniel and Associates Consultants Ltd., addressed to the Initial Purchaser, dated the date hereof and the Closing Date, in form and substance reasonably satisfactory to the Initial Purchaser. (m) The Company shall have furnished to the Initial Purchaser a certificate, dated the Closing Date, of its chief executive officer and its chief financial officer stating that (i) such officers have carefully examined the Offering Memorandum, (ii) in their opinion, the Offering Memorandum, as of its date, did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and since the date of the Offering Memorandum, no event has occurred that should have been set forth in a supplement or amendment to the Offering Memorandum so that the Offering Memorandum (as so amended or supplemented) would not include any untrue statement of a material fact and would not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, (iii) the representations and warranties of the Company Persons in this Agreement were true and correct on the date hereof and are true and correct in all material respects as of the Closing Time, (iv) the Company Persons have complied with all agreements and satisfied all conditions on their part to be performed or satisfied hereunder on or prior to the Closing Time in all material respects and (v) subsequent to the date of the most recent financial statements contained in the Offering Memorandum, there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs, management or business prospects of the Company and its subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, except as set forth in the Offering Memorandum. 23 (n) Each Company Person shall have furnished to the Initial Purchaser a certificate of its secretary or assistant secretary, dated the Closing Date, in form and substance satisfactory to the Initial Purchaser. (o) Each Company Person shall have furnished to the Initial Purchaser (i) a certificate of good standing from the state in which it is incorporated and from each other state or other jurisdiction in which the failure to be in good standing could reasonably be expected to have a Material Adverse Effect, each dated no more than seven days prior to the Closing Date, and (ii) a bring-down letter of good standing from CT Corporation System (or another similar service) with respect to the Company and each Guarantor in each such state or other jurisdiction, dated as of the Closing Date. (p) Subsequent to the execution and delivery of this Agreement or, if earlier, the dates as of which information is given in the Offering Memorandum (exclusive of any amendment or supplement thereto), there shall not have been any change in the capital stock or long-term debt or any change in or affecting the condition, financial or otherwise, earnings, business affairs, management or business prospects of the Company and its subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, the effect of which, in any such case described above, is, in the judgment of the Initial Purchaser, so material and adverse as to make it impracticable or inadvisable to proceed with the sale or delivery of the Securities on the terms and in the manner contemplated by this Agreement and the Offering Memorandum (exclusive of any amendment or supplement thereto). (q) The Company shall have: (i) notified the Existing Notes Indenture Trustee and the paying agent under the Existing Notes Indenture of its intention to redeem all of the Existing Notes in accordance with Section 3.01 of the Existing Notes Indenture, and each such notice shall be in form and substance satisfactory to the Initial Purchaser and shall have been given not less than five (5) days nor more than thirty (30) days prior to the Closing Date (unless the Existing Notes Indenture Trustee shall have agreed in writing to a shorter notice period or waived such notice); (ii) furnished a letter from the Existing Notes Indenture Trustee, in form and substance satisfactory to the Initial Purchaser, (A) confirming the amount (the "Existing Notes Payout Amount") required to be deposited with the Existing Notes Indenture Trustee pursuant to clauses (a)(ii) and (b) of Section 8.01 of the Existing Notes Indenture assuming the Company redeems all of the Existing Notes on the thirtieth (30th) day (or if such day is not a business day, the next succeeding business day) following the Closing Date and the Company incurs no amounts referred to in such clause (b) after the Closing Date and (B) agreeing to provide the acknowledgment referenced in clause (ii) of Section 5(t) hereof upon its receipt of the Existing Notes Payout Amount and satisfaction of the other conditions in Section 8.05 of the Existing Notes Indenture; and (iii) delivered a notice of redemption, in form and substance satisfactory to the Initial Purchaser, to the Existing Notes Indenture Trustee and irrevocably instructed the Existing Notes Indenture Trustee to mail such notice of redemption to each holder of the Existing Notes in accordance with 24 Section 3.04 of the Existing Notes Indenture upon the Existing Notes Indenture Trustee receiving the Existing Notes Payout Amount. (r) The Company shall have furnished a letter from the Existing Credit Agreement Agent, in form and substance satisfactory to the Initial Purchaser: (i) stating the amount (the "Existing Credit Agreement Payout Amount") required to pay in full in cash on the Closing Date all outstanding obligations under or in respect of Existing Credit Agreement; (ii) confirming and agreeing that upon its receipt of the Existing Credit Agreement Payout Amount, the Existing Credit Agreement will immediately terminate in accordance with Section 3.6(a) thereof (without regard to whether the Company provided thirty (30) days' prior written notice of such termination to the Existing Credit Agreement Agent and the Existing Credit Agreement Specified Appointee) and all Liens securing obligations under the Existing Credit Agreement will be forever released and discharged; and (iii) agreeing to provide the acknowledgment referenced in clause (ii) of Section 5(u) hereof upon its receipt of the Existing Credit Agreement Payout Amount. (s) Each of the Loan Documents, on substantially the terms described in the Offering Memorandum, shall have been duly executed and delivered by an authorized officer of each party thereto. The Company shall have furnished to the Initial Purchaser an officer's certificate, dated the Closing Date, (i) attaching a copy of each Loan Document and any other document referred to therein which the Initial Purchaser deems necessary and (ii) certifying (A) each such Loan Document and other document is a true, correct and complete copy thereof and remains in full force and effect and (B) that neither any Company Person nor Grey Wolf has breached or defaulted in any of its obligations under any of such Loan Documents and other documents. Such officer's certificate shall also certify that: (i) all conditions precedent (other than the satisfaction (or waiver) of the conditions precedent set forth in this Section 6 and the conditions precedent to (A) the making of the Grey Wolf Term Loan or (B) the initial extension of credit contained in the New Credit Facility) to the obligation of the lenders under the Bridge Loan Agreement to make a term loan in the principal amount of $25,000,000 to the Company have been satisfied (or waived) in accordance with the terms of the Bridge Loan Agreement; (ii) all conditions precedent (other than the satisfaction (or waiver) of the conditions precedent set forth in this Section 6 and the conditions precedent to (A) the making of the Bridge Loan or (B) the initial extension of credit contained in the New Credit Facility) to the obligation of the lenders under the Grey Wolf Loan Agreement to make a term loan in the principal amount of $35,000,000 to Grey Wolf have been satisfied (or waived) in accordance with the terms of the Grey Wolf Loan Agreement; and (iii) all conditions precedent (other than the satisfaction (or waiver) of the conditions precedent set forth in this Section 6 and the 25 conditions precedent to (A) the making of the Bridge Loan or (B) the making of the Grey Wolf Term Loan) to the obligation of the lenders under the New Credit Facility to make revolving credit loans in the aggregate principal amount, at any one time outstanding, not to exceed $15,000,000 have been satisfied (or waived) in accordance with the terms of the New Credit Facility. (t) The Collateral Agent shall have received (with a copy to the Initial Purchaser and the Trustee) prior to the Closing Time: (i) UCC requests for information (Form UCC-11), or similar search reports certified by a party acceptable to the Initial Purchaser and the Trustee, dated a date no more than fourteen (14) days prior to the Closing Date, listing all effective UCC financing statements in the respective jurisdictions listed on Schedule 1 hereto which name a Company Person (under its present name and any previous name) as the debtor, together with copies of such financing statements (none of which shall cover any collateral described in the Collateral Documents not being released on or prior to the Closing Date (other than Permitted Prior Liens); (ii) appropriately completed UCC-3 termination statements which have been duly authorized for filing by the appropriate person, or other similar agreements, documents or instruments (including releases, reconveyances, satisfactions or other instruments of discharge), necessary or, in the opinion of the Initial Purchaser, the Trustee or their respective counsel, desirable to release all Liens (other than Permitted Prior Liens) of any person in any collateral described in the Security Documents previously granted by any person, including, without limitation, each Lien identified in a report delivered pursuant to clause (i) above that is not a Permitted Prior Lien; provided, however, any such termination statement, instrument or document releasing Liens which secure obligations under the Existing Credit Agreement Agent or the Existing Notes Indenture Trustee may be delivered pursuant to an escrow arrangement pending termination of the Existing Credit Agreement Agent or mailing of a notice of redemption to each holder of the Existing Notes, respectively; and (iii) appropriately completed UCC financing statements which have been duly authorized for filing by the appropriate person and which name the Company and each Guarantor as a debtor and the Collateral Agent as the secured party, or other similar agreements, documents or instruments (including mortgages) to be filed under the UCC of all jurisdictions or otherwise as may be necessary or, in the opinion of the Initial Purchaser, the Trustee or their respective counsel, desirable to perfect the security interests of the Collateral Agent pursuant to the Security Documents. (u) All UCC financing statements, termination statements and other similar agreements, documents and instruments for filing required to be delivered to the Collateral Agent pursuant to Section 6(t) hereof (the "Financing Statements") shall have been delivered to CT Corporation System and/or one or more other similar filing service companies acceptable to the Trustee, the Collateral Agent and the Initial Purchaser with arrangements satisfactory to the Trustee, the Collateral Agent and the Initial Purchaser for the filing of such Financing Statements. (v) Prior to or concurrently with the Closing Time, the Company shall have received cash proceeds from borrowings of the Loan Documents in an amount 26 sufficient, when added to the net cash proceeds from the sale of the Securities hereunder, to pay in full in cash the Existing Credit Agreement Payout Amount and the Existing Notes Payout Amount and all other fees, costs and expenses payable by the Company Persons in connection with the closing of the transactions contemplated by the Transaction Documents, including the Refinancing Transaction, and shall have authorized disbursement of such cash proceeds directly to pay the Existing Credit Agreement Payout Amount and the Existing Notes Payout Amount and such fees, costs and expenses pursuant to a disbursement authorization letter, in form and substance satisfactory to the Initial Purchaser, executed and delivered by the Company Persons, and the Initial Purchaser shall have received such other confirmations as it may request as to the termination and discharge of the Existing Credit Agreement, the discharge of the Existing Notes and the release and discharge of all Liens securing the Existing Notes and obligations under the Existing Credit Agreement. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to the Initial Purchaser and Sidley Austin Brown & Wood LLP. 7. Termination. The Initial Purchaser may terminate this Agreement, by notice to the Company, at any time prior to Closing Time (i) if any condition specified in Section 6 hereof shall not have been fulfilled when and as required to be fulfilled or (ii) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Offering Memorandum (exclusive of any amendment or supplement thereto subsequent to the date of this Agreement), any material adverse change in the condition, financial or otherwise, earnings, business affairs or business prospects of the Company and its subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business or (iii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Initial Purchaser, impracticable or inadvisable to market the Securities or to enforce contracts for the sale of the Securities or (iv) if trading in any securities of the Company has been suspended or materially limited by the Commission, the American Stock Exchange or any other securities exchange or automated quotation system upon which any such securities are traded, or if trading generally on any national securities exchange or automated quotation system of a registered securities association has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any such exchange or system or by order of the Commission, the NASD or any other governmental authority or (v) a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States or (vi) if a banking moratorium has been declared by either Federal or New York authorities. Any such termination shall be without liability of any party to another party and, notwithstanding such termination, certain provisions of this Agreement shall survive and remain in full force and effect as provided in Section 14 hereof. 8. Reimbursement of Initial Purchaser Expenses. If (i) this Agreement shall have been terminated pursuant to Section 7 hereof, (ii) the Company shall fail to tender the Securities for delivery to the Initial Purchaser in accordance with the terms of this Agreement or (iii) the Initial Purchaser shall 27 decline to purchase the Securities for any reason permitted under this Agreement, the Company and each of the Guarantors shall, jointly and severally, reimburse the Initial Purchaser for such out-of-pocket expenses (including reasonable fees and disbursements of counsel) as shall have been reasonably incurred by the Initial Purchaser in connection with this Agreement and the proposed purchase and resale of the Securities. 9. Indemnification. (a) The Company Persons, jointly and severally, shall indemnify, defend and hold harmless the Initial Purchaser, its affiliates, each person, if any, who controls the Initial Purchaser within the meaning of the Securities Act or the Exchange Act and each officer, director, employee, representative and agent of the Company, its affiliates and any such other person who so controls the Initial Purchaser (each such person being referred to herein as a "Purchaser Indemnified Person"), from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, whether commenced or threatened and regardless of whether such Purchaser Indemnified Person is a party to such action, including, without limitation, any loss, claim, damage, liability or action relating to purchases and sales of the Securities, to which such Purchaser Indemnified Person may become subject under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum or in any amendment or supplement thereto or in any information provided by the Company or any Guarantor pursuant to Section 5(e) hereof or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that no Company Person shall be liable (i) in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with any Initial Purchaser's Information or (ii) with respect to the Preliminary Offering Memorandum, to the extent that any such loss, claim, damage or liability arises solely from the fact that the Initial Purchaser sold securities to a person to whom there was not sent or given, on or prior to the written confirmation of such sale, a copy of the Offering Memorandum, as amended or supplemented, if the Company shall have previously and timely furnished copies thereof to the Initial Purchaser in accordance with this Agreement and the Offering Memorandum, as amended or supplemented, would have corrected any such untrue statement or omission; and each Company Person shall jointly and severally reimburse each Purchaser Indemnified Person promptly upon demand for any legal or other expenses reasonably incurred by such Purchaser Indemnified Person in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred. (b) The Initial Purchaser shall indemnify, defend and hold harmless each Company Person, its affiliates, each person, if any, who controls a Company Person within the meaning of the Securities Act or the Exchange Act and each officer, director, employee, representative and agent of a Company Person, such affiliates and any such other person who so controls a Company Person (each such person being referred to herein as a "Company Indemnified Person"), from and against any loss, claim, damage or liability, joint or several, or any action in 28 respect thereof, whether commenced or threatened and regardless of whether such Company Indemnified Person is a party to such action, including, without limitation, any loss, claim, damage, liability or action relating to purchases and sales of the Securities, to which such Company Indemnified Person may become subject under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, in each case, only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with any Initial Purchaser's Information; and the Initial Purchaser shall reimburse such Company Indemnified Person for any legal or other expenses reasonably incurred by such Company Indemnified Person in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred. (c) Promptly after receipt by a Purchaser Indemnified Person or a Company Indemnified Person (each being referred to herein in such capacity as an "indemnified party") of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the Company or a Guarantor pursuant to Section 8(a) hereof or the Initial Purchaser pursuant to Section 9(b) hereof (the Company Persons and the Initial Purchaser being referred to herein in such capacity as an "indemnifying person"), notify such indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability that it may have under this Section 9 except to the extent that it has been materially prejudiced by such failure; and, provided, further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 9. If any such claim or action shall be brought against an indemnified party and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 9 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that an indemnified party shall have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel for the indemnified party will be at the expense of such indemnified party unless (i) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (ii) the indemnified party has reasonably concluded (based upon written advice of counsel to the indemnified party) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (iii) a conflict or potential conflict exists (based upon written advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (iv) 29 the indemnifying party has not in fact employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm of attorneys (in addition to any local counsel) at any one time for all such indemnified party or parties. Each indemnified party, as a condition of the indemnity agreements contained in Sections 9(a) and 9(b) hereof, shall use all reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. (d) Settlement without Consent if Failure to Reimburse. An indemnifying party shall not be liable for any settlement of any proceedings effected without its written consent (which consent shall not be unreasonably withheld). Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse such indemnified party for legal or other expenses in connection with investigating, responding to or defending any proceeding as contemplated by Section 9(a) or 9(b) hereof, as the case may be, such indemnifying person shall be liable for any settlement of any proceedings effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying person of such request for the reimbursement, (ii) such indemnifying person shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnifying person shall not have responded in writing to such request, specifying those expenses that it has chosen not to reimburse and the reason for such non-reimbursement, prior to the date of such settlement. An indemnifying person shall not, without the prior written consent of an indemnified party (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened proceedings in respect of which indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnified party in form and substance satisfactory to such indemnified party from all liability on claims that are the subject matter of such proceedings and (ii) does not include any statement as to, or any admission of, fault, culpability or failure to act by or on behalf of any indemnified party. In addition, except as otherwise set forth in this paragraph, an indemnified party shall not, without the prior written consent of an indemnifying person (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened proceedings in respect of which indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnifying person in form and substance satisfactory to such indemnifying person from all liability on claims that are the subject matter of such proceedings and (ii) does not include any statement as to, or any admission of, fault, culpability or failure to act by or on behalf of such indemnifying person. The obligations of each of the Company Persons and the Initial Purchaser in this Section 9 and in Section 10 hereof are in addition to any other liability that any Company Person or the Initial Purchaser, as the case may be, may otherwise have, including in respect of any breaches of representations, warranties and agreements made herein by any such party. 30 10. Contribution. If the indemnification provided for in Section 9 hereof is unavailable or insufficient to hold harmless an indemnified party under Section 9(a) or 9(b) hereof, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company Persons, on the one hand, and the Initial Purchaser, on the other, from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company Persons, on the one hand, and the Initial Purchaser, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company Persons, on the one hand, and the Initial Purchaser, on the other, with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities purchased under this Agreement (before deducting expenses) received by or on behalf of the Company Persons, on the one hand, and the total discounts and commissions received by the Initial Purchaser with respect to the Securities purchased under this Agreement, on the other, bear to the total gross proceeds from the sale of the Securities under this Agreement. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to the Company Persons or information supplied by the Company Persons, on the one hand, or to any Initial Purchaser's Information, on the other, the intent of the parties, their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omissions and any other equitable consideration appropriate in the circumstances. The Company, the Guarantors and the Initial Purchaser agree that it would not be just and equitable if contributions pursuant to this Section 10 were to be determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 10 shall be deemed to include, for purposes of this Section 10, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending or preparing to defend any such action or claim. Notwithstanding the provisions of this Section 10, the Initial Purchaser shall not be required to contribute any amount in excess of the amount by which the total discounts and commissions received by the Initial Purchaser with respect to the Securities purchased by it under this Agreement exceeds the amount of any damages which the Initial Purchaser has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 11. Assignment; Persons Entitled to Benefit of Agreement. This Agreement may not be assigned, by operation of law or otherwise, by any party hereto without the prior written consent of each other party hereto and any purported assignment without such consent shall be void; provided, that, notwithstanding the foregoing, the Initial Purchaser shall, without being released from any of its obligations hereunder, be permitted to assign its rights and obligations hereunder to one or more of its affiliates. This Agreement shall inure to the benefit of and be binding upon each of the Initial 31 Purchaser, the Company Persons and their respective successors and permitted assigns. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except as provided in Sections 9 and 10 hereof with respect to affiliates of such persons, controlling persons of the Company Persons and the Initial Purchaser, and officers, directors, employees, representatives and agents of such persons, such affiliates and such controlling persons and in Section 5(e) hereof with respect to holders and prospective purchasers of the Securities. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 11, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 12. Expenses. Each of the Company Persons, jointly and severally, covenants and agrees with the Initial Purchaser to pay or cause to be paid all reasonable expenses incident to the performance of the obligations of the Company Persons under this Agreement, including the following: (i) the costs incident to the authorization, issuance, sale, preparation and delivery of the Securities and the Exchange Securities and any taxes payable in that connection; (ii) the costs incident to the preparation, printing and distribution of the Preliminary Offering Memorandum and the Offering Memorandum (and any amendment or supplement thereto), and the mailing and delivering of copies thereof to the Initial Purchaser and persons designated by them; (iii) the costs of reproducing and distributing each of the Transaction Documents, the closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Securities; (iv) the costs incident to the preparation, printing and delivery of the certificates evidencing the Securities and the Exchange Securities, including stamp duties and transfer taxes, if any, payable upon issuance of the Securities and the Exchange Securities; (v) the fees and expenses of the Company's counsel, independent accountants and other representatives and agents; (vi) the fees and expenses of qualifying the Securities and the Exchange Securities under the securities laws of the several jurisdictions as provided in Section 5(g) hereof and of preparing, printing and distributing "Blue Sky" memoranda (including related fees and expenses of counsel for the Initial Purchaser); (vii) the fees and expenses of the Trustee and any paying agent (including related fees and expenses of any counsel to such parties); (viii) all expenses associated with the creation and perfection of security interests and associated documents, including, without limitation, the Security Documents and all Financing Statements, including filing fees and the reasonable fees and disbursements of counsel incurred in connection therewith and the fees and disbursements of local counsel to the Initial Purchaser incurred in connection therewith; (ix) the fees and expenses of the Collateral Agent and any agent of the Collateral Agent (including related fees and expenses of any counsel to such parties); (x) all expenses and application fees incurred in connection with the application for the inclusion of the Securities on the PORTAL Market and the approval of the Securities and the Exchange Securities for book-entry transfer by DTC; (xi) all travel expenses of the Company's officers and employees and other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Securities from the Initial Purchaser; (xii) such costs and expenses owing pursuant to Section 4 of the Engagement Letter (as defined below); and (xiii) all other costs and expenses incident to the performance of the obligations of the Company Persons under this Agreement and the other Transaction Documents that are not otherwise specifically provided for in this Section 12. 32 13. Survival. The respective agreements of the Company Persons and the Initial Purchaser contained in Sections 8 through 22 hereof and the respective representations and warranties of such persons contained in this Agreement or made by or on behalf of such persons pursuant to this Agreement or in any certificate delivered pursuant hereto shall survive and remain in full force and effect regardless of any termination or cancellation of this Agreement in accordance with its terms. In addition, for purposes of clarification, the respective agreements, representations and warranties of the Company Persons and the Initial Purchaser contained in this Agreement or made by or on behalf of such persons pursuant to this Agreement or any certificate delivered pursuant hereto shall survive and remain in full force and effect following the delivery of and payment for the Securities hereunder. 14. Notices, etc. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Initial Purchaser, shall be delivered or sent by mail or facsimile transmission to Guggenheim Capital Markets, LLC, 135 East 57th Street 9th Floor, New York, New York 10022, Attention: Todd Boehly (facsimile no.: (212) 644-8396); or (b) if to any Company Person, shall be delivered or sent by mail or facsimile transmission to the address of the Company set forth in the Offering Memorandum, Attention: Robert L.G. Watson (facsimile no.: (210) 490-8816). Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. 15. Definition of Terms; Construction. For purposes of this Agreement, (a) the term "business day" means any day on which the New York Stock Exchange is open for trading, (b) the term "subsidiary" has the meaning set forth in Rule 405 under the Securities Act and (c) except where otherwise expressly provided, the term "affiliate" has the meaning set forth in Rule 405 under the Securities Act. A reference herein to any party to this Agreement or any other agreement or instrument referred to herein shall include such party's successors and permitted assigns. A reference herein to any agreement shall, unless otherwise stated herein, be to such agreement (together with any schedule and exhibit attached thereto) as it may have been, or may hereafter be, amended, modified, supplemented, waived and/or restated from time to time in accordance with its terms. A reference herein to any law or other legislation or to any provision of any law or other legislation shall include any amendment, modification or re-enactment thereof, any legislative provision substituted therefor and all regulations, rules and interpretations issued thereunder or pursuant thereto. All references to "$", funds and dollars refer to United States currency. 16. Initial Purchaser's Information. The parties hereto acknowledge and agree that, for all purposes of this Agreement, the Initial Purchaser's Information consists solely of the following information in the Offering Memorandum: the statements concerning the Initial Purchaser contained in the fifth and sixth sentences of the fourth paragraph, and the first, second, penultimate and last sentences of the fifth paragraph, under the heading "Plan of Distribution". 33 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to any choice-of-law rules which might apply the laws of any other jurisdiction. 18. Counterparts. This Agreement may be executed in one or more counterparts (which may include counterparts delivered by facsimile) and, if executed in more than one counterpart, each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 19. Amendments. No amendment of any provision of this Agreement shall be effective unless the same shall be in writing and signed by each of the parties hereto. No waiver of any provision of this Agreement or any consent or approval to any departure therefrom shall be effective unless the same shall be in writing and signed by each party so waiving such provision or consenting to or approving such departure. 20. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 21. Entire Agreement. This Agreement, together with the schedules and annexes hereto (which schedules and annexes are deemed a part of this Agreement) (a) contain the entire agreement and understanding of the parties with respect to the subject matter hereof and (b) supersede all prior negotiations, discussions, correspondence, communications, understandings, drafts and agreements between the parties relating to the subject matter hereof, all of which are merged into this Agreement; provided, however, that the terms of the Engagement Letter, dated July 30, 2004 (the "Engagement Letter"), between the Company and the Initial Purchaser shall survive execution of this Agreement and shall continue to be in force regardless of whether the Securities are purchased by the Initial Purchaser hereunder at the Closing Time or this Agreement is terminated. No prior drafts of this Agreement and no words or phrases from any such prior drafts shall be admissible into evidence in any action or proceeding involving this Agreement. 22. Severability. Any provision hereof which is held by any court of competent jurisdiction in any jurisdiction to be illegal, void or unenforceable shall, as to such jurisdiction, be ineffective to the extent of such illegality or unenforceability without invalidating the remaining provisions hereof, and any such illegality or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the fullest extent permitted by applicable law, the parties hereby waive any provision of law which may render any provision hereof prohibited or unenforceable in any respect. [signature page follows] 34 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us a counterpart hereof, whereupon this instrument will become a binding agreement between the Company Persons and the Initial Purchaser in accordance with its terms. Very truly yours, ABRAXAS PETROLEUM CORPORATION By: -------------------------------------------- Name: Title: EASTSIDE COAL COMPANY, INC. By: -------------------------------------------- Name: Title: SANDIA OIL & GAS CORPORATION By: -------------------------------------------- Name: Title: SANDIA OPERATING CORP. By: ------------------------------------------- Name: Title: WAMSUTTER HOLDINGS, INC. By: ------------------------------------------ Name: Title: WESTERN ASSOCIATED ENERGY CORPORATION By: ----------------------------------------- Name: Title: Accepted: GUGGENHEIM CAPITAL MARKETS, LLC By: ---------------------------------------------- Name: Title: < EX-10 7 loanagreement.txt BRIDGE LOAN EXHIBIT 10.3 =============================================================================== LOAN AGREEMENT by and among ABRAXAS PETROLEUM CORPORATION, as Borrower, THE SUBSIDIARIES OF BORROWER THAT ARE SIGNATORIES HERETO, as Guarantors, THE LENDERS THAT ARE SIGNATORIES HERETO, as the Lenders, and GUGGENHEIM CORPORATE FUNDING, LLC, as the Arranger and Administrative Agent Dated as of October 28, 2004 ============================================================================== LOAN AGREEMENT LOAN AGREEMENT, dated as of October 28, 2004 (this "Agreement"), by and among (i) on the one hand, the lenders identified on the signature pages hereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders") and GUGGENHEIM CORPORATE FUNDING, LLC, a Delaware limited liability company, as the arranger and administrative agent for the Lenders ("Agent"), and (ii) on the other hand, ABRAXAS PETROLEUM CORPORATION, a Nevada corporation ("Borrower"), and the subsidiaries of Borrower that are signatories hereto ("Guarantors"). RECITALS WHEREAS, Borrower has requested that the Lenders make available to it, and, subject to and upon the terms and conditions hereinafter set forth, the Lenders are willing to make available to Borrower, the credit facility provided for herein; NOW, THEREFORE, the parties hereto agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Acceptable Commodity Hedging Agreement" means a Commodity Hedging Agreement (i) with a counterparty rated A3 or better by Moody's and A- or better by Standard & Poor's, or the equivalent by a rating agency acceptable to Agent, (ii) pursuant to an agreement the terms of which are acceptable to Agent and (iii) the arrangements of which are otherwise reasonably acceptable to Agent. "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, chattel paper or a General Intangible. "Accounts" means all of Borrower's or any Guarantor's now owned or hereafter acquired right, title and interest with respect to "accounts" (as that term is defined in the Code) and any and all supporting obligations in respect thereof. "Additional Documents" has the meaning set forth in Section 4.4(a). "Advances" has the meaning set forth in Section 2.1. "Affiliate" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract or otherwise; provided, however, that, for the purposes of Section 7.14: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture (other than joint ventures permitted under clause (d) of the definition of Permitted Investments) in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. "Agent" means GCF, solely in its capacity as agent for the Lenders hereunder, and any successor thereto. "Agent Directed Asset Sale" has the meaning set forth in Section 6.19(a). "Agent's Account" means an account identified on Schedule A-1. "Agent's Liens" means the Liens granted by any Loan Party to Agent for the benefit of the Lender Group pursuant to the Collateral Documents. "Agent-Related Persons" means Agent, its Affiliates and the officers, directors, employees and agents of Agent and such Affiliates. "Agreement" has the meaning set forth in the preamble hereto. "Assignee" has the meaning set forth in Section 14.1. "Assignment and Acceptance" means an Assignment and Acceptance in the form of Exhibit A-1. "Authorized Person" means, with respect to any Person, the President, the Chief Executive Officer, the Chief Financial Officer, any Vice President or the Treasurer of such Person. "Bank Product Obligation" has the meaning given to such term in the Revolving Credit Facility. "Bankruptcy Code" means (i) (A) the United States Bankruptcy Code, (B) the Bankruptcy and Insolvency Act (Canada) or (C) the Companies' Creditors Arrangement Act (Canada), as applicable, or (ii) any similar legislation in a relevant jurisdiction, in each case as in effect from time to time. "Base Rate" means (i) during the period from (and including) the Closing Date to (but excluding) the first anniversary of the Closing Date, 12.00 percentage points, and (ii) on the first anniversary of the Closing Date and every day thereafter, 15.00 percentage points; provided, that, if there is a Grey Wolf Stock Sale during the period of either clause (i) or (ii) and the aggregate amount of outstanding Advances under this Agreement exceeds $17,500,000 at the end of the day upon which such Grey Wolf Stock Sale is completed, then the applicable "Base Rate" from and after such day shall be 2.00 percentage points greater than would otherwise be applicable hereunder. 2 "Basis Differential" means, in the case of any Oil and Gas Property, the difference between the NYMEX futures contract prices and the sales prices at the delivery point where the oil or gas, as the case may be, produced by such Oil and Gas Property, is sold. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) or a benefit plan under Canadian Employee Benefit Laws for which Borrower or any Subsidiary or ERISA Affiliate of Borrower has been an "employer" (as defined in Section 3(5) of ERISA) or has held equivalent status under Canadian Employee Benefit Laws within the past six years. "Board of Directors" means the board of directors (or comparable managers) of a Person. "Books" means Borrower's and each Guarantor's now owned or hereafter acquired books and records (including all of its Records indicating, summarizing or evidencing its assets (including the Collateral) or liabilities, all of Borrower's and each Guarantor's Records relating to its or their business operations or financial condition). "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrower Parties" means Borrower and its Subsidiaries collectively. "Borrowing" means a borrowing hereunder consisting of Advances made on the same day by any of the Lenders (or Agent on behalf thereof). "Bridge Loan Disposition" means (a) a Grey Wolf Stock Sale or (b) an Agent Directed Asset Sale. "Business Day" means any day that is not a Saturday, Sunday or day on which national banks are authorized or required to close in New York City. "Canadian Employee Benefits Laws" means the Canadian pension Plan Act (Canada), the Pension Benefit Act (Ontario), the Health Insurance Act (Ontario), the Employment Standard Act (Ontario) and any other applicable federal, provincial or local counterparts or equivalents, to the extent same may be applicable to Borrower or any of the Guarantors. "Capital Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Capitalized Lease Obligation" means any Indebtedness represented by obligations under a Capital Lease. "Capital Restructuring" means (i) the repayment in full of all of the obligations of Borrower under, and the termination of, the Existing Credit Agreement, (ii) the Existing Note Redemption, (iii) the issuance of $125,000,000 aggregate principal amount of the New Notes pursuant to the New Notes Documents, (iv) the satisfaction (or waiver) of all conditions precedent 3 to the making of advances under the Revolving Credit Facility and (v) the consummation of the transactions contemplated by the Grey Wolf Credit Facility Documents. "Capital Restructuring Documents" means collectively the New Notes Documents, the Revolving Credit Facility Documents, the Grey Wolf Credit Facility Documents and the agreements, documents and instruments relating to the Existing Note Redemption. "Cash Equivalents" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 270 days from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank organized under the laws of the United States or any state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) certificates of deposit less than or equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation and (e) to the extent not otherwise included in clauses (a) through (d) above, "Cash Equivalents" as such term is defined in the New Notes Indenture as in effect on the Closing Date. "Change of Control" means (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 35%, or more, of the Stock of Borrower having the right to vote for the election of members of the Board of Directors of Borrower, or (b) majority of the members of the Board of Directors of Borrower do not constitute Continuing Directors, (c) a "Change of Control" (as defined in the New Notes Indenture) shall have occurred or (d) except in connection with a transaction described in clauses (k) or (l) of the definition of Permitted Disposition, Borrower ceases to directly own and control 100% of the outstanding capital Stock of each of its Restricted Subsidiaries extant as of the Closing Date. "Closing Date" means the date of the making of the Loan hereunder. "Code" means the New York Uniform Commercial Code. "Collateral" means, at the time of any determination, collectively, the Stock of Grey Wolf beneficially owned, directly or indirectly, by Borrower and the Shared Collateral. "Collateral Agent" means U.S. Bank National Association, as collateral agent under the Intercreditor Agreement, and any successor thereto as may be appointed pursuant to the terms of the Intercreditor Agreement. "Collateral Agent's Liens" means the Liens granted by Borrower or any Guarantor to the Collateral Agent for the benefit of the Lender Group under or pursuant to the Intercreditor Agreement and the other Collateral Documents. 4 "Collateral Documents" means the security agreements, the pledge agreements, mortgages, UCC financing statements and each other agreement, document and instrument described on Schedule 1.1, duly executed or authorized from time to time by each applicable Loan Party, the form and substance of which is satisfactory to Agent. "Collections" means all cash, checks, notes, instruments and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds and tax refunds) of Borrower or any Guarantor. "Commitment" means, with respect to each Lender, its Commitment and, with respect to all Lenders, all of their Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Commodity Hedging Agreement" means a commodity hedging or purchase agreement or similar arrangement entered into with the intent of protecting against fluctuations in commodity prices or the exchange of notional commodity obligations, either generally or under specific contingencies. "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Borrower to Agent. "Consolidated Net Interest Expense" means, with respect to Borrower and its Restricted Subsidiaries for any period, gross cash interest expense of Borrower and its Restricted Subsidiaries for such period determined on a consolidated basis and in accordance with GAAP (including, without limitation, interest expense paid to Affiliates of Borrower and its Restricted Subsidiaries), less (i) the sum of (A) cash interest income for such period and (B) cash gains for such period on Interest Rate Protection Agreements (to the extent not included in cash interest income above and to the extent not deducted in the calculation of gross cash interest expense), plus (ii) the sum of (A) cash losses for such period on Interest Rate Protection Agreements (to the extent not included in gross cash interest expense) and (B) the upfront cash costs or fees for such period associated with Interest Rate Protection Agreements (to the extent not included in gross cash interest expense), in each case, determined on a consolidated basis and in accordance with GAAP. "Continuing Director" means (a) any member of the Board of Directors who was a director (or comparable manager) of Borrower on the Closing Date and (b) any individual who becomes a member of the Board of Directors of Borrower after the Closing Date if such individual was recommended, appointed or nominated for election to the Board of Directors of Borrower by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Borrower (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof. 5 "Contribution Agreement" means the Contribution Agreement made by the Guarantors in favor of the Lender Group. "Control Agreement" means a control agreement, in form and substance satisfactory to Agent, executed and delivered by Borrower, the Collateral Agent and the applicable securities intermediary with respect to a Securities Account or bank. "Control Party" has the meaning given to such term in the Intercreditor Agreement. "Currency Protection Agreement" means a currency swap, cap or collar agreement or similar arrangement entered into with the intent of protecting against fluctuations in currency values, either generally or under specific contingencies. "Daily Balance" means, with respect to each day during the term of this Agreement, the amount of an Obligation owed at the end of such day. "DDA" means any checking or other demand deposit account maintained by Borrower. "Default" means an event, condition or default that, with the giving of notice, the passage of time or both, would be an Event of Default. "Defaulting Lender" means any Lender that fails to make any Advance (or other extension of credit (if any)) that it is required to make hereunder on the date that it is required to do so hereunder. "Designated Account" means that certain DDA of Borrower identified on Schedule D-1. "Designated Account Bank" has the meaning set forth on Schedule D-1. "Dollars" or "$" means United States dollars. "EBITDA" means, with respect to any fiscal period, Borrower's and its Restricted Subsidiaries' consolidated net earnings (or loss), minus extraordinary gains (including any gains related to the extinguishment or retirement of the Existing Notes), plus interest expense, income taxes, non-cash expenses incurred in connection with the payment of Stock compensation, non-cash expenses incurred in connection with the issuance of warrants or options to purchase the Stock of Borrower, and depletion depreciation and amortization for such period, as determined in accordance with GAAP. "Eligible Transferee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $50,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $50,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company or other financial institution or fund that is engaged in making, purchasing or otherwise investing in commercial loans or 6 securities in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $50,000,000, (d) any Affiliate (other than individuals) of a Lender that was party hereto as of the Closing Date, including, without limitation, a fund or account managed by such Lender or an Affiliate of such Lender or its investment manager (a "Related Fund"), (e) so long as no Event of Default or an Unmatured Default has occurred and is continuing, any other Person approved by Agent and Borrower (which approval by Borrower shall not be unreasonably withheld or delayed) and (f) during the continuation of an Event of Default or an Unmatured Default, any other Person approved by Agent. "Environmental Actions" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or Releases of Hazardous Materials from (a) any assets, properties, or businesses of any Loan Party or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by any Loan Party or any predecessor in interest. "Environmental Law" means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy, or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on any Loan Party, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USC ss. 1251 et seq.; the Toxic Substances Control Act, 15 USC ss. 2601 et seq.; the Clean Air Act, 42 USC ss. 7401 et seq.; the Safe Drinking Water Act, 42 USC ss. 3803 et seq.; the Oil Pollution Act of 1990, 33 USC ss. 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC ss. 11001 et seq.; the Hazardous Material Transportation Act, 49 USC ss. 1801 et seq.; the Occupational Safety and Health Act, 29 USC ss. 651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); the Canadian Environmental Protection Act (Canada); the Fisheries Act (Canada); the Environmental Protection Act (Ontario); the Water Resource Act (Ontario); the Environmental Protection and Enhancement Act (Alberta); the Waste Management Act (British Columbia); and any state, provincial and local or foreign counterparts or equivalents, in each case as amended from time to time. "Environmental Liabilities and Costs" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any Governmental Authority or any third party and which relate to any Environmental Action. "Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. 7 "Equipment" means all of Borrower's and any Guarantor's now owned or hereafter acquired right, title and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA Affiliate" means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m) or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of a Loan Party, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of a Loan Party, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, (g) providing any security to any Plan under Section 401(a)(29) of the IRC by a Loan Party or its Subsidiaries or any of their ERISA Affiliates or (h) any equivalent event, action, condition, proceeding or otherwise under Canadian Employee Benefit Laws. "Event of Default" has the meaning set forth in Section 8. "Excess Proceeds" has the meaning given to such term in the New Notes Indenture. "Exchange Act" means the Securities Exchange Act of 1934. "Existing Credit Agreement" means Loan and Security Agreement, dated as of January 22, 2003, among Borrower, the subsidiaries of Borrower party thereto, the lenders thereunder, the Existing Credit Agreement Agent and GCF, as the specified appointee thereunder. 8 "Existing Credit Agreement Agent" means Wells Fargo Foothill, Inc., as agent for the lenders under the Existing Credit Agreement, and any successor thereto as may be appointed pursuant to the terms of the Existing Credit Agreement. "Existing Note Redemption" has the meaning set forth in Section 3.1(dd). "Existing Notes" means Borrower's 11 1/2% Secured Notes due 2007 issued by Borrower pursuant to the Existing Notes Indenture. "Existing Notes Indenture" means the Indenture, dated as of January 23, 2003, among Borrower, each guarantor of the Existing Notes and the Existing Notes Indenture Trustee. "Existing Notes Indenture Trustee" means U.S. Bank, N.A., as trustee to the holders of the Existing Notes, and any successor thereto as may be appointed pursuant to the terms of the Existing Notes Indenture. "Farmout" means an arrangement whereby the owner(s) of one or more oil, gas and/or mineral lease or other oil and natural gas working interest with respect to Farmout Property (referred to as the "farmor") agrees to transfer or assign an interest in such Farmout Property to one or more other Persons (referred to as the "farmee") in exchange for the farmee (1) drilling, or participating in the cost of the drilling of, one or more oil and/or natural gas wells, or undertaking other exploration or development activity or participating in the cost of such other activity, to attempt to obtain production of hydrocarbons from such Farmout Property, (2) agreeing to so drill or undertake such other activity, or agreeing to participate in the cost of such drilling or such other activity, with respect to such Farmout Property, or (3) obtaining production of Hydrocarbons from such Farmout Property, or participating in the costs of obtaining such production. "Farmout Agreement" means, with respect to a Farmout, the agreement or agreements governing such Farmout. "Farmout Property" means, with respect to a Farmout, the property from which production of Hydrocarbons is sought to be obtained through such Farmout. The Farmout Property with respect to a Farmout may consist of only certain specified depths, strata, zones or geological formations under one or more tracts of land, but shall not include any depths, strata, zones or geological formations under such tract(s) of land (i) that, at the time of such Farmout, are being produced or developed by the farmor or any of its Affiliates in the same field or area or (ii) that have been subject to production or development activity by the farmor or any of its Affiliates in the same field or area and such activity was discontinued with the desire or expectation of entering into a Farmout. "Farmout Property Value" means, with respect to a Farmout, the value of the Farmout Property of Borrower or its Restricted Subsidiaries at the time the relevant Farmout Agreement is entered into determined as follows: (1) with respect to Farmout Property with a value not exceeding $1.0 million, as determined in good faith by the chief executive officer of Borrower and evidenced by an officers' certificate delivered to Agent; 9 (2) with respect to Farmout Property with a value exceeding $1.0 million but not exceeding $5.0 million, as determined in good faith by the Board of Directors of Borrower and evidenced by a resolution of such Board of Directors delivered to Agent; and (3) with respect to Farmout Property with a value exceeding $5.0 million, as reflected in an opinion or appraisal issued by an independent accounting or investment banking firm which is nationally recognized in the United States, or by a reputable independent appraisal or petroleum engineering firm, as appropriate under the circumstances, delivered to Borrower. "Fee Letter" means that certain fee letter, dated as of even date herewith, between Borrower and Agent, in form and substance satisfactory to Agent. "FEIN" means Federal Employer Identification Number. "Flow of Funds Agreement" means the Flow of Funds Agreement, dated as of the date hereof, by and among Borrower, Grey Wolf, the Initial Purchaser, Agent, the Grey Wolf Credit Facility Administrative Agent, the Existing Notes Indenture Trustee and the Existing Credit Agreement Agent regarding the transfer of funds to occur on the Closing Date, the form and substance of which is satisfactory to Agent. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "GCF" means Guggenheim Corporate Funding, LLC, a Delaware limited liability company. "General Intangibles" means all of Borrower's and any Guarantor's now owned or hereafter acquired right, title and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, judgments, rights arising under common law, statutes or regulations, choses or things in action, goodwill, patents, designs, inventions, trade names, trade secrets, d/b/a's, Internet domain names, logos, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds and tax refund claims) and any and all supporting obligations in respect thereof, and any other personal property other than goods, Accounts, Investment Property and Negotiable Collateral. "Governing Documents" means, with respect to any Person, the certificate or articles of incorporation, by-laws or other organizational documents of such Person. "Governmental Authority" means any United States or foreign federal, state, local or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission or other similar dispute-resolving panel or body. 10 "Grey Wolf" means Grey Wolf Exploration Inc., an Alberta corporation wholly owned on the Closing Date by Borrower, which was formed on December 6, 2002. "Grey Wolf Credit Facility" means the Loan Agreement, dated as of the Closing Date, among Grey Wolf, the lenders thereunder and the Grey Wolf Credit Facility Administrative Agent, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed. "Grey Wolf Credit Facility Administrative Agent" means GCF, as agent to the lenders under the Grey Wolf Credit Facility, and any successor thereto as may be appointed pursuant to the terms of the Grey Wolf Credit Facility. "Grey Wolf Credit Facility Documents" means the Grey Wolf Credit Facility and each other agreement, instrument and document related thereto, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed. "Grey Wolf Stock Sale" means the public or private sale, transfer or other disposition by Borrower, Grey Wolf or a Restricted Subsidiary of Borrower of Stock of Grey Wolf. "Grey Wolf Stock Pledge Agreement" means a pledge and security agreement, in form and substance satisfactory to Agent, executed and delivered by each Loan Party to Agent with respect to the pledge of the Stock of Grey Wolf beneficially owned by each such Loan Party. "Guarantor" has the meaning set forth in the preamble to this Agreement and each other Person that executes a Guaranty. "Guaranty" means that certain general continuing guaranty executed and delivered by any Guarantor in favor of Agent, for the benefit of the Lender Group, in form and substance satisfactory to Agent. "Guaranteed Obligations" has the meaning set forth in Section 18.1. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances", "hazardous materials", "hazardous wastes", "toxic substances" or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity" under Environmental Laws, (b) Hydrocarbons, including, without limitation, oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. 11 "Hedging Agreement" means any Currency Protection Agreement, Interest Rate Protection Agreement or Commodity Hedging Agreement. "Holdout Lender" has the meaning set forth in Section 15.2(a). "Hydrocarbons" means oil, gas, coal seam gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, all products and byproducts refined, separated, settled and dehydrated therefrom and all products and byproducts refined therefrom, including, without limitation, kerosene, liquefied petroleum gas, refined lubricating oils, diesel fuel, drip gasoline, natural gasoline, helium, sulfur, geothermal steam, water, carbon dioxide and all other minerals. "Hydrocarbon Interests" means all rights, titles, interests and estates now owned or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, oil, gas and casinghead gas leases or other liquid or gaseous hydrocarbon leases, mineral fee or lease interests, farm-outs, overriding royalty and royalty interests, net profit interests, oil payments, production payment interests and similar mineral interests, including any reserved or residual interest of whatever nature. "Indebtedness" means (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, interest rate swaps or other financial products, (c) all obligations under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of Borrower or its Restricted Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations for the deferred purchase price of assets, including trade debt (other than trade debt incurred in the ordinary course of business and paid in accordance with customary trade practices) and (f) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse) any obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Initial Purchaser" means Guggenheim Capital Markets, LLC. "Initial Reserve Report" means, collectively, the one or more reports of the Petroleum Engineers dated June 30, 2004 with respect to the Oil and Gas Properties of Borrower and its Subsidiaries. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other United States or foreign federal, state, provincial or other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors or proceedings seeking reorganization, arrangement, liquidation or other similar relief. "Intercreditor Agreement" means the Intercreditor, Security and Collateral Agency Agreement, dated as of the Closing Date, by and among 12 Agent, on behalf of the Lender Group, the New Notes Trustee, on behalf of the holders of the New Notes, the Revolving Credit Facility Administrative Agent, on behalf of the lenders party to the Revolving Credit Facility Agreement, the Collateral Agent, Borrower and each Guarantor, the form and substance of which shall be satisfactory to Agent, as such may from time to time be amended, restated, supplemented, modified or otherwise changed pursuant to the terms of the Intercreditor Agreement. "Interest Payment Date" has the meaning set forth in Section 2.5(c)(i). "Interest Rate Protection Agreement" means an interest rate swap, cap or collar agreement or similar arrangement entered into with the intent of protecting against fluctuations in interest rates or the exchange of notional interest obligations, either generally or under specific contingencies. "Inventory" means all Borrower's and Guarantors' now owned or hereafter acquired right, title and interest with respect to inventory (as defined in the Code), including extracted Hydrocarbons and other goods held for sale or lease or to be furnished under a contract of service, goods that are leased by Borrower or any Guarantor as lessor, goods that are furnished by Borrower or any Guarantor under a contract of service and raw materials, work in process, or materials used or consumed in Borrower's or any Guarantor's business. "Investment" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances or capital contributions (excluding (a) commission, travel and similar advances to officers and employees of such Person made in the ordinary course of business and (b) bona fide Accounts arising in the ordinary course of business consistent with past practices), purchases, or other acquisitions for consideration, of Indebtedness or Stock and any other item that is or would be classified as an investment on a balance sheet prepared in accordance with GAAP. "Investment Property" means all of Borrower's or any Guarantor's now owned or hereafter acquired right, title and interest with respect to "investment property" (as that term is defined in the Code) and any and all supporting obligations in respect thereof. "IRC" means the Internal Revenue Code of 1986. "Lender" and "Lenders" have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1. "Lender Group" means, individually and collectively, each of the Lenders and Agent. "Lender Group Expenses" means all (a) costs or expenses (including taxes and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by any one or more members of the Lender Group, (b) reasonable fees and charges paid or incurred by any one or more members of the Lender Group in connection with any one or more members of the Lender Group's transactions with Borrower, including fees and charges for photocopying, notarization, couriers and messengers, telecommunication, public 13 record searches (including tax lien and judgment searches and searches for liens under the Uniform Commercial Code and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals, business valuations or examinations of Borrower's or any Guarantors' Oil and Gas Properties to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement) and environmental audits, (c) costs and expenses incurred by any one or more members of the Lender Group in the disbursement of funds to Borrower (by wire transfer or otherwise), (d) reasonable charges paid or incurred by any one or more members of the Lender Group resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) reasonable audit fees and expenses of any one or more members of the Lender Group related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by any one or more members of the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or any one or more members of the Lender Group's relationship with Borrower or any guarantor of the Obligations, (h) Agent's reasonable fees and expenses (including attorneys' fees and disbursements) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents and (i) Agent's and each Lender's reasonable fees and expenses (including attorneys' fees and disbursements) incurred in terminating, enforcing (including attorneys' fees, disbursements and expenses incurred in connection with a "workout", a "restructuring" or an Insolvency Proceeding concerning Borrower or any of its Subsidiaries or in exercising rights or remedies under the Loan Documents) or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral. "Lender-Related Person" means, with respect to any Lender, such Lender, such Lender's Affiliates and the officers, directors, employees and agents of such Lender and such Affiliates. "Lien" means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including (a) the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including, purchase options, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting any Oil and Gas Properties or Real Property and (b) production or royalty payments or the like payable from Oil and Gas Properties. "Loan" has the meaning set forth in Section 2.1. 14 "Loan Account" has the meaning set forth in Section 2.9. "Loan Amount" means $25,000,000. "Loan Documents" means this Agreement, the Collateral Documents (including the Intercreditor Agreement, the Mortgages, the Pledge Agreement and the Grey Wolf Stock Pledge Agreement), the Contribution Agreement, the Flow of Funds Agreement, the Fee Letter, the Guarantees, any note or notes executed by Borrower or any Guarantor in connection with this Agreement or any of the other Loan Documents and payable to a member of the Lender Group, and any other agreement entered into, now or in the future, by Borrower or any Guarantor, on the one hand, and one or more members of the Lender Group, on the other hand, in connection with this Agreement or any of the other Loan Documents. "Loan Party" means the Borrower and any Guarantor. "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, individually, or the Borrower Parties taken as a whole, (b) a material impairment of Borrower's, individually, or the Loan Parties' taken as a whole, ability to perform its or their obligations under the Loan Documents to which it is or they are a party or of the Lender Group's or the Collateral Agent's ability to enforce the Obligations or realize upon the Collateral or (c) a material impairment of the enforceability or priority of the Collateral Agent's or Agent's, as the case may be, Liens with respect to the Collateral as a result of an action or failure to act on the part of Borrower or any Guarantor. "Material Contract" means, with respect to any Person, (i) each contract, agreement, note, indenture, mortgage, instrument, guaranty or other evidence of indebtedness to which such Person or any of its Subsidiaries is a party involving aggregate consideration payable to or by such Person or such Subsidiary of $250,000 or more (other than purchase orders in the ordinary course of the business of such Person or such Subsidiary and other than contracts that by their terms may be terminated by such Person or Subsidiary in the ordinary course of its business upon less than 60 days' notice without penalty or premium) and (ii) all other contracts, agreements, notes, indentures, mortgages, instruments, guaranties or evidences of indebtedness material to the business, operations, condition (financial or otherwise), performance, prospects or properties of such Person or such Subsidiary. "Maturity Date" has the meaning set forth in Section 3.2. "Moody's" means Moody's Investors Service, Inc. and any successor thereto. "Mortgages" means, individually and collectively, one or more mortgages, deeds of trust, debentures or deeds to secure debt, executed and delivered by Borrower or any Guarantor in favor of the Collateral Agent, for the benefit of, among other Persons, the Lender Group, in form and substance satisfactory to the Collateral Agent and Agent, that encumber the Real Property Collateral, the Oil and Gas Properties and the related improvements thereto. "Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) or such equivalent plan under Canadian Employee Benefit Laws to which a Loan Party, any of its Subsidiaries, or any ERISA 15 Affiliate has contributed, or was obligated to contribute, within the past six years. "Negotiable Collateral" means all of Borrower's or any Guarantor's now owned and hereafter acquired right, title and interest with respect to letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents and chattel paper (including electronic chattel paper and tangible chattel paper) and any and all supporting obligations in respect thereof. "Net Cash Interest Coverage Ratio" means, as of any date of determination, the ratio of (i) EBITDA for such period to (ii) the Consolidated Net Interest Expense for such period. "Net Proceeds Offer" has the meaning given to such term in the New Notes Indenture. "New Notes" means Borrower's Floating Rate Senior Secured Notes due 2009 issued by Borrower pursuant to the New Notes Indenture, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. "New Notes Documents" means the New Notes Indenture, the New Notes and each other agreement, instrument and document related thereto, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. "New Notes Indenture" means the Indenture, dated as of the Closing Date, among Borrower, each guarantor of the New Notes and the New Notes Trustee, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. "New Notes Purchase Agreement" means the Purchase Agreement, dated October 21, 2004, among Borrower, the Guarantors and the Initial Purchaser in respect of the sale of $125,000,000 aggregate principal amount of the New Notes by Borrower to the Initial Purchaser. "New Notes Trustee" means U.S. Bank National Association, as trustee to the holders of the New Notes, and any successor thereto, as may be appointed pursuant to the terms of the New Notes Indenture. "NYMEX" means the New York Mercantile Exchange or its successor entity. "NYMEX Strip Price" means the lower of (i) as of any date of determination the average of the 24 succeeding monthly futures contract prices, commencing with the month during which the determination date occurs, for each of the appropriate crude oil and natural gas categories included in the most recent Reserve Report provided by Borrower to Agent pursuant to Section 6.2(e), as quoted on the NYMEX; provided, that if the NYMEX no longer provides futures contract price quotes or has ceased to operate, the future contract prices used shall be the comparable futures contract prices quoted on such other nationally recognized commodities exchange as Agent shall designate and (ii) $27.43 per 16 barrel of oil and $4.43 per MmBTU of natural gas produced from Oil and Gas Properties of Borrower, provided, that with respect to the volume of Borrower's Hydrocarbons for which prices are fixed under an Acceptable Commodity Hedging Agreement, the NYMEX Strip Price for such volume of Hydrocarbons, if greater than the price determined above, shall be the price fixed under such Acceptable Commodity Hedging Agreement then in effect. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), premiums, liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees (including the fees provided for in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants and duties of any kind and description owing by any Loan Party to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Group Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law or otherwise. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals replacements, substitutions and supplements thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding. "Oil and Gas Business" means (a) the acquisition, exploration, exploitation, development, operation and disposition of interests in Oil and Gas Properties and Hydrocarbons, (b) the gathering, marketing, treating, processing, storage, selling and transporting of any production from such interests or properties, including, without limitation, the marketing of Hydrocarbons obtained from unrelated Persons, (c) any business relating to or arising from exploration for or development, production, treatment, processing, storage, transportation or marketing of oil, gas and other minerals and products produced in association therewith, (d) any business relating to oilfield sales and service and (e) any activity that is ancillary or necessary or desirable to facilitate the activities described in clauses (a) through (d) of this definition. "Oil and Gas Properties" means all (a) Hydrocarbon Interests, (b) personal property and/or real property now or hereafter pooled or unitized with Hydrocarbon Interests, (c) presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including without limitation all units created under orders, regulations and rules of any Governmental Authority having jurisdiction) which may affect all or any portion of the Hydrocarbon Interests, (d) pipelines, gathering lines, compression facilities, tanks and processing plants, (e) oil wells, gas wells, water well, injection wells, platforms, spars or other offshore facilities, casings, rods, tubing, pumping units and engines, Christmas trees, derricks, separators, gun barrels, flow lines, gas systems (for gathering, treating and compression) and water systems (for treating, disposal and injection), (f) interests held in royalty trusts whether presently existing or hereafter created, (g) Hydrocarbons in and under and which may be produced, saved, processed or attributable to the Hydrocarbon Interests, the lands covered thereby and all Hydrocarbons in pipelines, gathering lines, tanks and processing plants and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests, (h) tenements, hereditaments, appurtenances and personal property and/or real property in any 17 way appertaining, belonging, affixed or incidental to the Hydrocarbon Interests and all rights, titles, interests and estates described or referred to above, including any and all real property, now owned or hereafter acquired, used or held for use in connection with the operating, working or development of any of such Hydrocarbon Interests or personal property and/or Real Property and including any and all surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing and (i) oil, gas and mineral leasehold, fee and term interests, overriding royalty interests, mineral interests, royalty interests, net profits interests, net revenue interests, oil payments, production payments, carried interests, leases, subleases, farm-outs and any and all other interests in Hydrocarbons, in each case whether now owned or hereafter acquired directly or indirectly. "Originating Lender" has the meaning set forth in Section 14.1(e). "Participant" has the meaning set forth in Section 14.1(e). "Participant Register" has the meaning set forth in Section 14.1(i). "Pay-Off Letter" means a letter from Agent in respect of the amount necessary to repay in full all of the existing obligations of Borrower and its Subsidiaries under the Existing Credit Agreement and the documents related thereto. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto or equivalent entity under Canadian Employee Benefits Laws. "Permitted Discretion" means a determination made in good faith and in the exercise of reasonable (from the perspective of a subordinated, secured asset-based lender under a bridge loan) business judgment. "Permitted Dispositions" means (a) sales or other dispositions by Borrower or its Subsidiaries of Equipment that is substantially worn, damaged, no longer used, surplus, or obsolete in the ordinary course of Borrower's or its Subsidiaries' business, (b) sales by Borrower or its Subsidiaries of Inventory, including Hydrocarbons, to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents by Borrower or its Subsidiaries in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, (d) the licensing by Borrower or its Subsidiaries, on a non-exclusive basis, of patents, trademarks, copyrights and other intellectual property rights in the ordinary course of Borrower's or its Subsidiaries' business, (e) releases or surrenders (in accordance with the terms of the applicable lease) and sales or other dispositions of leasehold interests in properties with no Proved Reserves, (f) releases or surrenders (in accordance with the terms of the applicable lease) and sales or other dispositions of leasehold interests in properties with Proved Undeveloped Reserves to the extent Agent consents in its Permitted Discretion, to such releases, surrenders, sales or dispositions, (g) Bridge Loan Dispositions, (h) Permitted PUD/PDNP Dispositions, (i) transfers or assignments of interests in Farmout Properties in accordance with the terms of Permitted Farmout Agreements, (j) sales or other dispositions of properties or leasehold interests in properties with Proved Reserves, other than Farmouts, with an aggregate PV-10 attributable to such 18 reserves of less than $100,000, provided that the aggregate net cash proceeds received upon the consummation of such transaction pursuant to this clause (j) shall not exceed $500,000 in any 12 calendar month period, (k) the liquidation, winding up or dissolution of any Restricted Subsidiary of Borrower so long as Borrower does not and will not incur, directly or indirectly, any liabilities or other obligations (whether contingent or otherwise) for or in connection with any such liquidation, winding up or dissolution (other than reasonable and ordinary course ministerial costs, expenses, and attorneys' fees related thereto), (l) the merger or consolidation of any Restricted Subsidiary of Borrower into any other Restricted Subsidiary of Borrower, so long as there is no Default, Unmatured Default or Event of Default immediately before and immediately after such transaction and (m) such other sales or other dispositions as may be agreed to by Agent in its Permitted Discretion. "Permitted Farmout Agreement" means any Farmout Agreement entered into by Borrower and/or any of the other Loan Parties, as the farmor, in the ordinary course of business, (a) covering Farmout Property of Borrower and/or one or more other Loan Parties that does not include proved oil or natural gas properties (other than those (i) proved by the efforts to obtain production taken pursuant to such Farmout Agreement or (ii) that are not then otherwise included in Borrower's PV-10 or as a proved reserve in any reserve or other report prepared by or on behalf of Borrower in amount which exceeds either $150,000 with respect to any individual property subject to such Farmout Agreement or $500,000 when aggregated with any other proved oil or natural gas property then subject to such Farmout Agreement or any other Farmout Agreement) and (b) that, as determined in good faith by the Board of Directors of Borrower and evidenced by a resolution of such Board of Directors delivered to Agent (or, solely with respect to any Farmout with a Farmout Property Value not exceeding $1.0 million, as determined in good faith by the chief executive officer of Borrower and evidenced by an officers' certificate delivered to Agent), is in the best interests of the Loan Parties and does not adversely affect the ability of the Loan Parties to perform their respective obligations under the Loan Documents. "Permitted Investments" means (a) investments in Cash Equivalents, (b) investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, (d) investments made in the ordinary course of, and of a nature that is customary in, the Oil and Gas Business as a means of actively exploiting, exploring for, acquiring, developing, processing, gathering, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit one to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of the Oil and Gas Business jointly with third parties, including, without limitation, the entry into operating agreements, working interests, royalty interests, mineral leases, processing agreements, Farmout Agreements, division orders, contracts for the sale, transportation or exchange of oil or natural gas, unitization and pooling declarations and agreements and area of mutual interest agreements, production sharing agreements or other similar or customary agreements, transactions, properties, interests and investments and expenditures in connection therewith; provided that for purposes of this clause (d), an investment in capital Stock, partnership or joint venture interests (other than interests arising from Permitted Farmout Agreements or other similar operating agreements entered into in the ordinary course of the Oil and Gas Business), limited liability company interests or other similar equity interests in a Person shall not constitute a Permitted Investment, (e) Investments constituting intercompany Indebtedness to the extent permitted pursuant to Section 7.1(i), (f) an Investment in the form 19 of a guarantee by Borrower of Wamsutter Holdings, Inc.'s obligations as the general partner in Abraxas Wamsutter, L.P. so long as neither Wamsutter Holdings, Inc. nor Abraxas Wamsutter, L.P. conducts any business or operations, (g) after the consummation of a Grey Wolf Stock Sale, if Grey Wolf is no longer a Subsidiary of Borrower or any Restricted Subsidiary, the equity or ownership interest of Borrower in Grey Wolf, (h) other Investments by Borrower or any Restricted Subsidiary in any Person so long as the aggregate fair market value of all such Investments (determined in good faith by the chief financial officer of the Company and measured as of the date each such Investment is made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (h) (net of returns of capital, dividends and interest paid on Investments and sales, liquidations and redemptions of Investments), does not exceed $500,000 after the Closing Date and (i) other Investments as may be agreed to by Agent in its Permitted Discretion. "Permitted Liens" means (a) Liens held by the Collateral Agent or Agent for the benefit of Lender Group, (b) Liens for unpaid taxes that either (i) are not yet delinquent or (ii) do not constitute an Event of Default or an Unmatured Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases, (e) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, performance bonds, regulatory compliance in connection with the Oil and Gas Business or leases incurred in the ordinary course of business and not in connection with the borrowing of money, (i) Liens granted as security for surety bonds, performance bonds or appeal bonds in connection with obtaining such bonds in the ordinary course of business, (j) Liens resulting from any judgment or award that is not an Event of Default or an Unmatured Default hereunder, (k) Liens with respect to the Real Property (not including Oil and Gas Properties) constituting easements, rights of way, zoning restrictions and other minor imperfections of title that do not materially interfere with or impair the use or operation thereof, (l) with respect to the Oil and Gas Properties, imperfections of title as described in title opinions delivered and which are acceptable to Agent, (m) Liens held by the Collateral Agent to secure the obligations evidenced by the New Notes Documents to the extent such Liens are subject to the Intercreditor Agreement and Liens held by the Collateral Agent to secure Indebtedness and other obligations under the Revolving Credit Facility Documents to the extent such Liens are subordinated to the Liens securing the Obligations and are subject to the terms of the Intercreditor Agreement, (n) Liens for royalties, overriding royalties, net profit interests, reversionary interests, operating agreements and other similar interests, properties, arrangements and agreements as they relate to Hydrocarbon Interests of Borrower, to the extent such Liens are customary in the Oil and Gas Business, are incurred in the ordinary course of business, do not secure Indebtedness for borrowed money and which secure sums which are not then required to be paid, (o) Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of Borrower or any Restricted 20 Subsidiary on deposit with or in possession of such bank to the extent such Liens secure Indebtedness under clause (j) of Section 7.1, (p) Liens on cash and Cash Equivalents securing the performance obligations of Borrower under Hedging Agreements so long as the aggregate amount of obligations secured by such Liens at any time outstanding does not exceed $250,000, (q) Liens in favor of Persons financing unpaid insurance premiums so long as such Liens are limited to insurance policies with respect to which such premiums are financed, (r) non-consensual statutory Liens on pipeline or pipeline facilities, Hydrocarbons or properties and assets of Borrower or any Restricted Subsidiary of Borrower which arise out of operation of law and are not in connection with the borrowing of money, (s) Liens pursuant to documents governing Permitted Farmout Agreements, (t) Liens not otherwise permitted under this Agreement incurred in the ordinary course of business of Borrower or any Restricted Subsidiary of Borrower securing Indebtedness of Borrower or such Restricted Subsidiary in an aggregate principal amount at any time outstanding not to exceed $100,000 and (u) other Liens securing other obligations of the Loan Parties to the extent permitted by Agent in its Permitted Discretion. "Permitted Protest" means the right of Borrower or any of its Subsidiaries, as applicable, to protest any Lien (other than any such Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien or a Canadian provincial deemed trust) or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Borrower or any of its Subsidiaries, as applicable, in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity or priority of any of the Liens of the Collateral Agent or Agent. "Permitted PUD/PDNP Dispositions" means releases, surrenders, sales or other dispositions of properties or leasehold interests in properties with Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves so long as (i) no Default, Unmatured Default or Event of Default shall have occurred and be continuing prior to and after giving effect to such release, surrender, sale or disposition, (ii) the ratio of (A) the net cash proceeds received by Borrower or its Restricted Subsidiaries on the date of the consummation of such transaction as consideration for any such release, surrender, sale or disposition to (B) the PV-10 of the applicable Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves subject to such release, surrender, sale or disposition, as shown on the most recent Reserve Report, equals or exceeds 1.25 to 1.00, and (iii) the aggregate net cash proceeds received in connection with such releases, surrenders, sales or other dispositions do not exceed $1,000,000 after the Closing Date. "Permitted Purchase Money Indebtedness" means, as of any date of determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate principal amount outstanding at any one time not in excess of $500,000 (or such greater amount as may be agreed to by Agent) in its Permitted Discretion. "Person" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. 21 "Petroleum Engineers" means (i) DeGolyer & McNaughton, (ii) McDaniel & Associates Consultants Ltd. or (iii) such other petroleum engineers of recognized national standing as may be selected by Borrower with the prior consent of Agent. "Pledge Agreement" means a pledge and security agreement, in form and substance satisfactory to Agent and the Collateral Agent, executed and delivered by each Loan Party to the Collateral Agent with respect to the pledge of the Stock (other than Stock of Grey Wolf) owned by, and promissory notes made in favor of, each such Loan Party. "Pledged Grey Wolf Stock" has the meaning set forth in Section 4.3. "Post-Nine Month Repayment Factor" means, with respect to the calculation of the respective Prepayment Fee (if any) associated with a repayment of Advances occurring on a day which is more than nine (9) months after the Closing Date, the result of 1.025 plus the following product: ((the number of whole months between (x) the day on which such repayment is made and (y) the Closing Date) minus 9) multiplied by 0.03. "Prepayment Fee" has the meaning set forth in Section 2.10(a). "Projections" means forecasted Borrower's and Guarantor's (a) balance sheets, (b) profit and loss statements and (c) cash flow statements, all prepared on a basis consistent with Borrower's and Guarantor's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Pro Rata Share" means: (a) with respect to a Lender's obligation to make the Loan and receive payments of principal, interest, fees, costs and expenses with respect thereto, (i) prior to the making of the Loan, the percentage obtained by dividing (x) such Lender's Commitment by (y) the aggregate amount of all Lenders' Commitments and (ii) from and after the making of the Loan, the percentage obtained by dividing (x) the principal amount of such Lender's portion of the Loan Amount by (y) the Loan Amount, and (b) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) the unpaid principal amount of such Lender's portion of the outstanding Loan by (ii) the aggregate unpaid principal amount of the outstanding Loan. "Proved Developed Non-Producing Reserves" means those Oil and Gas Properties designated as "proved developed non-producing" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Proved Developed Producing Reserves" means those Oil and Gas Properties designated as "proved developed producing" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the 22 Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Proved Reserves" means those Oil and Gas Properties designated as "proved" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Proved Undeveloped Reserves" means those Oil and Gas Properties designated as "proved undeveloped" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "PV-10" means, as of any date of determination, the sum of the present values of the amounts of net revenues before income taxes expected to be received in each of the months following the date of determination on the basis of estimated production from Proved Reserves during such months determined as follows: (i) each such monthly net revenue amount shall be calculated (x) on the basis of the applicable NYMEX Strip Price for the appropriate category of oil or gas as of such date of determination, adjusting such price to reflect (A) the appropriate Basis Differential with respect to Hydrocarbons produced from specific Oil and Gas Properties of Borrower and as set forth on Exhibit PV-10, as such Exhibit may from time to time be amended at the request of Borrower with the written consent of Agent, (B) the prices for fixed price contracts for such month and (C) Btu content, (y) assuming that production costs remain constant throughout the periods of the calculation of such monthly net revenues and (z) otherwise applying the financial accounting and reporting standards prescribed by the SEC for application of the successful efforts method of accounting for such revenues under Rule 4-10 of Regulation S-X as promulgated by the SEC from time to time; and (ii) the present value of each such monthly net revenue amount shall be determined by discounting each such monthly net revenue amount from the month in which it is expected to be received, on a monthly basis, to such date of determination at a rate of 10% per annum. "Purchase Money Indebtedness" means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 20 days after (or such other period as may be agreed to by Agent), the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. "Qualified Capital" means (a) common Stock of Borrower or (b) other Stock of Borrower that is not (i) stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is mandatorily redeemable at the sole option of the holder thereof, in whole or in part, in either case, on or prior to 91 days after the payment in full in cash of all Obligations after the termination of the Commitments or (ii) Stock that, by its terms, by the terms of any security into which it is convertible or 23 exchangeable, by contract or otherwise, requires, or upon the happening of an event or passage of time would require, the payment of dividends (other than dividends paid (A) in Qualified Capital and/or (B) from a segregated reserve account funded solely from the amounts paid by the purchaser or purchasers of such Stock in connection with the issuance and sale thereof) on or prior to 91 days after the payment in full in cash of all Obligations after the termination of the Commitments. "Real Property" means any estates or interests in real property now owned or hereafter acquired by Borrower or any Guarantor and the improvements thereto. "Real Property Collateral" means (i) the parcel or parcels of Real Property identified on Parts A and C of Schedule 5.22 and (ii) any Real Property hereafter (A) acquired by Borrower or any Guarantor in the case of Real Property constituting Oil and Gas Properties or (B) owned in fee in the case of Real Property not constituting Oil and Gas Properties. "Record" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "Register" has the meaning set forth in Section 14.1(h). "Registered Loan" has the meaning set forth in Section 2.12. "Registered Note" has the meaning set forth in Section 2.12. "Related Fund" has the meaning set forth in the definition of "Eligible Transferee". "Related Indebtedness" means (i) Indebtedness related to any fees and expenses incurred by Borrower or any of its Subsidiaries (including, but not limited to, those owed to any Person not an Affiliate of Borrower or any of its Subsidiaries) in connection with any amendment (including any amendment and restatement thereof), supplement, replacement, restatement or other modification from time to time, including any agreements (and related instruments and documents) extending the maturity of, refinancing, substituting, replacing or other restructuring of all or any portion of the Indebtedness under the Loan Documents (and related instruments and documents) or any successor or replacement agreements (and related instruments and documents) and (ii) any capitalized interest, fees or other expenses incurred by Borrower or any of its Subsidiaries whether or not charged to the Loan Account or any similar account created under the Loan Documents. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, seeping, migrating, dumping or disposing of any Hazardous Material (including the abandonment or discarding of barrels, containers and other closed receptacles containing any Hazardous Material) into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through or in the ambient air, soil, surface or ground water, or property. "Remaining Excess Proceeds" has the meaning set forth in Section 2.3(c). 24 "Remedial Action" means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations or post-remedial operation and maintenance activities or (d) conduct any other actions authorized by 42 USC ss. 9601. "Replacement Lender" has the meaning set forth in Section 15.2(a). "Report" has the meaning set forth in Section 16.17. "Reportable Event" means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days' notice to the PBGC is waived under applicable regulations. "Required Lenders" means, at any time, Agent, if at such time Agent or an Affiliate of Agent is a Lender, together with Lenders whose Pro Rata Shares (as determined pursuant to paragraph (a) of the definition thereof) aggregate more than 50%. "Reserve Report" means a report of the Petroleum Engineers in the form of the Initial Reserve Report, setting forth, as of June 30 or December 31 of any calendar year, and as of any other date on which a Reserve Report is required or permitted to be obtained pursuant to this Agreement, (i) the volumetric quantity (calculated using the same pricing assumptions as used in the calculation of PV-10) and the PV-10 (and, solely with respect to the Reserve Report dated December 31 of any year, the SEC Value), of the oil and gas reserves attributable to the Oil and Gas Properties of Borrower included in the calculation of the Borrowing Base (as such term is defined in the Revolving Credit Facility Agreement), together with a projection of the rate of production and future net income, taxes, operating expenses and Capital Expenditures with respect thereto as of such date, and (ii) such other information as Agent may reasonably request, all in form and substance satisfactory to Agent. Any reference herein to a Reserve Report without reference to the date thereof shall, unless the context otherwise requires, refer to the most recent Reserve Report. "Reserve Report Delivery Date" means the date on which Agent receives from Borrower the most recent Reserve Report required to be delivered by Borrower in accordance with Section 6.2(e). "Restricted Subsidiary" means each Subsidiary of Borrower or Guarantor other than (x) Grey Wolf and (y) any other Subsidiary of Borrower or Guarantor agreed to in writing by Agent. "Revolving Credit Facility" means the Loan Agreement, dated as of the Closing Date, among Borrower, the Subsidiaries of Borrower party thereto, the lenders thereunder and the Revolving Credit Facility, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. 25 "Revolving Credit Facility Administration Agent" means Wells Fargo Foothill, Inc., as agent for the lenders under the Revolving Credit Facility and any successor thereto as may be appointed pursuant to the terms of the Revolving Credit Facility. "Revolving Credit Facility Documents" means the Revolving Credit Facility and each other agreement, instrument and document related thereto, as such may from time to time be amended, restated, replaced, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. "SEC" means the United States Securities and Exchange Commission and any successor thereto. "SEC Value" means the future net revenues before income taxes from Proved Reserves, estimated utilizing the actual price for the appropriate category of oil or gas as of the date of determination and assuming that oil and natural gas prices and production costs thereafter remain constant, then discounted at the rate of 10% per year to obtain the present value and otherwise applying the financial accounting and reporting standards prescribed by the SEC for application of the successful efforts method of accounting under Rule 4-10 and Regulation S-X as promulgated by the SEC from time to time. "Securities Account" means a "securities account" as that term is defined in the Code. "Shared Collateral" means the assets and properties constituting "Collateral" under or as contemplated by the Intercreditor Agreement. "Solvent" means, with respect to any Person on a particular date, that such Person is not insolvent (as such term is defined in the Uniform Fraudulent Transfer Act or any similar law in Canada). "Standard & Poor's" means Standard & Poor's Rating Services, a division of the McGraw-Hill Companies, Inc. and any successor thereto. "Stock" means all shares, options, warrants, interests, participations or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Subsidiary" means, with respect to any Person, a corporation, partnership, limited liability company or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company or other entity. "Tax Payments" has the meaning set forth in Section 6.6. "Taxes" has the meaning set forth in Section 16.11. 26 "Unmatured Default" means an event, condition or default under Sections 8.2 or 8.11 that, after giving of notice by Agent to Borrower, would be an Event of Default. "Voidable Transfer" has the meaning set forth in Section 17.7. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial or related covenant or a related definition, it shall be understood to mean Borrower and its Restricted Subsidiaries on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or". The words "hereof", "herein", "hereby", "hereunder" and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders and supplements thereto and thereof, as applicable (subject to any restriction on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders and supplements set forth therein or herein). Any reference herein to any law or other legislation or to any provision of any law or other legislation shall include any amendment, modification or re-enactment thereof, any law or other legislative provision substituted therefor and all regulations, rules and interpretations issued thereunder or pursuant thereto. Any reference herein to any Person shall be construed to refer to and include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference, and all references herein to this Agreement shall include such schedules and exhibits as so incorporated. 2. LOANS AND TERMS OF PAYMENT. 2.1 Loan. Subject to the terms and conditions of this Agreement, each Lender agrees (severally, not jointly or jointly and severally) to make loans (the "Advances" and, collectively, the "Loan") to Borrower on the Closing Date in an amount equal to such Lender's Pro Rata Share of the Loan Amount. 27 2.2 Borrowing Procedures. (a) Making of Advances. (i) Each Lender shall make the amount of such Lender's Pro Rata Share of the Borrowing available to Agent in immediately available funds, to Agent's Account, not later than 10:00 a.m. (California time) on the Closing Date. After Agent's receipt of the proceeds of such Advances, upon satisfaction of the conditions precedent set forth in Section 3, Agent shall make the proceeds thereof available to Borrower on the Closing Date by transferring immediately available funds equal to such proceeds received by Agent to Borrower's Designated Account; provided, however, that, Agent shall not request any Lender to make, and no Lender shall make, any Advance if Agent shall have actual knowledge that one or more of the conditions precedent set forth in Section 3 will not be satisfied on the Closing Date unless such condition has been waived. (ii) Agent may assume that each Lender will make the amount of that Lender's Pro Rata Share of the Loan available to Agent in immediately available funds on the Closing Date pursuant to Section 2.2(a)(i), and Agent may (but shall not be so required),in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds pursuant to Section 2.2(a)(i) and Agent in such circumstances has made available to Borrower such amount, that Lender shall on the Business Day following the Closing Date make such amount available to Agent, together with interest at the Base Rate for each day during such period. A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is so made available, such payment to Agent shall constitute such Lender's Advance on the date of the Borrowing for all purposes of this Agreement. If such amount is not made available to Agent on the Business Day following the Closing Date, Agent will notify Borrower of such failure to fund and, upon demand by Agent, Borrower shall pay such amount to Agent (or if required by the Intercreditor Agreement, to the Collateral Agent) for Agent's account, together with interest thereon for each day elapsed since the date of the Borrowing, at a rate per annum equal to the Base Rate. The failure of any Lender to make any Advance on the Closing Date shall not relieve any other Lender of any obligation hereunder to make an Advance on the Closing Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the Closing Date. (iii) Agent shall not be obligated to transfer to a Defaulting Lender any payment made by Borrower to Agent for the Defaulting Lender's benefit and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payment to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender's Advance was funded by the other members of the Lender Group) or, if so directed by Borrower and if no Default or Event of Default had occurred and is continuing (and to the extent such Defaulting Lender's Advance was not funded by the Lender Group), retain same to be 28 re-advanced to Borrower as if such Defaulting Lender had made Advances to Borrower. Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrower for the account of such Defaulting Lender the amount of all such payments received and retained by it for the account of such Defaulting Lender. Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a "Lender" and such Lender's Commitment shall be deemed to be zero. This Section 2.2(a)(iii) shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have beendeclared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent and Borrower shall have waived such Defaulting Lender's default in writing or (z) the Defaulting Lender makes its Pro Rata Share of the Advance and pays to Agent all amounts owing by such Defaulting Lender in respect thereof. The operation of this Section 2.2(a)(iii) shall not be construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder or to relieve or excuse the performance by Borrower of its duties and obligations hereunder to Agent or to the Lenders other than such Defaulting Lender. Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be acceptable to Agent. In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no right to refuse to be replaced hereunder and agrees to execute and deliver a completed form of Assignment and Acceptance Agreement in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations without any premium or penalty of any kind whatsoever; provided further, however, that any such assumption of the Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups' or Borrower's rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund. (b) Notation. Agent shall record on its books the principal amount of the Advances owing to each Lender from time to time. In addition, each Lender is authorized, at such Lender's option, to note the date and amount of each payment or prepayment of principal of such Lender's Advances in its books and records, including computer records, such books and records constituting conclusive evidence, absent manifest error, of the accuracy of the information contained therein. (c) Lenders' Failure to Perform. All Advances shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit (if any)) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder. 29 2.3 Payments. (a) Payments by Borrower. (i) Except as otherwise expressly provided herein, all payments by Borrower shall be made to Agent's Account for the account of the Lender Group and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Agent later than 11:00 a.m. (California time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) Unless Agent receives notice from Borrower prior to the date on which any payment is due to the Lenders that Borrower will not make such payment in full as and when required, Agent may assume that Borrower has made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower does not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid. (b) Apportionment and Application of Payments. (i) Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including letter agreements, if any, between and/or among Agent and/or individual Lenders), aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations held by each Lender) and payments of fees and expenses shall be apportioned ratably among the Lenders (other than (x) payments received while no Unmatured Default or Event of Default has occurred and is continuing and which relate to the payment of principal or interest of specific Obligations or which relate to the payment of specific fees, (y) payments received from the Collateral Agent during the existence of a Default Period (as such term is defined in the Intercreditor Agreement) which relate to the payment of specific Obligations as set forth in Section 4.06(b) of the Intercreditor Agreement and (z) payments received in respect of an Agent Directed Sale, which will be governed by Section 4.05 of the Intercreditor Agreement to the extent inconsistent with this Section 2.3(b)(i), and all proceeds of Accounts or other Collateral received by Agent, shall, subject to the terms of the Intercreditor Agreement and Sections 2.3(b)(v), be applied (unless otherwise agreed by the Required Lenders) as follows: (A) first, to pay any Lender Group Expenses then due to Agent under the Loan Documents, until paid in full, 30 (B) second, to pay any Lender Group Expenses then due to the Lenders under the Loan Documents, on a ratable basis, until paid in full, (C) third, to pay any fees then due to Agent (in each case for its separate account and after giving effect to any letter agreements between Agent and individual Lenders) under the Loan Documents, until paid in full, (D) fourth, to pay any fees then due to any or all of the Lenders (after giving effect to any letter agreements between Agent and individual Lenders) under the Loan Documents, on a ratable basis, until paid in full, (E) fifth, to pay interest due in respect of the Advances, until paid in full, (F) sixth, to pay the principal of all Advances, until paid in full, (G) seventh, to pay the applicable Prepayment Premium (if any), until paid in full, (H) eighth, to pay any other Obligations, until paid in full, and (I) ninth, to Borrower (to be wired to the Designated Account) or such other Person entitled thereto under applicable law or under the Intercreditor Agreement. (ii) Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive. (iii) In each instance, so long as no Unmatured Default or Event of Default has occurred and is continuing, Section 2.3(b)(i) shall not be deemed to apply to any payment by Borrower specified by Borrower to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement. (iv) For purposes of the foregoing, "paid in full" means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest and expense reimbursements, whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding. (v) In the event of a direct conflict between the priority provisions of this Section 2.3 and other provisions contained in any other 31 Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.3 shall control and govern; provided, however, notwithstanding the foregoing or anything else to the contrary contained in this Agreement, if Borrower, any Guarantor or any member of the Lender Group is required by the terms of the Intercreditor Agreement to make, apply or retain any payment or proceeds, or to take any other action or refrain from taking any other action, in a manner which but for this proviso would conflict with the terms of this Agreement (including this Section 2.3), then Borrower, such Guarantor or such member of the Lender Group, as the case may be, shall comply with the terms of the Intercreditor Agreement without regard to the conflicting terms of this Agreement (but only to the extent of such conflict). (c) Remaining Excess Proceeds After Net Proceeds Offer. If Borrower completes a Net Proceeds Offer pursuant to the New Notes Indenture and $250,000 or more of Excess Proceeds remain (as if not reset to zero pursuant to the New Notes Indenture) following completion of such Net Proceeds Offer (such Excess Proceeds, the "Remaining Excess Proceeds"), Borrower shall (i) within five (5) Business Days thereafter, provide written notice to Agent stating (A) that Borrower completed a Net Proceeds Offer pursuant to the New Notes Indenture, (B) the date upon which such Net Proceeds Offer was completed and (C) the amount of such Remaining Excess Proceeds; and (ii) on the first Interest Payment Date occurring after the ninth (9th) Business Day following the day upon which such Net Proceeds Offer is completed, prepay Advances in an amount equal to the lesser of (A) the aggregate amount of Advances outstanding on such Interest Payment Date and (B) the difference of (I) such Remaining Excess Proceeds and (II) the Prepayment Fee associated with such prepayment. This Agreement shall terminate, and any obligation of a Lender to extend credit hereunder shall terminate, if, upon consummation of any prepayment pursuant to this Section 2.3(c), (i) there are no Obligations (including, without limitation, the Prepayment Fee associated with such prepayment) outstanding upon consummation of such prepayment and (ii) Borrower delivers to Agent a certificate executed by an Authorized Person of Borrower certifying that there are no outstanding Obligations. 2.4 Repayment of Obligations. Borrower hereby promises to pay the Obligations (including principal, interest, fees, costs and expenses) in Dollars in full to the Lender Group as and when due and payable under the terms of this Agreement and the other Loan Documents. 32 2.5 Interest Rates; Payments and Calculations. (a) Interest Rates. Except as provided in clause (b) below, all Obligations, whether or not charged to the Loan Account pursuant to the terms hereof, shall bear interest on the Daily Balance thereof at a per annum rate equal to the Base Rate. (b) Default Rate. Upon the occurrence and during the continuation of an Event of Default (and at the election of Agent or the Required Lenders), all Obligations, whether or not charged to the Loan Account pursuant to the terms hereof, shall bear interest on the Daily Balance thereof at a per annum rate equal to 4.00 percentage points above the per annum rate otherwise applicable hereunder. (c) Payment. (i) Without limiting clause (ii)(B) below, interest in respect of the Obligations shall be due and payable, in arrears, on the first Business Day of each month at any time that Obligations are outstanding (each such date, an "Interest Payment Date"). All fees payable hereunder shall be due and payable on the date upon which such fees are due and payable hereunder. Borrower hereby authorizes Agent, from time to time without prior notice to Borrower, to, and Agent agrees that it may (at its sole and absolute discretion), charge such interest and fees, all Lender Group Expenses (as and when incurred), the fees and costs provided for in Section 2.10 (as and when accrued or incurred) and all other payments as and when due and payable under any Loan Document, to Borrower's Loan Account, which amounts thereafter shall be deemed to constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded by being charged to Borrower's Loan Account and shall thereafter be deemed to constitute an Advance hereunder and shall accrue interest at the Base Rate in existence from time to time. (ii) All interest accruing on Obligations pursuant to the terms of this Agreement shall be (A) payable in immediately available funds on the respective Interest Payment Date during the period beginning on the Closing Date and ending on the first anniversary of the Closing Date and (B) thereafter capitalized on each Interest Payment Date by being charged to Borrower's Loan Account and deemed to constitute an Advance hereunder which shall accrue interest at the applicable Base Rate in existence from time to time. (d) Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360-day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate. (e) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final 33 determination, deem applicable. Borrower and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.6 Cash Management. The Loan Parties shall establish and maintain cash management services in accordance with the requirements set forth in the Collateral Documents. 2.7 Crediting Payments. Without limiting Section 2.5(c)(ii)(B), the receipt of any payment item by Agent shall not be considered a payment on account unless such payment item is a wire transfer of immediately available funds made to the Agent's Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, but without limiting Section 2.5(c)(ii)(B), any payment item shall be deemed received by Agent only if it is received into the Agent's Account on a Business Day on or before 11:00 a.m. (California time). Without limiting Section 2.5(c)(ii)(B), if any payment item is received into the Agent's Account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day. 2.8 Designated Account. Agent is authorized to make the Advances under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.5(c). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances made hereunder. Unless otherwise agreed by Agent and Borrower, any Advance made hereunder shall be made to the Designated Account. 2.9 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances made by (or deemed to be made by) Agent or the Lenders to Borrower or for Borrower's account and all other payment Obligations hereunder or under the other Loan Documents, including accrued interest, fees and expenses and Lender Group Expenses. In accordance with Section 2.7, the Loan Account will be credited with all payments received by Agent from Borrower or for Borrower's account. Agent shall render statements regarding the Loan Account to Borrower, including principal, interest, fees and an itemization of all charges and expenses constituting Lender Group Expenses owing, and each such statement shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within 30 days after receipt thereof by Borrower, Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 34 2.10 Fees and Charges. Borrower shall pay to Agent the following fees and charges, which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is terminated thereafter): (a) Prepayment Fee. On any day on which all or any portion of the Advances are repaid in whole or in part prior to the Maturity Date (including, without limitation, pursuant to Sections 2.3(c) or 3.4), Borrower shall, as a condition to making such repayment, pay a prepayment fee (a "Prepayment Fee") equal to: (i) if such repayment occurs on or prior to the day which is nine (9) months after the Closing Date, the product of (A) the aggregate amount of Advances being so repaid and (B) 1.025; and (ii) if such repayment occurs on a day which is more than nine (9) months after the Closing Date, the product of (A) the aggregate amount of Advances being so repaid and (B) the Post-Nine Month Repayment Factor. Such Prepayment Fee shall be apportioned among the Lenders in accordance with their respective Pro Rata Share of the then outstanding Advances (without giving effect to the repayment of which such Prepayment Fee is the subject). (b) Fee Letter Fees. As and when due and payable under the terms of the Fee Letter, Borrower shall pay to Agent the fees set forth in the Fee Letter. (c) Audit, Appraisal and Valuation Charges. For the separate account of Agent, Borrower shall pay audit, appraisal and valuation fees and charges as follows, (i) a fee of $850 per day, per auditor (such fees for all auditors for any single financial audit not to exceed $5,000 in the aggregate), plus out-of-pocket expenses for each financial audit of a Loan Party performed by personnel employed by Agent, (ii) a fee of $1,500 per day per appraiser, plus out-of-pocket expenses, for each appraisal of the Collateral performed by personnel employed by Agent, and (iii) the actual charges paid or incurred by Agent if it elects to employ the services of one or more third Persons to perform financial audits of any Loan Party, to appraise the Collateral, or any portion thereof, to review or examine the Oil and Gas Properties of any Loan Party or to assess any Loan Party's business valuation, provided, that, (x) with respect of clause (i) above, so long as no Unmatured Default or Event of Default shall have occurred and be continuing, Borrower shall not be obligated to pay for more than four (4) financial audits during any calendar year and (y) with respect to any Reserve Report requested by Borrower or Agent (in addition to the Reserve Reports required to be delivered semi-annually by Borrower to Agent pursuant to Section 6.2(e)), the party requesting the issuance of such Reserve Report shall pay the costs and expenses associated therewith in the absence of a continuing Default, Unmatured Default or Event of Default (and during a continuing Default or Event of Default, such Reserve Report shall be at Borrower's sole cost and expense). 2.11 Capital Requirements. If, after the date hereof, any Lender determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) 35 compliance by such Lender or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), the effect of reducing the return on such Lender's or such holding company's capital as a consequence of such Lender's Commitments hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital) by any amount deemed by such Lender to be material, then such Lender may notify Borrower and Agent thereof. Following receipt of such notice, Borrower agrees to pay such Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender's calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, such Lender may use any reasonable averaging and attribution methods. 2.12 Registered Loans and Registered Notes. Borrower agrees to record each Advance on the Register referred to in Section 14.1(h). Each Advance recorded on the Register (a "Registered Loan") may not be evidenced by promissory notes other than Registered Notes (as defined below). Upon the registration of any Advance, Borrower agrees, at the request of any Lender, to execute and deliver to such Lender a promissory note, in conformity with the terms of this Agreement, in registered form to evidence such Registered Loan, in form and substance reasonably satisfactory to Agent and such Lender, and registered as provided in Section 14.1(h) (a "Registered Note"), payable to the order of such Lender and otherwise duly completed. Once recorded on the Register, each Advance may not be removed from the Register so long as it or they remain outstanding, and a Registered Note may not be exchanged for a promissory note that is not a Registered Note. 2.13 Repayment of Advances. Borrower may prepay Advances at any time, but in each case subject to Section 2.10(a) and to the following terms and conditions and, if applicable, to Sections 2.3(c) and 3.4, but without payment of any fee other than as set forth in Section 2.10(a): (a) Borrower shall have provided 10 days' prior written notice to Agent of the prepayment date and the amount of such prepayment or, in the case of a prepayment being made pursuant to Section 2.3(c), shall have complied with such Section 2.3(c); and (b) except for any such prepayment in connection with the termination of this Agreement pursuant to Section 3.4, each such prepayment shall occur on and be effective as of an Interest Payment Date. 3. CONDITIONS; TERM OF AGREEMENT; TERMINATION OF AGREEMENT AND REDUCTION OF COMMITMENTS. 3.1 Conditions Precedent to the Making of the Loan. The obligation of the Lender Group (or any member thereof) to make the Loan (or otherwise to extend any credit provided for hereunder) is subject to the 36 fulfillment, to the satisfaction of Agent, of each of the conditions precedent set forth below: (a) the Collateral Agent and Agent shall have received and filed all UCC or other financing statements required by the Collateral Agent or Agent, duly executed or otherwise authorized by Borrower or any Guarantor, and Agent shall have received evidence reflecting the filing of all such financing statements; (b) Agent (and, to the extent that the Collateral Agent is a party thereto, the Collateral Agent) shall have received each of the following documents, in form and substance satisfactory to Agent and the Collateral Agent, as applicable, duly executed, and each such document shall be in full force and effect: (i) the Contribution Agreement, (ii) the Flow of Funds Agreement, (iii) the Fee Letter, (iv) the Mortgages, (v) if the Closing Date is not the same date that this Agreement is executed and delivered by the Loan Parties and the Lender Group, an officer's certificate executed and delivered on behalf of Borrower by one of its Authorized Persons stating that (i) the representations and warranties of the Loan Parties in this Agreement are true and correct on and as of the Closing Date (except to the extent such representations and warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct on and as of such earlier date) and (ii) the Loan Parties have complied with all agreements and satisfied all conditions on their part to be performed or satisfied hereunder on or prior to the Closing Date, (vi) a Pledge Agreement from each Loan Party, together with all certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank and all promissory notes pledged thereunder as well as allonges with respect thereto endorsed in blank, (vii) the Grey Wolf Pledge Agreement, together with all certificates representing the shares of Pledged Grey Wolf Stock, as well as Stock powers with respect thereto endorsed in blank, (viii) the Intercreditor Agreement, and (ix) the Pay-Off Letter; (c) Agent shall have received a certificate from the Secretary of Borrower (i) attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific 37 officers of Borrower to execute the same and (ii) certifying the names and true signatures of the officers of Borrower authorized to sign each Loan Document to which Borrower is a party; (d) Agent shall have received copies of Borrower's Governing Documents, as amended, modified or supplemented to the Closing Date, certified by the Secretary of Borrower; (e) Agent shall have received a certificate of status with respect to Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (f) Agent shall have received certificates of status with respect to Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change (which such jurisdictions are set forth on Schedule 3.1(f)), which certificates shall indicate that Borrower is in good standing in such jurisdictions; (g) Agent shall have received a certificate from the Secretary of each Guarantor (i) attesting to the resolutions of such Guarantor's Board of Directors authorizing its execution, delivery and performance of the Loan Documents to which such Guarantor is a party and authorizing specific officers of such Guarantor to execute the same and (ii) certifying the names and true signatures of the officers of such Guarantor authorized to sign each Loan Document to which such Guarantor is a party; (h) Agent shall have received copies of each Guarantor's Governing Documents, as amended, modified or supplemented to the Closing Date, certified by the Secretary of such Guarantor; (i) Agent shall have received a certificate of status with respect to each Guarantor, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Guarantor, which certificate shall indicate that such Guarantor is in good standing in such jurisdiction; (j) Agent shall have received certificates of status with respect to each Guarantor, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Guarantor) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change (which such jurisdictions are set forth on Schedule 3.1(j)), which certificates shall indicate that such Guarantor is in good standing in such jurisdictions; (k) Agent shall have received copies of Grey Wolf's Governing Documents, as amended, modified or supplemented to the Closing Date, certified by the Secretary Grey Wolf; 38 (l) Agent shall have received a certificate of status with respect to Grey Wolf, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Grey Wolf, which certificate shall indicate that Grey Wolf is in good standing in such jurisdiction; (m) Agent shall have received certificates of status with respect to Grey Wolf, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of Grey Wolf) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change (which such jurisdictions are set forth on Schedule 3.1(m)), which certificates shall indicate that Grey Wolf is in good standing in such jurisdictions; (n) Agent shall have received certificates of insurance, together with the endorsements thereto, as are required by Section 6.7, the form and substance of which shall be satisfactory to Agent; (o) Agent shall have received an opinion, in form and substance satisfactory to Agent, from each of (i) Cox Smith and Matthews Incorporated, counsel to the Loan Parties and Grey Wolf, (ii) Bryan Cave LLP, special New York counsel to the Loan Parties and Grey Wolf, and (iii) Osler, Hoskin & Harcourt LLP, special Canadian counsel to Grey Wolf; (p) Agent shall have received satisfactory evidence (including a certificate of the chief financial officer of Borrower) that all tax returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income and franchises (including Real Property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (q) Agent shall (i) be satisfied that the debt and capital structure of Borrower and its Subsidiaries, after giving effect to the Capital Restructuring, including the Loan under this Agreement, is consistent with the projections of Borrower and its Subsidiaries previously delivered to Agent and (ii) have received financial reports of Borrower and its Subsidiaries for the month ending immediately prior to the Closing Date; (r) Borrower shall pay all Lender Group Expenses incurred in connection with the transactions evidenced by this Agreement; (s) (i) Agent shall have received updated land records and/or title searches and abstracts of Oil and Gas Properties of Borrower, the review of which shall be satisfactory to Agent and (ii) the Collateral Agent shall have received Mortgages on such Oil and Gas Properties of Borrower, for the benefit of the Lender Group, that are valid and enforceable second priority mortgage Liens on such Oil and Gas Properties of Borrower free and clear of all Liens except Permitted Liens; (t) the Collateral Agent shall have been granted, for the benefit of the Lender Group, a second priority perfected security interest in all of the Stock of each Subsidiary of Borrower (other than Grey Wolf) owned, directly or indirectly, by Borrower, free and clear of all Liens except Permitted Liens; 39 (u) Agent shall have been granted, for the benefit of the Lender Group, a first priority perfected security interest in all of the Stock of Grey Wolf beneficially owned, directly or indirectly, by Borrower, free and clear of all Liens except Permitted Liens; (v) Agent shall have received the Initial Reserve Report, which shall be satisfactory to the Lender Group; (w) Agent shall have received satisfactory evidence verifying all production taxes and royalty payments pertaining to each well comprising a part of the Oil and Gas Properties of Borrower and its Subsidiaries are current; (x) Borrower shall have entered into the New Notes Indenture, the terms and conditions of which are set forth in Borrower's Offering Memorandum, dated October 21, 2004, which New Notes Indenture shall be in compliance with all applicable laws; (y) Agent shall have received an Officer's Certificate executed and delivered on behalf of Borrower by an Authorized Officer of Borrower, in form and substance satisfactory to Agent confirming, and Agent shall be satisfied, that: (i) the conditions precedent (other than the satisfaction (or waiver) of the conditions precedent to (i) the making of the Loan contained in this Agreement, (ii) the making of the term loan contained in the Grey Wolf Credit Facility or (iii) the initial extension of credit contained in the Revolving Credit Facility) to the obligation of the Initial Purchaser to purchase $125,000,000 aggregate principal amount of the New Notes pursuant to the New Notes Purchase Agreement have been satisfied (or waived) in accordance with the terms of the New Notes Purchase Agreement, (ii) the conditions precedent (other than the satisfaction (or waiver) of the conditions precedent to (i) the making of the Loan contained in this Agreement, (ii) the purchasing of the New Notes by the Initial Purchaser contained in the New Notes Purchase Agreement or (iii) the initial extension of credit contained in the Revolving Credit Facility) to the obligation of the lenders under the Grey Wolf Credit Facility to make a term loan in the principal amount of $35,000,000 to Grey Wolf have been satisfied (or waived) in accordance with the terms of the Grey Wolf Credit Facility, and (iii) the conditions precedent (other than the satisfaction (or waiver) of the conditions precedent to (i) the making of the Loan contained in this Agreement, (ii) the making of the term loan contained in the Grey Wolf Credit Facility or (iii) the purchasing of the New Notes by the Initial Purchaser contained in the New Notes Purchase Agreement) to the obligation of the lenders under the Revolving Credit Facility to make revolving credit loans in the aggregate principal amount, at any one time outstanding, not to exceed $15,000,000 have been satisfied (or waived) in accordance with the terms of the Revolving Credit Facility; (z) no Material Adverse Change since June 30, 2004 shall have occurred; 40 (aa) Agent shall have received evidence that Borrower shall have entered into Commodity Hedging Agreements with respect to its Hydrocarbon production with one or more counterparties rated investment grade by Moody's and Standard & Poor's, or the equivalent by a rating agency acceptable to Agent or with a counterparty otherwise reasonably acceptable to Agent, with the aggregate notional volumes of Hydrocarbons covered by such Commodities Hedging Agreements constituting not less than 25% and not more than 75% of the aggregate amount of Borrower's estimated Hydrocarbon production volumes on an mcf equivalent basis (where one barrel of oil is equal to six mcf of gas) for the succeeding six calendar months after the Closing Date from Oil and Gas Properties classified as Proved Developed Producing Reserves in the Initial Reserve Report plus the estimated production from anticipated drilling by Borrower or its Subsidiaries during such succeeding six months; (bb) Agent shall have received a fully executed copy of each Capital Restructuring Document set forth on Schedule 3.1(bb), together with a certificate of an Authorized Officer of Borrower certifying each such document as being a true, correct and complete copy thereof and that such agreements, documents or instruments remain in full force and effect and that none of the Loan Parties has breached or defaulted in any of its obligations under such agreements, documents or instruments; (cc) Borrower shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the Capital Restructuring and the execution and delivery by Borrower and each Guarantor of this Agreement or any other Loan Document or with the consummation of the transactions contemplated by the Capital Restructuring and hereby and thereby; (dd) Agent shall have received evidence that (i) Borrower shall have deposited funds sufficient to effect a redemption or discharge, on terms satisfactory to Agent, of the Existing Notes and shall have effected such redemption or discharge of such Existing Notes in compliance with all applicable laws and pursuant to documents satisfactory to Agent and (ii) immediately upon the deposit of such funds, the Existing Notes Indenture Trustee shall have terminated, discharged and released its Liens and mortgages on all of properties and assets of the Borrower Parties and shall have delivered and/or authorized the filing of UCC and PPSA termination statements, discharges or release or mortgages and such other documentation evidencing such termination, discharge and release (such redemption and terminations described in clauses (i) and (ii) collectively the "Existing Note Redemption"); (ee) all other documents and legal matters in connection with the transactions contemplated by this Agreement and the Capital Restructuring shall have been delivered, executed or recorded and shall be in form and substance satisfactory to Agent; (ff) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct on and as of the Closing Date, as though made on and as of the Closing Date (except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct on and as of such earlier date); 41 (gg) no Default or Event of Default shall have occurred and be continuing on the Closing Date, nor shall either result from the making of the Loan; and (hh) no injunction, writ, restraining order or other order of any nature prohibiting, directly or indirectly, the extending of the Loan shall have been issued and remain in force by any Governmental Authority against Borrower, any Guarantor, Agent, any Lender or any of their Affiliates. 3.2 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower, each Guarantor, Agent and the Lenders and shall continue in full force and effect for a term ending on the sixth (6th) anniversary of the Closing Date (the "Maturity Date"). The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.3 Effect of Termination. On the date of termination of this Agreement, all Obligations immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower or the Guarantors of their respective duties, Obligations or covenants hereunder and the Collateral Agent's and Agent's respective Liens in the Collateral (with respect to the Obligations) shall remain in effect until all Obligations have been fully and finally discharged and any obligation of Lender to provide additional credit hereunder has been terminated. When this Agreement has been terminated and all of the Obligations have been fully and finally discharged and any obligation of Lender to provide additional credit under the Loan Documents has been terminated irrevocably, Agent will, and will authorize the Collateral Agent to, at Borrower's sole expense, execute and deliver any UCC termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Liens of the Collateral Agent and Agent, and all notices of security interests and liens previously filed, with respect to the Obligations. 3.4 Early Termination. Without limiting Section 2.3(c), Borrower shall have the option, at any time upon 15 days' prior written notice to Agent, to terminate this Agreement by paying to Agent, on any Business Day (which need not be an Interest Payment Date), in cash, the then outstanding Obligations, in full, together with the applicable Prepayment Fee. If Borrower has sent a notice of termination pursuant to the provisions of this Section 3.4, then any obligation of a Lender to extend credit hereunder shall terminate and Borrower shall be obligated to repay the Obligations, in full, together with the applicable Prepayment Fee, on the date set forth as the date of termination of this Agreement in such notice. In the event of the termination of this Agreement and repayment of the Obligations at any time prior to the Maturity Date, for any other reason, including (a) termination upon the election of the Required Lenders to terminate after the occurrence of an Event of Default, (b) foreclosure and sale of Collateral, (c) sale of the Collateral in any Insolvency Proceeding, (d) repayment of all the Obligations with Remaining Excess Proceeds pursuant to Section 2.3(c), (e) repayment of all the Obligations upon a Change of Control or (f) restructure, reorganization or compromise of the Obligations by the confirmation of a plan of reorganization or any other plan of compromise, restructure or arrangement in any Insolvency Proceeding, then, in view of the 42 impracticability and extreme difficulty of ascertaining the actual amount of damages to Lenders or profits lost by the Lenders as a result of such early termination, and by mutual agreement of the parties as to a reasonable estimation and calculation of the lost profits or damages of the Lenders, Borrower shall pay the applicable Prepayment Fee to the Lenders, measured as of the date of such termination; provided, however, that Borrower shall not be obligated to pay the applicable Prepayment Fee pursuant to the preceding sentence if, in connection with the termination of this Agreement pursuant to the preceding sentence, the repayment of the Obligations at any time prior to the Maturity Date is from the proceeds received by Borrower pursuant to (x) a public or private placement of stock (including a placement in the form of a merger) or subordinated indebtedness of any Loan Party, (y) a sale of assets of any Loan Party or (z) a financing facility provided by, or consented to by, Agent. 4. ACKNOWLEDGEMENT OF SECURITY INTEREST; PLEDGED GREY WOLF STOCK 4.1 Acknowledgement of Security Interest. Each Loan Party hereby acknowledges the grant to the Collateral Agent, for the benefit of the Lender Group, of the security interests in the Collateral created by the Intercreditor Agreement and the other Collateral Documents in order to secure prompt repayment of any and all of the Obligations or the Guaranteed Obligations (as the case may be) in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by each such Loan Party of each of its covenants and duties under the Loan Documents. 4.2 Right to Inspect Collateral. Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, upon notice to Borrower, which notice shall not be required upon the occurrence and during the continuance of an Unmatured Default or Event of Default, from time to time hereafter (i) to inspect the Books and to check, test, and appraise the Collateral and review and examine the Oil and Gas Properties of Borrower in order to verify Borrower's or any Guarantor's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral, and (ii) to inspect the books, records, properties and assets of Grey Wolf in order to verify Grey Wolf's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Pledged Grey Wolf Stock. 4.3 Security Interest in Pledged Grey Wolf Stock. Borrower hereby grants to Agent, for the benefit of the Lender Group, a Lien and security interest in all of the Stock of Grey Wolf in accordance with the provisions of the Grey Wolf Pledge Agreement (such Stock, the "Pledged Grey Wolf Stock"), in order to secure prompt repayment of any and all of the Obligations or the Guaranteed Obligations (as the case may be) in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by each such Loan Party of each of its covenants and duties under the Loan Documents. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, no Loan Party shall have authority, express or implied, to dispose of any item or portion of the Pledged Grey Wolf Stock (or any proceeds thereof). 43 4.4 Delivery of Additional Documentation Required; Stock of Grey Wolf. (a) At any time upon the request of Agent, Borrower shall execute and deliver to Agent stock powers, powers of attorney, security agreements, pledges, assignments, and all other documents (collectively, the "Additional Documents") that Agent may request, in form and substance reasonably satisfactory to Agent, to create and perfect and continue perfected or better perfect the Agent's Lien in the Pledged Grey Wolf Stock (whether now owned or hereafter acquired), and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents, including the Grey Wolf Stock Pledge Agreement. (b) Subject to the provisions of the Grey Wolf Stock Pledge Agreement, the executive officers of Borrower may attend any meeting of the holders of equity interests of Grey Wolf that are held by Borrower and, in the name of and on behalf of Borrower thereat, vote and exercise any or all other powers of Borrower as a holder of the Pledged Grey Wolf Stock and, unless otherwise provided by the Board of Directors, such executive officers may from time to time appoint an attorney or attorneys or agent or agents of Borrower in the name and on behalf of Borrower to cast votes which Borrower may be entitled to cast as a holder of such Pledged Grey Wolf Stock (and may instruct the person or person so appointed as to the manner of casting such votes or acting upon such matters as may come before the meeting, and may execute or cause to be executed on behalf of Borrower and under its corporate seal or otherwise such written proxies, consents, waivers or other instruments as such person or persons may deem necessary or proper in the circumstances). Notwithstanding the foregoing, until such time as the Obligations have been paid in full, upon the occurrence of an Event of Default, Borrower and such executive officers shall only exercise their rights with respect to the Pledged Grey Wolf Stock at the direction of Agent notwithstanding that Borrower may be the registered holder of such Pledged Grey Wolf Stock. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes and appoints Agent (and any of Agent's officers, employees or agents designated by Agent, as the case may be) as Borrower's true and lawful attorney, with power to if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4, The appointment of each of Agent as such Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group's obligations to extend credit hereunder are terminated. 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender Group to enter into this Agreement, each Loan Party, jointly and severally, makes the following representations and warranties to the Lender Group, which shall be true, correct and complete on and as of the Closing Date, as though made on and as of the Closing Date (except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct on and as of such earlier date), and such representations and warranties shall survive the execution and delivery of this Agreement: 44 5.1 No Encumbrances. The Loan Parties have good and indefeasible title to the Collateral and the Real Property (other than Oil and Gas Properties constituting Real Property) or good and defeasible title to Oil and Gas Properties constituting Real Property, free and clear of Liens except for Permitted Liens. 5.2 Equipment. All of the Equipment is used or held for use in the business of a Loan Party and is fit for such purposes. 5.3 Location of Inventory and Equipment. The Equipment is located only at the locations identified on Schedule 5.3, other than such Equipment in transit or temporarily removed to a location not identified therein for refurbishment or repair. There is no location at which any Loan Party has any Inventory, including Hydrocarbon products (except for Hydrocarbon products in transit), other than the locations identified on Schedules 5.3 and 5.22. Each of Schedule 5.3 and 5.22 contains a true, correct and complete list of each location at which Hydrocarbon products of the Loan Parties are stored. 5.4 Inventory Records. Each Loan Party keeps correct and accurate records itemizing and describing the type and quantity of its Inventory and the book value thereof. 5.5 Location of Chief Executive Office; FEIN. (a) The chief executive office of each Loan Party is located at the address indicated on Schedule 5.5 and such Loan Party's FEIN is identified on Schedule 5.5. (b) Each Loan Party's organizational identification number is identified on Schedule 5.5. (c) No Loan Party holds any commercial tort claims, except as identified on Schedule 5.5. 5.6 Due Organization and Qualification; Subsidiaries. (a) Each Loan Party is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in each jurisdiction where the failure to be so qualified reasonably could be expected to have a Material Adverse Change. (b) Set forth on Schedule 5.6(b) is a complete and accurate description of the authorized capital Stock of Borrower, by class, and a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 5.6(b), there are no subscriptions, options, warrants or calls relating to any shares of Borrower's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on Schedule 5.6(c) is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing (i) the jurisdiction of their organization, (ii) the number of shares of each class of common and 45 preferred Stock authorized for each of such Subsidiaries and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (d) Except as set forth on Schedule 5.6(c), there are no subscriptions, options, warrants or calls relating to any shares of the capital Stock of Borrower's Subsidiaries, including any right of conversion or exchange under any outstanding security or other instrument. Neither Borrower nor any of its Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of capital Stock of Borrower's Subsidiaries or any security convertible into or exchangeable for any such capital Stock. 5.7 Due Authorization; No Conflict. (a) Borrower has full corporate power and authority to execute and deliver this Agreement and each other Loan Document to which it is a party and to perform its obligations hereunder and thereunder. The execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to which it is a party have been duly authorized by all necessary action on the part of Borrower. (b) The execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to which it is a party do not and will not (i) violate any provision of any law or regulation applicable to Borrower, the Governing Documents of Borrower or any order, judgment or decree of any court or other Governmental Authority binding on Borrower or its properties or assets, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under, any material contractual obligation of Borrower (including, without limitation, any Material Contract of any Borrower Party), (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Liens being granted pursuant to the Capital Restructuring Documents, or (iv) require any approval of Borrower's interestholders or any approval or consent of any Person under any material contractual obligation of Borrower that has not been obtained by Borrower on or prior to the Closing Date. (c) Other than the filing of UCC or other financing statements, informational filings with the SEC, fixture filings and Mortgages, the execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to which Borrower is a party do not and will not require any registration with, consent or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (d) Borrower has duly executed and delivered this Agreement and, on the Closing Date, each other Loan Document to which Borrower is a party and each other document contemplated hereby and thereby to which Borrower is a party will be duly and validly executed by Borrower. This Agreement constitutes, and each other Loan Document to which Borrower is a party and each other document contemplated hereby and thereby to which Borrower is a party, when executed and delivered by Borrower will constitute, a legally valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as 46 enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. (e) On and after the Closing Date (after giving effect to the Capital Restructuring) , (i) the Collateral Agent will have a validly created, second priority perfected Lien on all of the Shared Collateral, subject only to Permitted Liens and (ii) the Agent will have a validly created, first priority perfected Lien on all of the outstanding Stock of Grey Wolf beneficially owned, directly or indirectly, by Borrower, subject only to Permitted Liens. (f) Each Guarantor has full corporate power and authority to execute and deliver this Agreement and each other Loan Document to which it is a party and to perform its obligations hereunder and thereunder. The execution, delivery and performance by each Guarantor of the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Guarantor. (g) The execution, delivery and performance by each Guarantor of the Loan Documents to which it is a party do not and will not (i) violate any provision of any law or regulation applicable to such Guarantor, the Governing Documents of such Guarantor or any order, judgment or decree of any court or other Governmental Authority binding on such Guarantor or its properties or assets, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under, any material contractual obligation of such Guarantor (including, without limitation, any Material Contract of any Borrower Party), (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Guarantor, other than Liens being granted pursuant to the Capital Restructuring Documents, or (iv) require any approval of such Guarantor's interestholders or any approval or consent of any Person under any material contractual obligation of such Guarantor that has not been obtained by such Guarantor on or prior to the Closing Date. (h) The execution, delivery and performance by each Guarantor of the Loan Documents to which such Guarantor is a party do not and will not require any registration with, consent or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (i) Each Guarantor has duly executed and delivered this Agreement and, on the Closing Date, each other Loan Document to which such Guarantor is a party and each other document contemplated hereby and thereby to which such Guarantor is a party will be duly and validly executed by such Guarantor. This Agreement constitutes, and each other Loan Document to which each Guarantor is a party and each other document contemplated hereby and thereby to which such Guarantor is a party, when executed and delivered by such Guarantor will constitute, a legally valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, except as enforcement may be limited by such equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. 5.8 Litigation. Other than those matters disclosed on Schedule 5.8, there are no actions, suits or proceedings pending or, to the best knowledge of a Loan Party, threatened against a Borrower Party except for matters that are 47 fully covered by insurance (subject to customary deductibles). 5.9 No Material Adverse Change. All financial statements relating to Borrower or a Guarantor that have been delivered by Borrower to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrower's (or Guarantor's, as applicable) financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change since June 30, 2004. 5.10 Fraudulent Transfer. (a) After giving effect to the Capital Restructuring, Borrower individually is, and the Loan Parties taken as a whole are, Solvent. (b) No transfer of property is being made by any Loan Party and no obligation is being incurred by any Loan Party in connection with the transactions contemplated by the Capital Restructuring (including by this Agreement or the other Loan Documents) with the intent to hinder, delay or defraud either present or future creditors of any Loan Party. 5.11 Employee Benefits. None of the Borrower Parties or any of their ERISA Affiliates maintains or contributes to any Benefit Plan. Each Borrower Party and each ERISA Affiliate has satisfied the minimum funding standards of ERISA, the IRC, the Canadian Employee Benefit Laws and any other applicable law relating to employee benefits with respect to each Benefit Plan to which it is obligated to contribute, except where the failure to maintain such standards reasonably could not be expected to result in a Material Adverse Change. No ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse Change. No Borrower Party or any ERISA Affiliate is required to provide security to any Benefit Plan under Section 401(a)(29) of the IRC or under Canadian Employee Benefit Laws. 5.12 Environmental Condition. Except as set forth on Schedule 5.12, (a) to each Loan Party's knowledge, no assets of any Borrower Party have ever been used by any such Borrower Party or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release or transport, any Hazardous Materials, where such production, storage, handling, treatment, release or transportation was in violation, in any material respect, of applicable Environmental Law, (b) to each Loan Party's knowledge, no properties or assets of any Borrower Party have ever been designated or identified in any manner pursuant to environmental protection statute as a Hazardous Materials disposal site, (c) no Borrower Party has received notice that a Lien arising under any Environmental Law has attached to any revenues or to any Real Property owned or operated by a Borrower Party and (d) none of the Borrower Parties has received a summons, citation, notice or directive from the Environmental Protection Agency or any other federal, provincial or state governmental agency concerning any action or omission by a Borrower Party resulting in the releasing or disposing of Hazardous Materials into the environment. 48 5.13 Brokerage Fees. Other than GCF and its Affiliates, no Loan Party has utilized the services of any broker or finder in connection with Borrower's obtaining financing from the Lender Group under this Agreement, and, other than GCF and its Affiliates, no brokerage commission or finders' fee is payable by any Loan Party in connection herewith. 5.14 Intellectual Property. Each Borrower Party owns, or holds licenses in, all trademarks, trade names, copyrights, patents, patent rights and licenses that are necessary to the conduct of its business as currently conducted. Attached hereto as Schedule 5.14 is a true, correct and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights and copyright registrations as to which Borrower Party is the owner or an exclusive licensee. 5.15 Leases. Each Borrower Party enjoys peaceful and undisturbed possession under all leases material to the business of such Borrower Party and to which it is a party or under which it is operating. All of such leases are valid and subsisting and no material default by such Borrower Party exists under any of them. There are no leases, subleases, contracts or other operating agreements with respect to any Oil and Gas Property that allocate operating expenses to a Borrower Party in excess of such Borrower Party's working interest of record in the particular Oil and Gas Property subject to such lease, the sublease, contract or other operating agreement. 5.16 DDAs. Set forth on Schedule 5.16 are all of each Loan Party's DDAs, including, with respect to each depository (i) the name and address of such depository and (ii) the account numbers of the accounts maintained with such depository. 5.17 Compliance with the Law. No Borrower Party has violated any law or failed to obtain any material license, permit, franchise or other authorization from any Governmental Authority necessary for the ownership of any of its Oil and Gas Properties or the conduct of its business. The Oil and Gas Properties of each Borrower Party (and assets and properties utilized therewith) have been maintained, operated and developed in a good and workmanlike manner and in substantial conformity with all applicable laws and all rules, regulations and orders of all Governmental Authorities having jurisdiction and in substantial conformity with the provisions of all leases, subleases or other contracts comprising a part of the Hydrocarbon Interests and other contracts and agreements forming a part of such Oil and Gas Properties; specifically in this connection, (i) except as set forth on Schedule 5.17, after the Closing Date, no such Oil and Gas Property is subject to having allowable production reduced below the full and regular allowable production (including the maximum permissible tolerance) because of any overproduction (whether or not the same was permissible at the time) prior to the Closing Date and (ii) none of the wells comprising a part of such Oil and Gas Properties (or assets and properties utilized therewith) is deviated from the vertical by more than the maximum permitted by applicable laws, regulations, rules and orders of any Governmental Authority. 5.18 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Borrower in writing to Agent or any Lender (including all information contained in the schedules hereto or in the other Loan Documents) for purposes of or in connection with the Capital Restructuring or this Agreement, the other Loan Documents or any transaction contemplated herein or therein does not, and all other such factual information (taken as a 49 whole) hereafter furnished by or on behalf of Borrower in writing to Agent or any Lender will not on the date as of which such information is dated or certified, contain any untrue statement of a material fact, and does not or will not on such date, as the case may be, omit to state any material fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. As of the date on which any Projections are delivered to Agent, such Projections will represent Borrower's good faith best estimate of its future performance for the periods covered thereby. 5.19 Indebtedness. Set forth on Schedule 5.19 is a true and complete list of all Indebtedness of each Borrower Party which will be outstanding on the Closing Date (after giving effect to the Loan and the other transactions contemplated by the Capital Restructuring), and Schedule 5.19 accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 5.20 Oil and Gas Imbalances. Except as set forth on Schedule 5.20, on a net basis there are not gas imbalances, take-or-pay oil and gas or other prepayments with respect to the Oil and Gas Properties of any Borrower Party which would require such Borrower Party either to make cash settlements for such production or deliver Hydrocarbons produced from such Oil and Gas Properties at some future time without then or thereafter receiving full payments therefor exceeding two percent (2%) of the current monthly production of oil and gas from the Oil and Gas Properties of the Borrower Parties in the aggregate. 5.21 Hedging Agreements. Schedule 5.21 sets forth a true and complete list of all Hedging Agreements (including commodity price swap agreements, forward agreements or contracts of sale which provide for prepayment for deferred shipment or delivery of Hydrocarbons or other commodities) of the Borrower Parties, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), all credit support agreements relating thereto (including any margin required or supplied) and the counterparty to each such agreement. 5.22 Location of Real Property and Leased Premises. (a) (i) Part A of Schedule 5.22 lists completely and correctly all Real Property (other than Oil and Gas Properties) owned in fee by each Borrower Party and the respective addresses thereof, (ii) Part B of Schedule 5.22 lists completely and correctly all Real Property (other than Oil and Gas Properties) leased by each Borrower Party and the respective addresses thereof and (iii) Part C of Schedule 5.22 lists completely and correctly all Oil and Gas Properties of each Borrower Party with a PV-10 of at least $50,000, whether leased or owned by any Borrower Party, and the respective legal descriptions, addresses (if any), counties and states thereof. (b) Borrower or the respective Subsidiary of Borrower, as the case may be, has a valid leasehold interest in each of the respective leases described on Schedule 5.22 and such schedule sets forth with respect to each such lease, the commencement date, termination date, renewal options (if any) and annual base rents. Each such lease is valid and enforceable in accordance with its terms in all material respects and is in full force and effect. No 50 consent or approval of any landlord or other third party in connection with any such lease is necessary for any Loan Party to enter into and execute the Loan Documents to which it is a party, except as set forth on Schedule 5.22. None of the Borrower Parties is in default of its obligations under any such lease and, to the knowledge of any Loan Party, no other party to any such lease is in default of its obligations thereunder, and no Borrower Party (or any other party to any such lease) has at any time delivered or received any notice of default which remains uncured under any such lease and no event has occurred which, with the giving of notice or the passage of time or both, would constitute a default under any such lease. (c) Each Borrower Party has good and defensible title to all of its Oil and Gas Properties set forth on Schedule 5.22 which constitute Real Property, and good and indefeasible title to all of its Oil and Gas Properties which constitute personal property, except for (i) such imperfections of title which do not in the aggregate materially detract from the value thereof to, or the use thereof in, the business of such Borrower Party and (ii) Permitted Liens. The quantum and nature of the interest of each such Borrower Party in and to the Oil and Gas Properties as set forth in the Initial Reserve Report includes the entire interest of such Borrower Party in such Oil and Gas Properties as of the date of the Initial Reserve Report and are complete and accurate in all material respects as of the date of the Initial Reserve Report; and there are no "back-in" or "reversionary" interests held by third parties which could materially reduce the interest of such Borrower Party in such Oil and Gas Properties except as expressly set forth in the Initial Reserve Report. The ownership of the Oil and Gas Properties by each Borrower Party shall not in any material respect obligate any such Borrower Party to bear the costs and expenses relating to the maintenance, development or operations of each such Oil and Gas Property in an amount in excess of the working interest of record of such Borrower Party in each Oil and Gas Property set forth in the Initial Reserve Report. (d) Each Borrower Party's marketing, gathering, transportation, processing and treating facilities and equipment, together with any marketing, gathering, transportation, processing and treating contract in effect between and/or among such Borrower Party and any other Person, are sufficient to gather, transport, process and/or treat reasonably anticipated volumes of production of Hydrocarbons from the Oil and Gas Properties of such Borrower Party. 5.23 Capital Restructuring Documents and Intercreditor Agreement. The Indebtedness of Borrower and the Guarantors incurred or to be incurred from the Advances hereunder, subject to the limitations set forth in this Agreement, does not and will not conflict with or result in a default under the Intercreditor Agreement or any of the other Capital Restructuring Documents. 5.24 Material Contracts. Set forth on Schedule 5.24 is a complete and accurate list of all Material Contracts of each Borrower Party, showing the parties and subject matter thereof and amendments and modifications thereto. Each such Material Contract (i) is in full force and effect and is binding upon and enforceable against each Borrower Party thereto and, to the knowledge of each Borrower Party, all other parties thereto in accordance with its terms, (ii) has not been otherwise amended or modified and (iii) is not in default due to the action of a Borrower Party or, to the knowledge of each Borrower Party, any other party thereto. 51 5.25 Permits, Etc. Each Borrower Party has, and is in compliance with, all permits, licenses, authorizations, approvals, entitlements and accreditations required for such Borrower Party lawfully to own, lease, manage or operate, or to acquire, each business and the Real Property currently owned, leased, managed or operated, or to be acquired, by such Borrower Party, except for such permits, licenses, authorizations, approvals, entitlements and accreditations the absence of which could not reasonably be expected to result in a Material Adverse Change. No condition exists or event has occurred which, in itself or with the giving of notice or lapse of time or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such permit, license, authorization, approval, entitlement or accreditation, and, to each Loan Party's knowledge, there is no claim that any thereof is not in full force and effect. 5.26 Employee and Labor Matters. Except as set forth on Schedule 5.26, there is (a) no unfair labor practice complaint pending or, to each Loan Party's knowledge, threatened against any Borrower Party before any Governmental Authority and no grievance or arbitration proceeding pending or threatened against any Borrower Party which arises out of or under any collective bargaining agreement, (b) no strike, labor dispute, slowdown, stoppage or similar action or grievance pending or, to the knowledge of any Borrower Party, threatened against any Borrower Party and (c) no union representation question existing with respect to the employees of any Borrower Party and no union organizing activity taking place with respect to any of the employees of any of them. Neither any Borrower Party nor any ERISA Affiliate has incurred any liability or obligation under the Worker Adjustment and Retraining Notification Act ("WARN") or similar state or provincial law which remains unpaid or unsatisfied. The hours worked and payments made to employees of each Borrower Party have not been in violation of the Fair Labor Standards Act, the applicable Canadian provincial employment standards legislation or any other applicable legal requirements. All material payments due from any Borrower Party on account of workers compensation, wages and employee health and welfare insurance and other benefits have been paid or accrued as a liability on the books of such Borrower Party. 5.27 Bonds and Insurance. Schedule 5.27 contains an accurate and complete description of all performance bonds related to operations on or pertaining to the Oil and Gas Properties of the Borrower Parties and all material policies of insurance owned or held by the Borrower Parties. Except as set forth on Schedule 5.27, all such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Such bonds and policies (i) are sufficient for compliance with all requirements of law and of all agreements to which Borrower or any of its Subsidiaries is a party, (ii) are valid, outstanding and enforceable policies, (iii) provide adequate coverage in at least such amounts and against at least such risks (but including in any event public liability) as are required by Governmental Authorities and/or usually insured or bonded against in the same general area by companies engaged in the same or a similar business for the assets and operations of the Borrower Parties, (iv) will remain in full force and effect through the respective dates set forth on Schedule 5.27 without the payment of additional premiums except as set forth on Schedule 5.27 and (v) will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement or the other Capital Restructuring Documents. No Borrower Party has been refused 52 any bonds or insurance with respect to its assets or operations, nor has its coverage been limited below usual and customary bond or policy limits, by any bonding company or insurance carrier to which it has applied for any such bond or insurance or with which it has carried insurance during the last three years. 5.28 Nature of Business. Except for the business of Grey Wolf, none of the Borrower Parties is engaged in any business other than the Oil and Gas Business within the continental United States. Grey Wolf is not engaged in any business other than the Oil and Gas Business within Canada. Except as otherwise disclosed on Schedule 5.28, no other Loan Party (x) owns any assets or properties used by Borrower or Grey Wolf in its Oil and Gas Business or (y) has any liabilities or conducts any business. 5.29 Grey Wolf Stock Sales. No term or provision of any contract, instrument, agreement or other arrangement to which Borrower or any of its Affiliates is a party conflicts with, or otherwise restricts, the obligations of Borrower under Section 6.20(a). 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations and the termination of this Agreement, Borrower shall and shall cause each of its Restricted Subsidiaries to do all of the following (unless otherwise agreed to by Agent or the Required Lenders): 6.1 Accounting System. Maintain a system of accounting that enables Borrower to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent or the Collateral Agent. Borrower also shall keep a joint interest billing and remittance system with respect to each of the Oil and Gas Properties on which Borrower or a Restricted Subsidiary is the operator and a reporting system that shows, among other things, the value, revenues and profits/losses of the Oil and Gas Properties of Borrower and its Restricted Subsidiaries, volume of production and value of sales of Hydrocarbon production, the location and condition of the Equipment and the positions and liability exposure of Borrower and its Restricted Subsidiaries under all Hedging Agreements. 6.2 Collateral Reporting. Provide Agent (and if so requested by Agent, with copies for each Lender) with the following documents at the following times in form satisfactory to Agent: (a) daily notices of any dispute or claim that, if adversely determined, would, individually or in the aggregate, result in a liability to Borrower or a Restricted Subsidiary in excess of $500,000; (b) as soon as available, but in any event within 30 days after the end of each month, (i) a detailed aging, by total, of the Accounts, including, among other things, lease operating expenses and royalty payments and (ii) a summary, by vendor of each Loan Party's accounts payable and any book overdraft; (c) as soon as available, but in any event within 30 days after the end of each month, a report, in form and substance satisfactory to Agent, setting forth on a well-by-well or unit-by-unit basis and also on an 53 aggregated basis (i) a statement of gross and net sales proceeds of all Hydrocarbons produced from the Oil and Gas Properties of each Loan Party and pricing information (and in the aggregate only on a hedged and unhedged basis) relating thereto, (ii) the volume and/or quantity of Hydrocarbon products sold for the previous month, (iii) the severance, gross production, occupation and/or gathering taxes deducted from or paid out of the proceeds payable to the Loan Parties, (iv) the operating expenses, drilling costs and capital expenditures, (v) the number of wells operated (or the numbers of pooled units), drilled or abandoned, (vi) a statement of all funds received from the sale of Hydrocarbons representing amounts attributable to trust fund taxes or Hydrocarbon Interests of third parties and (vii) such other information as Agent may reasonably request; (d) as soon as available, but in any event within 30 days after the end of each month, a report, in form and substance satisfactory to Agent, setting forth, as of the last Business Day of such month, a summary of the hedging positions of each Loan Party under all Hedging Agreements (including, without limitation, any contract of sale which provides for prepayment for deferred shipment or delivery of oil, gas or other commodities of each Loan Party), including the type, term, effective date, termination date and notional principal amounts or volumes, the hedged price(s), interest rate(s) or exchange rate(s), as applicable, and any new credit support agreements relating thereto; (e) as soon as available, but in any event not later than 75 days after June 30th and December 31st of each year, a Reserve Report, prepared under the supervision of the chief engineer of Borrower who shall certify such Reserve Report to be true and accurate and to have been prepared in accordance with the procedures used in the Initial Reserve Report, and together with each such Reserve Report, a certificate of an Authorized Person of Borrower certifying that, to such Authorized Person's knowledge (i) the information contained in the Reserve Report and any other information delivered in connection therewith is true and correct, (ii) Borrower owns good and defensible title to its Oil and Gas Properties evaluated in such Reserve Report and such Oil and Gas Properties are free and clear of all Liens except for Permitted Liens, (iii) except as set forth on an exhibit to the certificate, on a net basis there are no gas imbalances, take-or-pay or other prepayments with respect to the Oil and Gas Properties evaluated in such Reserve Report which would require Borrower to deliver Hydrocarbons produced from such Oil and Gas Properties or make cash payments at some future time without then or thereafter receiving full payment therefor, (iv) except as set forth on an exhibit to the certificate, none of the Oil and Gas Properties of Borrower have been sold since the date of the Reserve Report most recently delivered pursuant to this Section 6.2(e) (or if no such Reserve Report has been so delivered, since the date of the Initial Reserve Report), which exhibit shall list all of the Oil and Gas Properties of Borrower sold and in such detail as is reasonably required by Agent, (v) attached as an exhibit to the certificate is a list of the Oil and Gas Properties of Borrower added to and deleted from the Reserve Report most recently delivered pursuant to this Section 6.2(e) (or if no such Reserve Report has been so delivered, from the Initial Reserve Report) and a list of all Persons disbursing proceeds to Borrower or any Guarantor, as applicable, from its Oil and Gas Properties, (vi) all of the Oil and Gas Properties evaluated by such Reserve Report are subject to a Mortgage, the Collateral Agent's Liens and UCC financing statements, that in each case create a second priority perfected Lien in such Oil and Gas Properties in favor of the Collateral Agent for the benefit of the Lender Group, subject only to Permitted Liens that arise by operation of law and securing obligations for the payment of money not 54 delinquent, (vii) none of the Oil and Gas Properties evaluated by such Reserve Report are subject to any Farmout or similar arrangement other than pursuant to a Permitted Farmout Agreement and (viii) except as set forth on an exhibit to such certificate, there has not been any change in the working interest or net revenue interest of any Loan Party in any of the Oil and Gas Properties included on such Reserve Report; (f) as soon as available, but in any event not later than 45 days after the end of each quarter, a report, certified by an Authorized Person of Borrower: (i) setting forth the total amount actually paid by each Loan Party during the preceding quarter for (A) plugging and abandonment costs for previous or ongoing plugging and abandonment operations pertaining to its Oil and Gas Properties and (B) general bond and supplemental bond payments pertaining to plugging and abandonment costs; and (ii) estimating the future payments for (A) and (B), above, for each of the succeeding two quarters; and (g) upon request by Agent, such other reports as to the Oil and Gas Properties of the Loan Parties, the other Collateral or the financial condition of Borrower or any of its Subsidiaries. 6.3 Financial Statements, Reports, Certificates. Deliver to Agent, with copies to each Lender: (a) as soon as available, but in any event within 30 days (45 days in the case of a month that is the end of one of the first 3 fiscal quarters in a fiscal year) after the end of each month during each of Borrower's fiscal years, (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering the operations of the Borrower Parties during such period, (ii) a certificate signed by the chief financial officer of Borrower to the effect that: (A) the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of the Borrower Parties; (B) the representations and warranties of the Loan Parties contained in this Agreement and the other Loan Documents were true and correct on and as of the Closing Date (except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties were true and correct on and as of such earlier date); and (C) there does not exist any condition or event that constitutes a Default, Unmatured Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking or 55 proposes to take with respect thereto), and (iii) for each month that is the date on which the covenant in Section 7.18 is to be tested, a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such period with such covenant; (b) as soon as available, but in any event within 90 days after the end of each of Borrower's fiscal years, (i) financial statements of the Borrower Parties for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualification (including, without limitation, (A) any going concern or like qualification or exception or (B) any qualification as to the scope of such audit), by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement and statement of cash flow and, if prepared, such accountants' letter to management), (ii) a certificate of such accountants addressed to Agent and the Lenders stating that such accountants do not have knowledge of the existence of any Default or Event of Default under Section 7.18; (c) as soon as available, but in any event within 30 days prior to the start of each of Borrower's fiscal years, copies of Borrower's Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its sole discretion, for the forthcoming 3 years, year by year, and for the forthcoming fiscal year, month by month, certified by the chief financial officer of Borrower as being such officer's good faith best estimate of the financial performance of Borrower during the period covered thereby; (d) if and when filed by Borrower, (i) Form 10-Q quarterly reports, Form 10-K annual reports and Form 8-K current reports, (ii) any other filings made by Borrower with the SEC, (iii) copies of Borrower's federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and (iv) any other information that is provided by Borrower to its shareholders or to the holders of the New Notes; (e) if and when filed by any Loan Party and as requested by Agent, satisfactory evidence of payment of applicable excise taxes in each jurisdiction in which (i) such Loan Party conducts business or is required to pay any such excise tax, (ii) where such Loan Party's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of such Loan Party or (iii) where such Loan Party's failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change; 56 (f) promptly after sending or receipt thereof, copies of any material notice or other correspondence sent to, or received from, any Governmental Authority related to the Oil and Gas Properties of any Loan Party, including, without limitation, notice of any new plugging and abandonment or other performance or other assurance bond requirements related to such Oil and Gas Properties; (g) promptly after the commencement thereof, but in any event within five (5) days after the service of process with respect thereto on any Loan Party, notice of all actions, suits or proceedings brought by or against any Loan Party before any Governmental Authority which, if determined adversely to such Loan Party, could result in a Material Adverse Change; (h) as soon as Borrower has knowledge of any event or condition that constitutes a Default or an Unmatured Default or an Event of Default, notice thereof and a statement of the curative action that Borrower proposes to take with respect thereto; (i) (i) promptly after receipt or delivery thereof, copies of any material notice that any Borrower Party receives from or sends to any Person in connection with the Capital Restructuring Documents and (ii) at least 3 Business Days prior to the effective date thereof, any amendment, modification, waiver or other change to any of the Capital Restructuring Documents; and (j) upon the request of Agent, any other report reasonably requested relating to the financial condition of any of the Borrower Parties. In addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on both a consolidated and consolidating basis, and for it and its Restricted Subsidiaries and for Grey Wolf so long as Grey Wolf is a Subsidiary of Borrower, and agrees that no Subsidiary of Borrower will have a fiscal year different from that of Borrower. Borrower agrees that its independent certified public accountants are authorized to communicate with Agent and to release to Agent whatever financial information concerning Borrower that Agent reasonably may request. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Agent pursuant to or in accordance with this Agreement, and agrees that Agent may contact directly any such accounting firm or service bureau in order to obtain such information. 6.4 Guarantor Reports. Cause each Guarantor to deliver its annual financial statements at the time when Borrower provides its audited financial statements to Agent and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 6.5 Maintenance of Properties. (a) Maintain and preserve all of its properties which are necessary or useful in the proper conduct to its business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder. 57 (b) Cause to be done all things necessary to preserve and keep in good repair, working order and efficiency all the Oil and Gas Properties of each Loan Party and other material assets including, without limitation, all equipment, machinery, facilities and marketing, gathering, transportation and processing assets and, from time to time, will make all the reasonably necessary repairs, renewals and replacements so that at all times the state and conditions of such Oil and Gas Properties and other material assets will be fully preserved and maintained, except to the extent a portion of such assets is no longer capable of producing Hydrocarbons in economically reasonable amounts. (c) Promptly (i) pay and/or discharge or cause to be paid and/or discharged, all rentals, royalties, expenses, taxes and Indebtedness accruing under the lease or other agreements affecting or pertaining to the Oil and Gas Properties of each Loan Party, (ii) perform, observe and comply, or make reasonable and customary efforts to cause to be performed, observed and complied with, in accordance with usual and customary industry standards, the obligations required by each and all of the assignments, deeds, leases, sub-leases, contracts and agreements affecting its interests in such Oil and Gas Properties and the accompanying elements therefrom and other material properties so long as such properties are capable of producing Hydrocarbons and the accompanying elements in quantities and at prices providing for continued efficient and profitable operations of business and (iii) do all other things necessary to keep unimpaired, except for Permitted Liens, its rights with respect thereto and prevent any forfeiture thereof or a default thereunder, except to the extent a portion of such properties is no longer capable of producing Hydrocarbons in economically reasonable amounts. (d) Operate its Oil and Gas Properties and other material properties or cause or make reasonable and customary efforts to cause such Oil and Gas Properties and other material properties to be operated on a continuous basis for the production of Hydrocarbons and in a careful and efficient manner in accordance with the usual and customary practices of the industry and in substantial compliance with all applicable contracts and agreements and in compliance in all material respects with all material laws. (e) Operate and produce, as a reasonably prudent operator, the Oil and Gas Properties of the Loan Parties in accordance with good engineering practices and the following requirements: (i) the amount of Hydrocarbons produced from any well shall not exceed in any month the lower of (A) the maximum amount that such well is capable of producing at its maximum efficient rate of flow and (B) the respective allowable rate of flow under applicable orders, rules, regulations or laws, if any; (ii) the amount of Hydrocarbons produced from the Loan Parties' wells shall be sufficient to prevent a net migration of Hydrocarbons from the reservoirs to which Proved Reserves are attributed; and (iii) subject to field rules established by any Governmental Authority having or asserting jurisdiction, the amount of Hydrocarbons produced from the Loan Parties' wells shall be equitable and ratable, based on factors used in determining such field rules. (f) To the extent the interests in Oil and Gas Properties of Borrower (other than working interests of record) are operated by Persons other than Borrower, Borrower shall cause any owner or operator of such Oil and Gas Properties to comply with this Section 6.5; provided, however, that it shall not be a breach of this Section 6.5 if such owners or operators are not in 58 compliance with this Section 6.5 on Oil and Gas Properties of Borrower with an aggregate PV-10 for all such Oil and Gas Properties of less than $200,000. 6.6 Taxes. Cause all assessments, remittances, source deductions and taxes (including, without limitation, withholding taxes), whether real, personal or otherwise, due or payable by, or imposed, levied, or assessed against ("Tax Payments"), any Loan Party or any of such Loan Party's assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such Tax Payment shall be the subject of a Permitted Protest. Each Loan Party will make timely payment or deposit of all Tax Payments required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that such Loan Party has made such Tax Payments or deposits. Borrower shall deliver satisfactory evidence of payment of applicable excise taxes in each jurisdiction in which a Loan Party is required to pay any such excise tax. 6.7 Insurance. (a) At Borrower's expense, maintain insurance respecting its assets wherever located, covering loss or damage by fire, theft, explosion and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrower also shall maintain public liability insurance, as well as insurance against larceny, embezzlement and criminal misappropriation to the extent Borrower maintains such insurance on the Closing Date or is otherwise required by Agent, in its reasonable discretion, to maintain such insurance after the Closing Date to the extent the premiums related thereto are not at levels commercially unreasonable. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrower shall deliver copies of all such policies to Agent with a satisfactory lender's loss payable endorsement naming the Collateral Agent as sole loss payee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days' prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever. During the period of the drilling of wells and the construction of any other improvements comprising a part of the Oil and Gas Properties of any Loan Party, Borrower shall, or, as applicable, shall cause its contractors or subcontractors to, obtain and maintain well control insurance (including coverage for costs and redrilling) and builder's risk insurance, as applicable, in such form and amounts as is customary in the industry and worker's compensation insurance covering all Persons employed by any Loan Party or its agents or subcontractors of any tier in connection with any construction affecting such Oil and Gas Properties, including, without limitation, all agents and employees of any Loan Party and such Loan Party's subcontractors with respect to whom death or bodily injury claims could be asserted against any Loan Party. Borrower shall give Agent prompt notice of any loss covered by such insurance. (b) No Loan Party will take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.7, unless the Collateral Agent is included thereon as named insured with the loss payable to the Collateral Agent under a lender's loss payable endorsement or its equivalent. 59 6.8 Location of Inventory and Equipment. Keep the Equipment only at the locations identified on Schedule 5.3 and 5.22; provided, however, that Borrower may amend Schedule 5.3 so long as such amendment occurs by written notice to Agent and the Collateral Agent not less than 30 days prior to the date on which Equipment is moved to such new location, so long as such new location is within the continental United States or Canada, and so long as, at the time of such written notification, Borrower provides any UCC or other financing statements or fixture filings necessary to perfect and continue perfected the Collateral Agent's Liens on such assets. 6.9 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act and other than laws, rules, regulations and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 6.10 Leases. Pay when due all rents and other amounts payable under any lease to which any Loan Party is a party or by which any Loan Party's properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.11 Brokerage Commissions. Pay any and all brokerage commission or finders' fees incurred in connection with or as a result of Borrower's obtaining financing from the Lender Group under this Agreement. Borrower agrees and acknowledges that payment of all such brokerage commissions or finders' fees shall be the sole responsibility of Borrower, and Borrower agrees to indemnify, defend and hold Agent and the Lender Group harmless from and against any claim of any broker or finder arising out of Borrower's obtaining financing from the Lender Group under this Agreement. 6.12 Existence. At all times preserve and keep in full force and effect each Loan Party's valid existence and good standing and any rights and franchises material to each Loan Party's businesses. 6.13 Environmental. (a) Keep any property either owned or operated by any Loan Party free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Agent documentation of such compliance which Agent reasonably requests, (c) promptly notify Agent of any release of a Hazardous Material in a quantity which is in violation of any Environmental Law from or onto property owned or operated by any Loan Party and take any Remedial Actions required to abate said release or otherwise to come into compliance with applicable Environmental Law and (d) promptly provide Agent with written notice within 10 days of the receipt of any of (i) notice that an Environmental Lien has been filed against any of the real or personal property of any Loan Party, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against any Loan Party and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change. 6.14 Disclosure Updates. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, (a) notify Agent if any written information, exhibit or report furnished to the Lender Group contained any 60 untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made and (b) correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgement, filing or recordation thereof. 6.15 After Acquired Properties. With respect to any Oil and Gas Property of any Loan Party with a PV-10 of at least $50,000 acquired after the Closing Date by such Loan Party or any discovery and/or confirmation of the existence of Hydrocarbons in any property owned or leased by any Loan Party, promptly (and in any event within 30 days after the acquisition thereof): (A) execute and deliver to the Collateral Agent such amendments to the Mortgages or such other documents as Agent or the Collateral Agent shall deem necessary or advisable to grant to the Collateral Agent, for the benefit of the Lender Group, a perfected second priority Lien on such Oil and Gas Property; (B) take all actions necessary or advisable to cause such Lien to be duly perfected in accordance with all applicable law, including, without limitation, the filing of Mortgages and/or UCC or other financing statements in such jurisdictions as may be requested by Agent or the Collateral Agent; and (C) deliver to Agent and the Collateral Agent title opinions and/or legal opinions relating to the matters described in clauses (A) and (B) immediately preceding, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to Agent and the Collateral Agent. 6.16 Protection Against Drainage. To the extent that the Oil and Gas Properties of any Loan Party (i) are operated by Borrower or its Restricted Subsidiaries, Borrower shall, or shall cause its Restricted Subsidiaries to, act as a reasonably prudent operator in an effort to identify and prevent the occurrence of any drainage of Hydrocarbons from such Oil and Gas Properties and (ii) are not operated by Borrower or its Restricted Subsidiaries, Borrower shall, or cause its Restricted Subsidiaries to, utilize its property and contractual rights as a reasonably prudent owner in an effort to identify and prevent the occurrence of any drainage of Hydrocarbons from such Oil and Gas Properties. 6.17 Additional Collateral Reviews. Borrower shall, from time to time upon the reasonable request of Agent or the Collateral Agent, take such actions and execute and deliver such documents and instruments as Agent or the Collateral Agent, as applicable, shall require to ensure that Agent and the Collateral Agent shall, at all times, have received satisfactory title reviews (including, if requested, supplemental or new title opinions addressed to it), which title opinions shall be in form and substance acceptable to Agent and the Collateral Agent in their sole discretions and shall include opinions regarding the before payout and after payout ownership interests held by Borrower, for all wells located on the Oil and Gas Properties covered thereby as to the ownership of Oil and Gas Properties of Borrower and its Restricted Subsidiaries. 6.18 Hedging Agreements. Maintain in effect one or more Commodities Hedging Agreements with respect to its Hydrocarbon production with one or more counterparties rated investment grade by Moody's and Standard & Poor's, or the equivalent by a rating agency acceptable to Agent or with a counterparty otherwise reasonably acceptable to Agent. The aggregate notional volumes of Hydrocarbons covered by such Commodities Hedging Agreements shall constitute not less than 25% and not more than 75% of the Loan Parties' aggregate estimated 61 Hydrocarbon production volumes on an mcf equivalent basis (where one barrel of oil is equal to six mcf of gas) for the succeeding six calendar months on a rolling six calendar month basis for such period from Oil and Gas Properties classified as Proved Developed Producing Reserves as of the date of the most recent Reserve Report delivered pursuant to Section 6.2(e) plus the estimated production from anticipated drilling by Borrower or its Restricted Subsidiaries during such succeeding six months. Borrower shall use such Commodities Hedging Agreements solely as a part of its normal business operations as a risk management strategy and/or hedge against changes resulting from market conditions related to the oil and gas operations of Borrower and its Restricted Subsidiaries and not as a means to speculate for investment purposes on trends and shifts in financial or commodities markets. 6.19 Asset Sales at the Direction of Agent. (a) The Loan Parties hereby agree that if there is any Obligation outstanding after the date which is fifteen (15) months after the Closing Date, then, at any one or more times thereafter and for so long as any Obligation remains outstanding and there is not then an "Event of Default" (as defined in the Intercreditor Agreement), Agent shall have the right to require Borrower and its Restricted Subsidiaries to sell or otherwise dispose of its assets and properties pursuant to this Section 6.19 (an "Agent Directed Asset Sale"). (b) Agent shall exercise such right by providing written notice to Borrower (with a copy to each of the Collateral Agent, the New Notes Trustee and the Revolving Credit Facility Administrative Agent), which notice must specify in reasonable detail one or more assets and properties of Abraxas and/or of a Restricted Subsidiary that Agent is requiring Borrower or a Restricted Subsidiary, as the case may be, to sell or otherwise dispose pursuant to this Section 6.19. Following receipt of any such notice, Abraxas shall be required to use its commercially reasonable efforts to consummate one or more Agent Directed Asset Sales with respect to the assets and properties to which such notice relates in a prompt but orderly manner intended to maximize the aggregate amount of cash (or cash equivalents) to be received by Abraxas and the Restricted Subsidiaries as consideration in respect of such Agent Directed Asset Sale. Abraxas shall have the sole discretion as to every aspect of each such proposed Agent Directed Asset Sale, including the method, manner, time, place and terms of any proposed Agent Directed Asset Sale and whether or not to consummate any such proposed Agent Directed Asset Sale (but without limiting Abraxas' obligation to use its commercially reasonable efforts to so consummate an Agent Directed Asset Sale); provided, however, that, (i) Abraxas will be required to consult on a regular basis with Agent and its representatives, including, without limitation, by furnishing to Agent and its representatives such data, financial records and other documents and information relating to the respective assets and properties as may be reasonably requested and by making one or more of its Authorized Persons available to discuss Abraxas' efforts with respect to such proposed Agent Directed Asset Sale and (ii) Agent will be permitted to require Borrower to engage an investment banking firm, petroleum engineering firm or other similar financial advisor selected by Borrower (and reasonably acceptable to Agent) to advise Borrower with respect to such Agent Directed Asset Sale. Notwithstanding anything to the contrary in this Section 6.19, neither Borrower nor any Restricted Subsidiary will be required to consummate any Agent Directed Asset Sale if doing so would result in a "Default" or an "Event of Default" under the New Notes Indenture or the Revolving Credit Facility. 62 (c) All fees, costs and expenses incurred or payable by Borrower and its Subsidiaries, including, without limitation, the fees and expenses of legal counsel and of any investment banking firm, petroleum engineering firm or other similar financial advisor engaged by Borrower at the direction of Agent, in connection with Agent's rights under this Section 6.19 shall be borne exclusively by Borrower. 6.20 Grey Wolf Stock Sales. (a) Borrower agrees that for so long as (i) any Obligation remains outstanding and (ii) Grey Wolf is a Subsidiary of Borrower or Borrower otherwise controls Grey Wolf, Borrower shall cause Grey Wolf not to enter into any arrangement or to consummate any transaction pursuant to which any shares of Stock of Grey Wolf will be issued (other than issuances of stock options (or upon exercise thereof) and common stock, in each case as compensation pursuant to stock option exercises by employees, officers and directors of Grey Wolf in the ordinary course of business), whether in a public or private transaction and whether as an initial or follow-on issuance, unless all of the net proceeds from such issuance are first applied to satisfy any obligation then outstanding under the Grey Wolf Credit Facility and then (to the extent remaining) to satisfy Obligations that remain outstanding. (b) Borrower agrees that it will not, and for so long as Grey Wolf is a Subsidiary of Borrower or Borrower otherwise controls Grey Wolf, Borrower will cause Grey Wolf not to, enter into any contract, instrument, agreement or other arrangement which conflicts with, or otherwise restricts, the obligations of Borrower under Section 6.20(a). 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations and the termination of this Agreement, Borrower will not and will not permit any of its Restricted Subsidiaries to do any of the following (unless otherwise agreed to by Agent or the Required Lenders): 7.1 Indebtedness. Create, incur, assume, permit, guarantee or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement and the other Loan Documents; (b) Indebtedness set forth on Schedule 5.19; (c) Permitted Purchase Money Indebtedness; (d) refinancings, renewals or extensions of Indebtedness permitted under clauses (b), (c), (e) and (l) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as (i) the terms and conditions of such refinancings, renewals or extensions do not, in Agent's judgment, materially impair the prospects of repayment of the Obligations by any Loan Party or materially impair any Loan Party's creditworthiness, (ii) such refinancings, renewals or extensions do not result in an increase in the principal amount of, or interest rate with respect to, the Indebtedness so refinanced, renewed or extended, (iii) such refinancings, renewals or extensions 63 do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed or extended, nor are they on terms or conditions that, taken as a whole, are materially more burdensome or restrictive to such Loan Party, (iv) if the Indebtedness that is refinanced, renewed or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal or extension Indebtedness must include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the refinanced, renewed or extended Indebtedness and (v) if the Permitted Liens securing the Indebtedness that is refinanced, renewed or extended was subordinated to the Liens of the Collateral Agent or Agent securing the Obligations, then the terms and conditions of such refinancing, renewal or extension shall include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the Indebtedness being refinanced, renewed or extended; (e) Indebtedness evidenced by the New Notes issued pursuant to the terms of the New Notes Documents, so long as all such Indebtedness and such New Notes Documents are subject to the Intercreditor Agreement; (f) Indebtedness under Hedging Agreements incurred in the ordinary course of business of the Borrower Parties consistent with prudent business practice and not for speculative purposes and in accordance with this Agreement; (g) Indebtedness associated with bonds or surety obligations required by applicable law in connection with the operation of the Oil and Gas Properties of Borrower and its Restricted Subsidiaries; (h) Indebtedness comprising Permitted Investments; (i) intercompany Indebtedness incurred by Borrower and made by a Guarantor that is unsecured and subject to an intercompany subordination agreement satisfactory to Agent, (ii) intercompany Indebtedness incurred by Grey Wolf and made by any Loan Party so long as (A) Grey Wolf is a wholly-owned Subsidiary of Borrower, (B) such Indebtedness is evidenced by a promissory note that is pledged to the Collateral Agent for the benefit of Agent and the Lenders, and (C) the aggregate principal amount of all such Indebtedness owing by Grey Wolf (x) outstanding on the Closing Date shall not exceed $6,500,000 and (y) incurred after the Closing Date shall not exceed $1,000,000 at any time outstanding and (iii) intercompany Indebtedness incurred by any Loan Party (other than Borrower) to Borrower so long as (A) such Indebtedness is evidenced by a promissory note that is pledged to the Collateral Agent for the benefit of Agent and the Lenders and (B) the aggregate outstanding principal amount of all such Indebtedness owing to Borrower shall not exceed $500,000 at any time; (j) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that the aggregate amount of such Indebtedness is extinguished within two (2) Business Days of incurrence and does not at any time exceed $50,000 (or such longer period or greater amount which may be agreed to by Agent); 64 (k) Indebtedness of Borrower or any of its Restricted Subsidiaries represented by letters of credit for the account of Borrower or any of its Restricted Subsidiaries, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business, to the extent such letters of credit are unsecured and subordinated, in form and substance satisfactory to Agent, to the Obligations; (l) Indebtedness evidenced by the Revolving Credit Facility Documents, so long as such Indebtedness and such Revolving Credit Facility Documents are subject to the Intercreditor Agreement or such Indebtedness and Liens securing such Indebtedness are otherwise on terms satisfactory to Agent; and (m) other unsecured Indebtedness of Borrower or any of its Restricted Subsidiaries in an aggregate principal amount at any time outstanding not to exceed $500,000 (or such greater amount which may be agreed to by Agent). 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed or extended under Section 7.1(d) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed or extended Indebtedness). 7.3 Restrictions on Fundamental Changes. (a) Enter into any merger, consolidation, reorganization or recapitalization or reclassify its Stock; (b) liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); or (c) convey, sell, lease, license, assign, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its assets. 7.4 Disposal of Assets. Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer or otherwise dispose of any of a Loan Party's assets, including, without limitation, sell, lease, license, assign, Farmout, convey or otherwise transfer any Oil and Gas Property or any interest in any Oil and Gas Property. 7.5 Change Name. Change any Loan Party's name, organizational identification number, state of incorporation, FEIN, corporate structure or identity or add any new fictitious name; provided, however, that a Loan Party may change its name upon at least 30 days' prior written notice to Agent and the Collateral Agent of such change and so long as, at the time of such written notification, such Loan Party provides any UCC or other financing statements, fixture filings or Mortgages necessary to perfect and continue perfected the Liens of the Collateral Agent and Agent in the Collateral. 65 7.6 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except (a) by endorsement of instruments or items of payment for deposit to the account of any Loan Party or which are transmitted or turned over to the Collateral Agent and (b) guarantees of Indebtedness permitted under Section 7.1. 7.7 Nature of Business. Make any change in the principal nature of its business as described in Section 5.28. 7.8 Payments, Prepayments and Amendments. (a) Except (i) in connection with a refinancing permitted by Section 7.1(d), (ii) the repayment of intercompany Indebtedness permitted by Section 7.1(i), (iii) payments permitted under clause (c) of this Section 7.8 or (iv) so long as no Default, Unmatured Default or Event of Default has occurred or is continuing, payments from the net proceeds received by Borrower from the issuance or sale of Qualified Capital to prepay, redeem, defease, purchase or otherwise acquire the New Notes, prepay, redeem, defease, purchase or otherwise acquire any Indebtedness of Borrower and its Restricted Subsidiaries, other than the Obligations in accordance with this Agreement. (b) Except in connection with a refinancing permitted by Section 7.1(d) or as otherwise permitted in accordance with the terms of the Intercreditor Agreement, directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b), (c), (e) or (l) without the prior written consent of Agent. (c) Directly or indirectly, by deposit of monies or otherwise, make any payment on account of any principal of, premium, interest, fees or other amounts payable in connection with the Indebtedness under the Revolving Credit Facility Documents or the New Notes Documents, other than (w) any repayment permitted under clause (a) of this Section 7.8, (x) (i) in connection with a refinancing permitted by Section 7.1(d), and (ii) expenses of the Revolving Credit Facility Agent and the New Notes Trustee incurred in the ordinary course, (y) in the absence of a Default Period, (i) payments from the proceeds of an Agent Directed Asset Sale applied in accordance with Section 4.05 of the Intercreditor Agreement, (ii) scheduled interest payments on the New Notes to be paid on June 1 and December 1 of each calendar year, commencing June 1, 2005, and (iii) principal of, premium, interest, fees or other amounts payable in connection with the Indebtedness under the Revolving Credit Facility Documents and (z) during the existence of a Default Period, payments as may be permitted by the terms of the Intercreditor Agreement. (d) (i) Amend, modify or otherwise change its or its Restricted Subsidiaries' Governing Documents, including, without limitation, by the filing or modification of any certificate of designation, or any agreement or arrangement entered into by it with respect to any of its Stock (including any shareholders' agreement), or enter into any new agreement with respect to any of its Stock, or (ii) amend, modify or otherwise change any Material Contract of Borrower or its Restricted Subsidiaries, except any such amendments, modifications or changes or any such new agreements or arrangements pursuant to this paragraph (d) that (x) either individually or in the aggregate, could not 66 reasonably be expected to have a Material Adverse Change or (y) is in connection with the issuance or sale of Qualified Capital. 7.9 Change of Control. Cause, permit or suffer, directly or indirectly, any Change of Control. 7.10 Forward Sales. Except in accordance with the ordinary course of the Oil and Gas Business, and except for Permitted Dispositions, enter into or permit to exist any advance payment agreement or other arrangement pursuant to which any Loan Party, having received full or substantial payment of the purchase price for a specified quantity of Hydrocarbons upon entering such agreement or arrangement, is required to deliver, in one or more installments subsequent to the date of such agreement or arrangement, such quantity of Hydrocarbons pursuant to and during the terms of such agreement or arrangement. 7.11 Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than Qualified Capital) on, or purchase, acquire, redeem or retire (for cash or other properties, other than a purchase, acquisition, redemption or retirement solely in exchange for Qualified Capital) any of Borrower's Stock, of any class, whether now or hereafter outstanding. 7.12 Accounting Methods. Modify or change its method of accounting (other than as may be required to conform to GAAP) or enter into, modify or terminate any agreement currently existing, or at any time hereafter entered into, with any third party accounting firm or service bureau for the preparation or storage of any Loan Party's accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding the Collateral or any Loan Party's financial condition. 7.13 Investments. Except for Permitted Investments, directly or indirectly, make or acquire any Investment or incur any liabilities (including contingent obligations) for or in connection with any Investment. 7.14 Transactions with Affiliates. Other than with respect to the transactions contemplated by the agreement identified in Part B of Schedule 5.24 or the Existing Note Redemption, directly or indirectly enter into or permit to exist any transaction with any Affiliate of any Loan Party except for transactions that are (i) in the ordinary course of such Loan Party's business, (ii) upon fair and reasonable terms, (iii) fully disclosed to Agent and (iv) no less favorable to such Loan Party than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 Suspension. Suspend or go out of a substantial portion of its business. 7.16 Compensation. Increase the annual fee or per-meeting fees paid to any member of its Board of Directors during any year by more than 20% (or such greater amount which may be agreed to by Agent) over the prior year; pay or accrue total cash compensation, during any year, to its officers and senior management employees in an aggregate amount in excess of 120% (or such greater amount which may be agreed to by Agent) of that paid or accrued in the prior year. 67 7.17 Use of Proceeds. Use the proceeds of the Advances for any purpose other than (a) on the Closing Date, (i) as specified in the Flow of Funds Agreement and (ii) to pay transactional fees, costs and expenses incurred in connection with this Agreement, the other Capital Restructuring Documents and the transactions contemplated hereby and thereby. 7.18 Financial Covenants. Net Cash Interest Coverage Ratio. At any time when Excess Availability (as defined in the Revolving Credit Facility in effect on the date hereof) is less than $10,000,000, permit the Net Cash Interest Coverage Ratio of Borrower and its Restricted Subsidiaries to be less than the amount set forth in the following table for the applicable period set forth opposite thereto: Applicable Period Cash Interest Coverage Ratio For the 4 fiscal quarters ending at the 1.25 to 1.00 end of each fiscal quarter 7.19 Oil and Gas Imbalances. Enter into any contracts or agreements which warrant production of Hydrocarbons (other than Hedging Agreements otherwise permitted hereunder) and will not hereafter allow gas imbalances, take-or-pay or other prepayments with respect to its Oil and Gas Properties which would require any Loan Party to deliver Hydrocarbons produced on Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor to exceed, during any monthly period two percent (2%) of the current aggregate monthly gas production for such monthly period from the Oil and Gas Properties of any Loan Party. 7.20 Environmental. Permit the use, handling, generation, storage, treatment, Release or disposal of Hazardous Materials at any Real Property owned, operated or leased by any Loan Party, except in compliance in all material respects with Environmental Laws. 7.21 Limitation on Leases. Create, incur, assume or suffer to exist any obligation for the payment of rent or hire of Oil and Gas Properties of any kind whatsoever (real or personal, including capital leases but excluding leases of Hydrocarbon Interests and leases directly related to oil and gas field operations), under leases or lease agreements which would cause the aggregate amount of all payments made by such Person pursuant to such leases or lease agreements to exceed $800,000 (or such greater amount agreed to by Agent), in any period of twelve (12) consecutive calendar months in the aggregate. 7.22 Bank Product Obligations. For so long as any obligation remains outstanding under the Revolving Credit Facility, neither Borrower nor any of its Restricted Subsidiaries shall incur (including, without limitation, by means of a guarantee) any Bank Product Obligation in favor of any lender under the Revolving Credit Facility, the Revolving Credit Facility Administrative Agent or any of their respective Affiliates. 68 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (other than any event described in Section 8.2 or 8.11, which shall constitute an event of default upon notice to Borrower by Agent of any such event) (each, an "Event of Default") under this Agreement: 8.1 If Borrower fails to pay when due and payable, or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses or other amounts constituting Obligations); 8.2 (i) If any Loan Party fails to perform, keep or observe any term, provision, condition, covenant or agreement contained in Sections 6.1, 6.4, 6.5, 6.6, 6.9 and 6.16 of this Agreement, or comparable provisions of the other Loan Documents, and such failure continues for 15 days, (ii) if any Loan Party fails to perform, keep, or observe any term, provision, condition, covenant or agreement contained in Sections 6.2, 6.3 (other than clause (h) thereof), 6.8 and 6.10 of this Agreement, or comparable provisions of the other Loan Documents, and such failure continues for 5 days or (iii) if any Loan Party otherwise fails to perform, keep or observe any other term, provision, condition, covenant or agreement contained in this Agreement or in any of the other Loan Documents; 8.3 If any material portion of the assets of Borrower or any of its Restricted Subsidiaries is attached, seized, subjected to a writ or distress warrant, levied upon or comes into the possession of any third Person; 8.4 If an Insolvency Proceeding is commenced by a Borrower Party (including, without limitation, Grey Wolf so long as Grey Wolf is a Subsidiary of Borrower); 8.5 If an Insolvency Proceeding is commenced against a Borrower Party (including, without limitation, Grey Wolf so long as Grey Wolf is a Subsidiary of Borrower), and any of the following events occur: (a) such Borrower Party consents to the institution of such Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Agent (including any successor agent) and each other member of the Lender Group shall be relieved of their obligations (if any) to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, a Borrower Party or (e) an order for relief shall have been entered therein; 8.6 If Borrower or any of its Restricted Subsidiaries is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.7 If a notice of Lien, levy or assessment is filed of record with respect to (a) any of a Borrower Party's (other than Grey Wolf's) assets (other than their Proved Developed Producing Reserves) in an amount or with respect to 69 assets in excess of $100,000, or (b) any of a Borrower Party's (other than Grey Wolf's) Proved Developed Producing Reserves, by the United States or any department, agency or instrumentality thereof, or by any state, county, municipal or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon (x) any of a Borrower Party's (other than Grey Wolf's) assets (other than their Proved Developed Producing Reserves), in an amount or with respect to assets in excess of $100,000 or (y) any of a Borrower Party's (other than Grey Wolf's) Proved Developed Producing Reserves, and the same is not paid before such payment is delinquent; 8.8 If a judgment or other claim in excess of $100,000 (to the extent not bonded or insured by a bonding or insurance company acceptable to Agent) in the aggregate becomes a Lien or encumbrance upon any material portion of a Borrower Party's (other than Grey Wolf's) assets; 8.9 If there is a continuing default under any material agreement (including any of the New Notes Documents, the Revolving Credit Facility Documents, the Grey Wolf Facility Documents or any other Material Contract) to which Borrower or any of its Restricted Subsidiaries is a party and such default (a) occurs at the final maturity of the obligations thereunder or (b) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of the obligations of a Borrower or a Restricted Subsidiary thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein; 8.10 If Borrower or any of its Restricted Subsidiaries makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness and except as permitted under Section 7.8; 8.11 If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement or Record made to any member of the Lender Group by a Borrower Party or any officer, employee, agent or director of a Borrower Party; 8.12 If there is a loss, suspension or revocation of, or failure to renew, any license or permit now held or hereafter acquired by Borrower or any of its Restricted Subsidiaries and such loss, suspension, revocation or failure to renew could reasonably be expected to have a Material Adverse Change; 8.13 If the obligation of any Guarantor under the applicable Guaranty is limited or terminated by operation of law or by such Guarantor thereunder; 8.14 If this Agreement, any Collateral Document (including, without limitation, the Intercreditor Agreement) or any other agreement, instrument or document that purports to create a Lien (i) in favor of the Collateral Agent, for the benefit of the Lender Group, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, second priority Lien on or security interest in the Collateral covered hereby or thereby or (ii) in favor of Agent, for the benefit 70 of the Lender Group, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; 8.15 Any provision of any Loan Document shall at any time for any reason be declared by a court of competent jurisdiction to be null and void or invalid or unenforceable, or the validity or enforceability thereof shall be contested in a proceeding by any Loan Party, or a proceeding shall be commenced by any Loan Party, or by any Governmental Authority having jurisdiction over any Loan Party, seeking to establish the invalidity or unenforceability thereof, or any Loan Party shall deny that it has any liability or obligation purported to be created under any Loan Document; or 8.16 If any Loan Party fails to perform, keep or observe any term, provision, condition, covenant or agreement contained in clause (h) of Section 6.3. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may, subject to the terms of the Intercreditor Agreement, authorize and instruct Agent to do (and to the extent permitted by the Intercreditor Agreement, to instruct the Collateral Agent to do) any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall, subject to the terms of the Intercreditor Agreement, do the same on behalf of the Lender Group), all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents or under any other agreement between Borrower and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Liens of the Collateral Agent or Agent in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which the Collateral Agent or Agent considers advisable, and in such cases, Agent will credit Borrower's Loan Account with only the net amounts received by the Collateral Agent or Agent, as the case may be, in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) Without notice to or demand upon Borrower or Guarantor, make such payments and do such acts as the Collateral Agent or Agent considers necessary or reasonable to protect its security interests in the Collateral. Borrower agrees to assemble the Personal Property Collateral if the Collateral Agent or Agent so requires, and to make the Personal Property Collateral 71 available to the Collateral Agent and/or Agent at a place that the Collateral Agent and/or Agent may designate which is reasonably convenient to both parties. Borrower authorizes the Collateral Agent and Agent to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest or compromise any Lien that in the determination of the Collateral Agent or Agent appears to conflict with the Liens of the Collateral Agent or Agent and to pay all reasonable expenses incurred in connection therewith and to charge Borrower's Loan Account therefor. With respect to any of Borrower's owned or leased premises, Borrower hereby grants the Collateral Agent and Agent a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of the Lender Group's rights or remedies provided herein or in any other Loan Document, at law, in equity or otherwise; (f) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of the Code), and subject to the terms of the Intercreditor Agreement, set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by the Lender Group or (ii) Indebtedness at any time owing to or for the credit or the account of Borrower held by the Lender Group; (g) Subject to the terms of the Intercreditor Agreement, hold, as cash collateral, any and all balances and deposits of Borrower held by the Lender Group, to secure the full and final repayment of all of the Obligations and apply, to the extent permitted by applicable law, such cash collateral to repay the Obligations; (h) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale and sell (in the manner provided for herein) the Personal Property Collateral. Borrower hereby grants to the Collateral Agent and Agent a license or other right to use, without charge, Borrower's labels, patents, copyrights, trade secrets, trade names, trademarks, service marks and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale and selling any Personal Property Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to the benefit of the Lender Group's and the Collateral Agent; (i) Sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as the Collateral Agent or Agent determines is commercially reasonable. It is not necessary that the Personal Property Collateral be present at any such sale; (j) Give notice of the disposition of the Personal Property Collateral as follows: (i) The Collateral Agent or Agent, as the case may be, shall give Borrower a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Personal Property Collateral, the time on or after 72 which the private sale or other disposition is to be made; and (ii) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least 10 days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; (k) Credit bid and purchase at any public sale on behalf of the Lender Group; (l) Seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver without the requirement of prior notice or a hearing; (m) Foreclose any or all of the Mortgages and sell the Real Property or cause the Real Property to be sold in accordance with the provisions of the Mortgages and applicable law, and exercise any and all other rights or remedies available to the Collateral Agent or Agent, on behalf of the Lender Group, under the Mortgages, any of the other Loan Documents, at law or in equity with respect to the Collateral encumbered by the Mortgages; and (n) Each of the Collateral Agent, Agent and the Lender Group shall have all other rights and remedies available at law or in equity or pursuant to any other Loan Document. 9.2 Remedies Cumulative. The rights and remedies of the Collateral Agent and the Lender Group under this Agreement, the other Loan Documents and all other agreements shall be cumulative. The Collateral Agent and the Lender Group shall have all other rights and remedies not inconsistent with this Agreement or the Intercreditor Agreement as provided under the Code, by law or in equity. No exercise by the Collateral Agent or the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Collateral Agent or the Lender Group of any Unmatured Default or Event of Default shall be deemed a continuing waiver. No delay by the Collateral Agent or the Lender Group shall constitute a waiver, election or acquiescence by it. 10. TAXES AND EXPENSES. If any Loan Party fails to pay any monies (whether taxes, assessments, remittances, source deductions, insurance premiums or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to any Loan Party, may do any or all of the following: (a) make payment of the same or any part thereof, (b) set up such reserves in Borrower's Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure or (c) in the case of the failure to comply with Section 6.7 hereof, obtain and maintain insurance policies of the type described in Section 6.7 and take any action with 73 respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Unmatured Default or Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by the Collateral Agent or the Lender Group on which Borrower may in any way be liable. 11.2 The Lender Group's Liability for Collateral. Borrower hereby agrees that: (a) so long as Agent complies with its obligations, if any, under the Code, the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency or other Person and (b) all risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend and hold the Agent-Related Persons, the Lender-Related Persons with respect to each Lender, each Participant (subject to Section 14.1(e)(v)), the Collateral Agent and each of their respective officers, directors, employees, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, amendment, waiver or administration of this Agreement, any of the other Loan Documents or the transactions contemplated hereby or thereby and (b) with respect to any investigation, litigation or proceeding related to this Agreement, any other Loan Document or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrower was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrower 74 with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by Borrower or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Borrower or Agent, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrower or Agent, as the case may be, at its address set forth below: If to Borrower: ABRAXAS PETROLEUM CORPORATION 500 North Loop 1604 East, Suite 100 San Antonio, Texas 78232 Attn: Robert Carington Fax No. 210-490-8816 with copies to: COX SMITH MATTHEWS INCORPORATED 112 East Pecan, Suite 1800 San Antonio, Texas 78205 Attn: Steve R. Jacobs, Esq. Fax No. 210-226-8395 If to Agent: GUGGENHEIM CORPORATE FUNDING, LLC 135 East 57th Street New York, New York 10022 Attn: Managing Director - Abraxas Fax No. 212-644-8396 Agent and Borrower may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 12 shall be deemed given when received. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY AND PERFECTION OR THE PERFECTION AND EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST CREATED HEREBY OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAW OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b). (c) BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 14.1 Assignments and Participations. (a) Any Lender may, with the written consent of Agent (provided that no written consent of Agent shall be required in connection with any assignment and delegation by a Lender to an Eligible Transferee), assign and delegate to one or more assignees (each an "Assignee") all, or any part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $1,000,000 (except such minimum amount shall not apply to any Affiliate of a Lender or to a Related Fund or account managed by a Lender); provided, however, that Borrower and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Borrower and Agent a fully executed Assignment and Acceptance, and (iii) the assignor Lender or Assignee has paid to Agent for 76 Agent's separate account a processing fee in the amount of $5,000. Anything contained herein to the contrary notwithstanding, the consent of Agent shall not be required (and payment of any fees shall not be required) if (x) such assignment is in connection with any merger, consolidation, sale, transfer or other disposition of all or any substantial portion of the business or loan portfolio of such Lender or (y) the assignee is an Affiliate of a Lender or a Related Fund. (b) From and after the date that Agent notifies the assignor Lender (with a copy to Borrower) that it has received a fully executed Assignment and Acceptance and payment (if applicable) of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from its obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall affect a novation between Borrower and the Assignee. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (2) such assigning Lender 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 this Agreement or any other Loan Document furnished pursuant hereto, (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, 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 this Agreement, (5) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance and receipt and acknowledgment by Agent of such fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments 77 arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions or other Persons not Affiliates of such Lender (a "Participant") participating interests in its Obligations owing to such Lender, the Commitment of such Lender, and the other rights and interests of that Lender (the "Originating Lender") hereunder and under the other Loan Documents (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the Originating Lender shall remain a "Lender" for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and interests of the Originating Lender hereunder shall not constitute a "Lender" hereunder or under the other Loan Documents and the Originating Lender's obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no originating Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or substantially all of the Collateral or Guarantees (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant, (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums in respect of the Obligations hereunder in which such Participant is participating or (F) subordinate the Liens of the Collateral Agent or Agent to the Liens of any other creditor of Borrower, and (v) all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Unmatured Default or Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrower, the Collections, the Collateral or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves. The provisions of this Section 14.1(e) are solely for the benefit of the Lender Group, and Borrower shall not have any rights as a third party beneficiary of such provisions. 78 (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose to a third party all documents and information which it now or hereafter may have relating to Borrower or Borrower's business. (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR ss.203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. (h) Borrower shall maintain, or cause to be maintained, a register (the "Register") on which it enters the name of a Lender as the registered owner of each Advance held by such Lender. A Registered Loan (and the Registered Note, if any, evidencing the same) may be assigned or sold in whole or in part only by registration of such assignment or sale on the Register (and each Registered Note shall expressly so provide). Any assignment or sale of all or part of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by registration of such assignment or sale on the Register, together with the surrender of the Registered Note, if any, evidencing the same duly endorsed by (or accompanied by a written instrument of assignment or sale duly executed by) the holder of such Registered Note, whereupon, at the request of the designated assignee(s) or transferee(s), one or more new Registered Notes in the same aggregate principal amount shall be issued to the designated assignee(s) or transferee(s). Prior to the registration of assignment or sale of any Registered Loan (and the Registered Note, if any evidencing the same), Borrower shall treat the Person in whose name such Registered Loan (and the Registered Note, if any, evidencing the same) is registered as the owner thereof for the purpose of receiving all payments thereon and for all other purposes, notwithstanding notice to the contrary. In the case of an assignment or delegation covered by Section 14.1(a)(y), the assigning Lender shall maintain a comparable Register on behalf of Borrower. (i) In the event that a Lender sells participations in the Registered Loan, such Lender shall maintain a register on which it enters the name of all participants in the Registered Loans held by it (the "Participant Register"). A Registered Loan (and the Registered Note, if any, evidencing the same) may be participated in whole or in part only by registration of such participation on the Participant Register (and each Registered Note shall expressly so provide). Any participation of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by the registration of such participation on the Participant Register. 14.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties hereto; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to Section 14.1 hereof, no consent or approval by Borrower is required in connection with any such assignment. 79 15. AMENDMENTS; WAIVERS. 15.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment or consent shall, unless in writing and signed (or otherwise authorized) by all of the Lenders affected thereby and Borrower, do any of the following: (a) increase or extend any Commitment of any Lender, (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due hereunder or under any other Loan Document, (c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document, (d) change the percentage of the Commitments that is required to take any action hereunder, (e) amend, modify or waive this Section 15 or any provision of the Agreement providing for consent or other action by all Lenders, (f) [Intentionally Omitted], (g) change the definition of "Required Lenders" or "Pro Rata Share" (h) [Intentionally Omitted], (i) release Borrower or any Guarantor from any obligation for the payment of money, (j) change, modify or waive the definition of "PV-10", "Related Indebtedness" or "Proved Developed Reserves Amount", or (k) amend, modify or waive any of the provisions of Sections 2.1(a), 2.3(b) or 16 (or change any definition of a term used in such Section in a manner adverse to any such Lender). and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by the Collateral Agent or Agent, as applicable, affect the rights or duties of the Collateral Agent or Agent, as applicable, under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination or release of, or with respect to, any provision of this Agreement or any other Loan Document that 80 relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrower, shall not, subject to Section 14.1(a), require consent by or the agreement of Borrower. 15.2 Replacement of Holdout Lender. (a) If any action to be taken by the Lender Group, the Collateral Agent or Agent hereunder or under any other Loan Document requires the unanimous consent, authorization or agreement of all Lenders, and a Lender ("Holdout Lender") fails to give its consent, authorization or agreement, then Agent, upon at least 5 Business Days' prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a "Replacement Lender"), and the Holdout Lender shall have no right to refuse to be replaced hereunder. Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given. (b) Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance Agreement, subject only to the Holdout Lender being repaid its share of the outstanding Obligations without any premium or penalty of any kind whatsoever. If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance Agreement prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance Agreement. The replacement of any Holdout Lender shall be made in accordance with the terms of Section 14.1. Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender's Pro Rata Share of Advances (if any). 15.3 No Waivers; Cumulative Remedies. No failure by the Collateral Agent, Agent or any Lender to exercise any right, remedy or option under this Agreement or any other Loan Document, or delay by the Collateral Agent, Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by the Collateral Agent, Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by the Collateral Agent, Agent or any Lender on any occasion shall affect or diminish the Collateral Agent's, Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement or any other Loan Document. The Collateral Agent's, Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that the Collateral Agent, Agent or any Lender may have. 16. AGENT; LENDER GROUP. 16.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints GCF as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are 81 expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 16. Except as otherwise specifically provided in Sections 16.12 and 16.17, the provisions of this Section 16 are solely for the benefit of Agent and the Lenders, and Borrower shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word "Agent" is for convenience only, that GCF is merely the representative of the Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall, subject to the terms of the Intercreditor Agreement, have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply and distribute the Collections as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management arrangements as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections, (f) perform, exercise and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the Obligations, the Collateral or the Collections or otherwise related to any of same as provided in the Loan Documents, (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents and (h) enter into and perform its duties under the Intercreditor Agreement (including, without limitation, as the Control Party). 16.2 Delegation of Duties. Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made without gross negligence or willful misconduct. 16.3 Liability of Agent Persons. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby or thereby (except for its own gross negligence or willful misconduct) or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Borrower 82 or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Books or properties of Borrower or the books or records or properties of any of Borrower's Subsidiaries or Affiliates. 16.4 Reliance by Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 16.5 Notice of Default, Unmatured Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default, Unmatured Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees and expenses required to be paid to Agent for the account of the Lenders and with respect to Defaults, Unmatured Defaults and Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default, Unmatured Default or Event of Default, and stating that such notice is a "notice of default". Agent promptly will notify the Lenders of its receipt of any such notice or of any Unmatured Default or Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Unmatured Default or Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Unmatured Default or Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 16.4, Agent shall take such action with respect to such Default, Unmatured Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default Unmatured Default or Event of Default as it shall deem advisable. 83 16.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons. 16.7 Costs and Expenses; Indemnification. Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers and obligations pursuant to the Loan Documents, including court costs, reasonable attorneys' fees and expenses, costs of collection by outside collection agencies and auctioneer fees and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrower is obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from Collections received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities resulting solely from such Agent-Related Person's gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any Defaulting Lender in failing to make an Advance or other extension of credit hereunder (if any). Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender's ratable share of any costs or out-of-pocket expenses (including attorneys fees' and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, 84 modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertakings in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent. 16.8 Agent-Related Persons in Individual Capacity. Agent-Related Persons may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally engage in any kind of banking, lending, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Document as though GCF was not a party hereto, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, Agent-Related Persons may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Document that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them. The terms "Lender" and "Lenders" include GCF in its individual capacity. 16.9 Successor Agent. (a) Agent may resign as Agent upon 45 days' notice to the Lenders. If Agent resigns under this Agreement, the Required Lenders and Agent shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. (b) Nothing contained in this Section 16.9 shall be construed to limit or eliminate Agent's right to resign as an Agent in accordance with this Section 16.9. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. Each of the resigning Agent and Borrower agrees to cooperate with the successor Agent in effecting the appointment of such successor Agent, including executing such documents and instruments of transfer, and taking such other actions, in each case without 85 recourse, representation or warranty to the resigning Agent, as reasonably requested by such successor Agent. 16.10 Lender in Individual Capacity. Any Lender and its respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Document as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Document that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender not shall be under any obligation to provide such information to them. 16.11 Withholding Taxes. (a) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and Borrower: (i) if such Lender claims an exemption from withholding tax pursuant to its portfolio interest exception, (a) a statement of the Lender, signed under penalty of perjury, that it is not a (I) a "bank" as described in Section 881(c)(3)(A) of the IRC, (II) a 10% shareholder (within the meaning of Section 881(c)(3)(B) of the IRC), or (III) a controlled foreign corporation described in Section 881(c)(3)(C) of the IRC, and (B) a properly completed IRS Form W-8BEN, before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (ii) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-8BEN before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (iii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form W-8ECI before the first payment of any interest is due under this Agreement and at any other time reasonably requested by Agent or Borrower; (iv) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. 86 Such Lender agrees promptly to notify Agent and Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrower to such Lender. To the extent of such percentage amount, Agent will treat such Lender's IRS Form W-8BEN as no longer valid. (c) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (d) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent. (e) All payments made by Borrower hereunder or under any note will be made without setoff, counterclaim or other defense, except as required by applicable law other than for Taxes (as defined below). All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of a Lender, or (ii) to the extent that such tax results from a change in the circumstances of the Lender, including a change in the residence, place of organization, or principal place of business of the Lender, or a change in the branch or lending office of the Lender participating in the transactions set forth herein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including any amount paid pursuant to this Section 16.11(e) after withholding or deduction for or on account of any Taxes, will not be less than the amount 87 provided for herein; provided, however, that Borrower shall not be required to increase any such amounts payable to Agent or any Lender (i) that is not organized under the laws of the United States, if such Person fails to comply with the other requirements of this Section 16.11, or (ii) if the increase in such amount payable results from Agent's or such Lender's own willful misconduct or gross negligence. Borrower will furnish to Agent as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrower. 16.12 Collateral Matters. (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release or authorize the release of any Lien on any Collateral (including by directing the Collateral Agent to release any Lien on any Collateral or to take any action in furtherance thereof pursuant to or in accordance with the Intercreditor Agreement and the other Collateral Documents) (i) upon the termination of the Commitments and payment and satisfaction in full by Borrower of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Borrower certifies to Agent that the sale or disposition is permitted under Section 7.4 or under the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which Borrower owned no interest at the time the security interest was granted or at any time thereafter or (iv) constituting property leased to Borrower under a lease that has expired or is terminated in a transaction permitted under this Agreement. Notwithstanding the foregoing, so long as no Unmatured Default or Event of Default shall have occurred and be continuing, Agent shall, for the benefit and at the request of Borrower, release (or, if the Lender Group is then the Control Party, direct the Collateral Agent to release, if applicable) its Lien on Collateral in a transaction constituting a Permitted Disposition. Except as provided above, Agent will not execute and deliver a release or authorize the execution and delivery of a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders or (z) otherwise, the Required Lenders. Upon request by the Collateral Agent, Agent or Borrower at any time, the Lenders will confirm in writing the Collateral Agent's or Agent's authority, as the case may be, to release or authorize the release of any such Liens on particular types or items of Collateral pursuant to this Section 16.12; provided, however, that (1) neither the Collateral Agent nor Agent shall be required to execute any document necessary to evidence such release or authorization on terms that, in the Collateral Agent's or Agent's opinion, as the case may be, would expose the Collateral Agent or Agent to liability or create any obligation or entail any consequence other than the release or authorization of such Lien without recourse, representation or warranty and (2) such release shall not in any manner discharge, affect or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrower in respect of) all interests retained by Borrower, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (b) Neither the Collateral Agent nor Agent shall have any obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrower or is cared for, protected or insured or has been encumbered, or that the Collateral Agent's or Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue 88 exercising, any of the rights, authorities and powers granted or available to the Collateral Agent or Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, subject to the terms and conditions contained herein, the Collateral Agent and Agent may act in any manner it may deem appropriate, absent the Collateral Agent's or Agent's, as the case may be, gross negligence or willful misconduct as finally determined by a court of competent jurisdiction, in its sole discretion given the Collateral Agent's, Agent's own interest in the Collateral in its capacity as one of the Lenders and that the Collateral Agent and Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 16.13 Restrictions on Actions by Lenders; Sharing of Payments. (a) Each of the Lenders agrees that it shall not, without the express consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrower or any deposit accounts of Borrower now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral the purpose of which is, or could be, to give such Lender any preference or priority against the other Lenders with respect to the Collateral. (b) If, at any time or times any Lender shall receive (i) by payment, foreclosure or setoff or otherwise any proceeds of Collateral or any payments with respect to the Obligations arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's Pro Rata Share portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 16.14 Agency for Perfection. Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Liens of the Collateral Agent and Agent in assets which, in accordance with Article 9 of the Code can be perfected only by possession. Should any Lender obtain possession of any such Collateral, such Lender shall notify the Collateral Agent and Agent thereof, and, promptly upon the request of 89 the Collateral Agent or Agent therefor shall deliver such Collateral to the Collateral Agent or Agent, as appropriate, or in accordance with the instructions of the Collateral Agent or Agent. 16.15 Payments to the Lenders. All payments to be made by Agent to the Lenders shall be made by bank wire transfer or internal transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, or interest of the Obligations. 16.16 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement, the Intercreditor Agreement and the other Loan Documents relating to the Collateral, for the benefit of the Lender Group. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement, the Intercreditor Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By becoming a party to this Agreement, each Lender: (a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports") prepared by or at the request of Agent, and Agent shall so furnish each Lender with such Reports, (b) expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report and (ii) shall not be liable for any information contained in any Report, (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon the Books, as well as on representations of Borrower's personnel, (d) agrees, for the benefit of the Lender Group and, notwithstanding Section 16.1, the Loan Parties, to keep all Reports and other material, non-public information regarding Borrower and its Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner; it being understood and agreed by Borrower that in any event such Lender may make disclosures (a) to counsel for and other advisors, accountants and auditors to such Lender, (b) reasonably required by any bona fide potential or actual Assignee or Participant in connection with any contemplated or actual assignment or transfer by such Lender of an interest herein or any participation interest in such Lender's rights hereunder, (c) of information that has become public by disclosures made by Persons other than such Lender, its Affiliates, assignees, transferees or Participants or (d) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation or court order; provided, however, that, unless prohibited by 90 applicable law, statute, regulation, or court order, such Lender shall notify Borrower of any request by any court governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of any such non-public material information concurrent with, or where practicable, prior to the disclosure thereof, and (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any other Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrower, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a loan or loans of Borrower, and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrower to Agent that has not been contemporaneously provided by Borrower to such Lender, and, upon receipt of such request, Agent promptly shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrower, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's notice to Agent, whereupon Agent promptly shall request of Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender. 16.18 Several Obligations; No Liability. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of the Lenders to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 16.7, no member of the Lender Group shall have any liability for the acts or any other member of the Lender Group. No Lender shall be responsible to Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 91 17. GENERAL PROVISIONS. 17.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower, Agent and each Lender whose signature is provided for on the signature pages hereof. 17.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 17.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 17.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 17.5 Amendments in Writing. This Agreement only can be amended by a writing signed by Agent (on behalf of the requisite Lenders) and Borrower. 17.6 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or electronic mail shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile or electronic mail also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 17.7 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or Guarantor or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences or other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrower or Guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 92 17.8 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 18. GUARANTY 18.1 Guaranty; Limitation of Liability. Each Guarantor hereby, unconditionally and irrevocably, guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all Obligations of Borrower now or hereafter existing under any Loan Document, whether for principal, interest (including, without limitation, all interest that accrues after the commencement of any case, proceeding or other action relating to bankruptcy, insolvency or reorganization of Borrower), fees, expenses or otherwise (such obligations, to the extent not paid by Borrower, being the "Guaranteed Obligations"), and agrees to pay any and all expenses (including reasonable counsel fees and expenses) incurred by the Lender Group in enforcing any rights under the guaranty set forth in this Section 18. Without limiting the generality of the foregoing, each such Guarantor's liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by Borrower to any member of the Lender Group under any Loan Document but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving Borrower. 18.2 Guaranty Absolute. Each Guarantor guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of Agent or the Lenders with respect thereto. The obligations of such Guarantor under this Section 18 are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against such Guarantor to enforce such obligations, irrespective of whether any action is brought against Borrower or whether the Borrower is joined in any such action or actions. The liability of such Guarantor under this Section 18 shall be irrevocable, absolute and unconditional irrespective of, and such Guarantor hereby irrevocably waives any defenses it may now or hereafter have in any way relating to, any or all of the following: (a) any lack of validity or enforceability of any Loan Document or any agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment or waiver of or any consent to departure from any Loan Document, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to Borrower or otherwise; (c) any taking, exchange, release or non-perfection of any Collateral, or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Guaranteed Obligations; 93 (d) any change, restructuring or termination of the corporate, limited liability company or partnership structure or existence of Borrower; or (e) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by Agent or the Lenders that might otherwise constitute a defense available to, or a discharge of, Guarantor, Borrower or any other guarantor or surety. This Section 18 shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by a Lender or any other Person upon the insolvency, bankruptcy or reorganization of Borrower or otherwise, all as though such payment had not been made. 18.3 Waiver. Each Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and this Section 18 and any requirement that Agent or the Lenders exhaust any right or take any action against Borrower or any other Person or any Collateral. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated herein and that the waiver set forth in this Section 18.3 is knowingly made in contemplation of such benefits. Each Guarantor hereby waives any right to revoke this Section 18, and acknowledges that this Section 18 is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future. 18.4 Continuing Guaranty; Assignments. This Section 18 is a continuing guaranty and shall (a) remain in full force and effect until the later of (i) the cash payment in full of the Guaranteed Obligations (other than indemnification obligations as to which no claim has been made) and all other amounts payable under this Section 18 and (ii) the Maturity Date, (b) be binding upon each Guarantor, its successors and assigns and (c) inure to the benefit of and be enforceable by Agent and the Lenders and their successors, pledgees, transferees and assigns. Without limiting the generality of the foregoing clause (c), any Lender may pledge, assign or otherwise transfer all or any portion of its rights and obligations under this Agreement (including, without limitation, all or any portion of its Commitments owing to it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted such Lender herein or otherwise, in each case as provided in Section 14.1. 18.5 Subrogation. Each Guarantor will not exercise any rights that it may now or hereafter acquire against Borrower or any other insider guarantor that arise from the existence, payment, performance or enforcement of such Guarantor's obligations under this Section 18, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of Agent and the Lenders against Borrower or any other insider guarantor or any collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from Borrower or any other insider guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security solely on account of such claim, remedy or right, unless and until all of the Guaranteed Obligations and all other amounts payable under this Section 18 shall have been paid in full in cash and the Maturity Date or earlier termination of this Agreement shall have occurred. If any amount shall be paid to each 94 Guarantor in violation of the immediately preceding sentence at any time prior to the later of the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Section 18 and the earlier of the Maturity Date and the early termination of this Agreement, such amount shall be held in trust for the benefit of Agent and the Lenders and shall forthwith be paid to Agent and the Lenders to be credited and applied to the Guaranteed Obligations and all other amounts payable under this Section 18, whether matured or unmatured, in accordance with the terms of this Agreement, or to be held as collateral for any Guaranteed Obligations or other amounts payable under this Section 18 thereafter arising. If (i) any Guarantor shall make payment to Agent and the Lenders of all or any part of the Guaranteed Obligations, (ii) all of the Guaranteed Obligations and all other amounts payable under this Section 18 shall be paid in full in cash and (iii) the Maturity Date or earlier termination of this Agreement shall have occurred, Agent and the Lenders will, at such Guarantor's request and expense, execute and deliver to such Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to such Guarantor of an interest in the Guaranteed Obligations resulting from such payment by such Guarantor. [signature page follows] 95 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. BORROWER: ABRAXAS PETROLEUM CORPORATION By: --------------------------------------- Name: Title: GUARANTORS: SANDIA OIL & GAS CORPORATION By: ----------------------------------------- Name: Title: SANDIA OPERATING CORP. By: ---------------------------------------- Name: Title: EASTSIDE COAL COMPANY, INC. By: ---------------------------------------- Name: Title: WESTERN ASSOCIATED ENERGY CORPORATION By: ---------------------------------------- Name: Title: [signature page to Bridge Loan Agreement] WAMSUTTER HOLDINGS, INC. By: --------------------------------------- Name: Title: AGENT AND LENDERS: GUGGENHEIM CORPORATE FUNDING, LLC as Agent and as a Lender By: --------------------------------------- Name: Title: [signature page to Bridge Loan Agreement] Clinton Multistrategy Master Fund Ltd., as a Lender By: -------------------------------------- Name: Title: [signature page to Bridge Loan Agreement] SOF INVESTMENTS, L.P., as a Lender By: -------------------------------------- Name: Title: [signature page to Bridge Loan Agreement] ORE HILL HUB FUND LTD., as a Lender By: ------------------------------------- Name: Title: [signature page to Bridge Loan Agreement] NY1 5609474v6 Schedule A-1 Agent's Account An account at a bank designated by Agent from time to time as the account into which Borrower shall make all payments to Agent for the benefit of the Lender Group and into which the Lender Group shall make all payments to Agent under this Agreement and the other Loan Documents; unless and until Agent notifies Borrower and the Lender Group to the contrary, Agent's Account shall be the following deposit account: Bank Name: Harris Trust and Savings Bank Chicago, Illinois ABA Number: 071-000-288 Account Number: 277-936-1 Account Name: Guggenheim Corporate Funding, LLC Reference: Abraxas (Bridge Loan) Schedule C-1 Commitments Lender Commitment ------ ---------- Clinton Group Inc. $12,000,000 Ore Hill Hub Fund Ltd. $1,000,000 Guggenheim Corporate Funding, LLC $12,000,000 SOF Investments, L.P. $10,000,000 =========== $25,000,000 NY1 5609474v6 Schedule D-1 Designated Account Account number 006224301 of Borrower maintained with Borrower's Designated Account Bank, or such other deposit account of Borrower (located within the United States) that has been designated as such, in writing, by Borrower to Agent. "Designated Account Bank" means International Bank of Commerce, whose office is located at 130 East Travis Street, San Antonio, Texas 78205, and whose ABA number is 114902528. TABLE OF CONTENTS Page 1. DEFINITIONS AND CONSTRUCTION.........................................1 1.1 Definitions.................................................1 1.2 Accounting Terms............................................27 1.3 Code........................................................27 1.4 Construction................................................27 1.5 Schedules and Exhibits......................................27 2. LOANS AND TERMS OF PAYMENT...........................................27 2.1 Loan........................................................27 2.2 Borrowing Procedures........................................28 2.3 Payments....................................................30 2.4 Repayment of Obligations....................................32 2.5 Interest Rates; Payments and Calculations...................33 2.6 Cash Management.............................................34 2.7 Crediting Payments..........................................34 2.8 Designated Account..........................................34 2.9 Maintenance of Loan Account; Statements of Obligations......34 2.10 Fees and Charges............................................35 2.11 Capital Requirements........................................35 2.12 Registered Loans and Registered Notes.......................36 2.13 Repayment of Advances.......................................36 3. CONDITIONS; TERM OF AGREEMENT; TERMINATION OF AGREEMENT AND REDUCTION OF COMMITMENTS.........................................36 3.1 Conditions Precedent to the Making of the Loan..............36 3.2 Term........................................................42 3.2 "Maturity Date")............................................42 3.3 Effect of Termination.......................................42 3.4 Early Termination...........................................42 4. ACKNOWLEDGEMENT OF SECURITY INTEREST; PLEDGED GREY WOLF STOCK........43 4.1 Acknowledgement of Security Interest........................43 4.2 Right to Inspect Collateral.................................43 4.3 Security Interest in Pledged Grey Wolf Stock................43 4.4 Delivery of Additional Documentation Required; Stock of Grey Wolf..........................................44 4.5 Power of Attorney...........................................44 5. REPRESENTATIONS AND WARRANTIES.......................................44 i 5.1 No Encumbrances.............................................45 5.2 Equipment...................................................45 5.3 Location of Inventory and Equipment.........................45 5.4 Inventory Records...........................................45 5.5 Location of Chief Executive Office; FEIN....................45 5.6 Due Organization and Qualification; Subsidiaries............45 5.7 Due Authorization; No Conflict..............................46 5.8 Litigation..................................................47 5.9 No Material Adverse Change..................................48 5.10 Fraudulent Transfer.........................................48 5.11 Employee Benefits...........................................48 5.12 Environmental Condition.....................................48 5.13 Brokerage Fees..............................................49 5.14 Intellectual Property.......................................49 5.15 Leases......................................................49 5.16 DDAs........................................................49 5.17 Compliance with the Law.....................................49 5.18 Complete Disclosure.........................................49 5.19 Indebtedness................................................50 5.20 Oil and Gas Imbalances......................................50 5.21 Hedging Agreements..........................................50 5.22 Location of Real Property and Leased Premises...............50 5.23 Capital Restructuring Documents and Intercreditor Agreement.51 5.24 Material Contracts..........................................51 5.25 Permits, Etc................................................52 5.26 Employee and Labor Matters..................................52 5.27 Bonds and Insurance.........................................52 5.28 Nature of Business..........................................53 5.29 Grey Wolf Stock Sales.......................................53 6. AFFIRMATIVE COVENANTS................................................53 6.1 Accounting System...........................................53 6.2 Collateral Reporting........................................53 6.3 Financial Statements, Reports, Certificates.................55 6.4 Guarantor Reports...........................................57 6.5 Maintenance of Properties...................................57 6.6 Taxes.......................................................59 6.7 Insurance...................................................59 6.8 Location of Inventory and Equipment.........................60 6.9 Compliance with Laws........................................60 6.10 Leases......................................................60 6.11 Brokerage Commissions.......................................60 6.12 Existence...................................................60 6.13 Environmental...............................................60 6.14 Disclosure Updates..........................................60 6.15 After Acquired Properties...................................61 ii 6.16 Protection Against Drainage.................................61 6.17 Additional Collateral Reviews...............................61 6.18 Hedging Agreements..........................................61 6.19 Asset Sales at the Direction of Agent.......................62 6.20 Grey Wolf Stock Sales.......................................63 7. NEGATIVE COVENANTS...................................................63 7.1 Indebtedness................................................63 7.2 Liens.......................................................65 7.3 Restrictions on Fundamental Changes.........................65 7.4 Disposal of Assets..........................................65 7.5 Change Name.................................................65 7.6 Guarantee...................................................66 7.7 Nature of Business..........................................66 7.8 Payments, Prepayments and Amendments........................66 7.9 Change of Control...........................................67 7.10 Forward Sales...............................................67 7.11 Distributions...............................................67 7.12 Accounting Methods..........................................67 7.13 Investments.................................................67 7.14 Transactions with Affiliates................................67 7.15 Suspension..................................................67 7.16 Compensation................................................67 7.17 Use of Proceeds.............................................68 7.18 Financial Covenants.........................................68 7.19 Oil and Gas Imbalances......................................68 7.20 Environmental...............................................68 7.21 Limitation on Leases........................................68 7.22 Bank Product Obligations....................................68 8. EVENTS OF DEFAULT....................................................69 9. THE LENDER GROUP'S RIGHTS AND REMEDIES...............................71 9.1 Rights and Remedies.........................................71 9.2 Remedies Cumulative.........................................73 10. TAXES AND EXPENSES...................................................73 11. WAIVERS; INDEMNIFICATION.............................................74 11.1 Demand; Protest; etc........................................74 11.2 The Lender Group's Liability for Collateral.................74 11.3 Indemnification.............................................74 iii 12. NOTICES..............................................................75 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER...........................75 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS...........................76 14.1 Assignments and Participations..............................76 14.2 Successors..................................................79 15. AMENDMENTS; WAIVERS..................................................80 15.1 Amendments and Waivers......................................80 15.2 Replacement of Holdout Lender...............................81 15.3 No Waivers; Cumulative Remedies.............................81 16. AGENT; LENDER GROUP..................................................81 16.1 Appointment and Authorization of Agent......................81 16.2 Delegation of Duties........................................82 16.3 Liability of Agent Persons..................................82 16.4 Reliance by Agent...........................................83 16.5 Notice of Default, Unmatured Default or Event of Default....83 16.6 Credit Decision.............................................84 16.7 Costs and Expenses; Indemnification.........................84 16.8 Agent-Related Persons in Individual Capacity................85 16.9 Successor Agent.............................................85 16.10 Lender in Individual Capacity...............................86 16.11 Withholding Taxes...........................................86 16.12 Collateral Matters..........................................88 16.13 Restrictions on Actions by Lenders; Sharing of Payments.....89 16.14 Agency for Perfection.......................................89 16.15 Payments to the Lenders.....................................90 16.16 Concerning the Collateral and Related Loan Documents........90 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information.................................................90 16.18 Several Obligations; No Liability...........................91 17. GENERAL PROVISIONS...................................................92 17.1 Effectiveness...............................................92 17.2 Section Headings............................................92 17.3 Interpretation..............................................92 17.4 Severability of Provisions..................................92 17.5 Amendments in Writing.......................................92 17.6 Counterparts; Telefacsimile Execution.......................92 17.7 Revival and Reinstatement of Obligations....................92 iv 17.8 Integration.................................................93 18. GUARANTY.............................................................93 18.1 Guaranty; Limitation of Liability...........................93 18.2 Guaranty Absolute...........................................93 18.3 Waiver......................................................94 18.4 Continuing Guaranty; Assignments............................94 18.5 Subrogation.................................................94 v EX-10 8 greywolfloan.txt GREY WOLF LOAN EXHIBIT 10.4 ================================================================================ LOAN AGREEMENT by and among GREY WOLF EXPLORATION INC., as Borrower, LENDERS THAT ARE SIGNATORIES HERETO, as Lenders, and GUGGENHEIM CORPORATE FUNDING, LLC, as the Arranger and Administrative Agent Dated as of October 28, 2004 ================================================================================ LOAN AGREEMENT LOAN AGREEMENT, dated as of October 28, 2004 (this "Agreement"), by and among (i) on the one hand, the lenders identified on the signature pages hereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders") and GUGGENHEIM CORPORATE FUNDING, LLC, a Delaware limited liability company, as the arranger and administrative agent for the Lenders ("Agent"), and (ii) on the other hand, GREY WOLF EXPLORATION INC., a corporation incorporated pursuant to the laws of the Province of Alberta ("Borrower"). RECITALS WHEREAS, Borrower has requested that Lenders make available to it, and, subject to and upon the terms and conditions hereinafter set forth, Lenders are willing to make available to Borrower, the credit facility provided for herein; NOW, THEREFORE, the parties hereto agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Abraxas" means Abraxas Petroleum Corporation and its successors and permitted assigns. "Abraxas Bridge Loan Facility" means the U.S. $25,000,000 bridge loan facility evidenced by the Abraxas Bridge Loan Agreement. "Abraxas Bridge Loan Agreement" means the loan agreement dated as of October 28, 2004 among Abraxas, the Subsidiaries of Abraxas parties thereto, GCF, in its capacity as Lender and Agent, and such other persons as may become party to such agreement from time to time. "Acceptable Commodity Hedging Agreement" means a Commodity Hedging Agreement (i) with a counterparty rated A3 or better by Moody's and A- or better by Standard & Poor's, or the equivalent by a rating agency acceptable to Agent, (ii) pursuant to an agreement the terms of which are acceptable to Agent and (iii) the arrangements of which are otherwise reasonably acceptable to Agent. "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, chattel paper or a General Intangible. "Accounts" means all of Borrower's now owned or hereafter acquired right, title and interest with respect to "accounts" (as that term is defined in the PPSA) and any and all supporting obligations in respect thereof. "Advances" has the meaning set forth in Section 2.1. "Affiliate" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of Shares, by contract or otherwise; provided, however, that, for the purposes of Section 7.14: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture (other than joint ventures permitted under clause (d) of the definition of Permitted Investments) in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. "After-Acquired Property" has the meaning set forth in Section 4.5. "Agent" means GCF, solely in its capacity as agent for Lenders hereunder, and any successor thereto. "Agent's Account" means an account identified on Schedule A-1. "Agent's Liens" means the Liens granted by Borrower to Agent for the benefit of the Lender Group pursuant to the Collateral Documents. "Agent-Related Persons" means Agent, its Affiliates and the officers, directors, employees and agents of Agent and such Affiliates. "Agreement" has the meaning set forth in the preamble hereto. "Applicable Law" means, in relation to any Person, transaction or event, all applicable provisions of laws, statutes, rules, regulations, official directives and orders of and the terms of all judgments, orders and decrees issued by any Authorized Authority by which such Person is bound or having application to the transaction or event in question. "Assignee" has the meaning set forth in Section 14.1. "Assignment and Acceptance" means an Assignment and Acceptance in the form of Exhibit A-1. "Authorized Authority" means, in relation to any Person, transaction or event, any (a) federal, provincial, municipal or local governmental body (whether administrative, legislative, executive (or the equivalent) or otherwise), both domestic and foreign, (b) agency, authority, commission, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, (c) court, arbitrator, commission or body exercising judicial, quasi-judicial, administrative or similar functions, and (d) other body or entity created under the authority of or otherwise subject to the jurisdiction of any of the foregoing, including any stock or other securities exchange, in each case having jurisdiction over such Person, transaction or event. "Authorized Person" means, with respect to any Person, the President, the Chief Executive Officer, the Chief Financial Officer, any Vice President or the Treasurer of such Person. "Bankruptcy Codes" means (i) (A) the United States Bankruptcy Code (B) the Bankruptcy and Insolvency Act (Canada) or (C) the Companies' Creditors Arrangement Act (Canada), as applicable, or (ii) any similar legislation in a relevant jurisdiction, in each case as in effect from time to time. "Base Rate" means with respect to each period commencing on an Interest Payment Date (or, with respect to the period prior to the first Interest Payment Date, the Closing Date) and ending on the day immediately before the Interest Payment Date immediately following such date, the prime rate of interest specified under the Bloomberg reference identified as "PRIMBB Index" on the date that is two Business Days prior to the first day of such period; provided, however, that if such rate is not available, "Prime Rate" shall mean such rate of interest as is publicly announced by Citibank, N.A. in New York, New York on such day as its prime or base rate and if Citibank, N.A. does not announce such rate on such day, "Prime Rate" shall mean the Prime Rate in effect immediately prior to the first day of such period. "Basis Differential" means, in the case of any Oil and Gas Property, the difference between the NYMEX futures contract prices and the sales prices at the delivery point where the oil or gas, as the case may be, produced by such Oil and Gas Property, is sold. "Basis Point" or "bps" means one one-hundredth of 1%. "Benefit Plan" means a benefit plan under Canadian Employee Benefit Laws for which Borrower or any Subsidiary of Borrower has been an "employer" under Canadian Employee Benefit Laws within the past six years. "Board of Directors" means the board of directors (or comparable managers) of Person. "Books" means Borrower's now owned or hereafter acquired books and records (including all of its Records indicating, summarizing, or evidencing its assets (including the Collateral) or liabilities, all of Borrower's Records relating to its business operations or financial condition, and all of its goods or General Intangibles related to such information). "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrower Parties" means Borrower and its Subsidiaries collectively and a "Borrower Party" means Borrower or any of its Subsidiaries individually. "Borrowing" means a borrowing hereunder consisting of Advances made on the same day by any of Lenders (or Agent on behalf thereof). "Business Day" means any day other than a Saturday or Sunday, on which Canadian chartered banks are open for domestic and foreign exchange business in Calgary, Alberta. "Canadian Dollars" or "Canadian $" or "Cdn. $" or "$" each mean such currency of Canada which, as at the time of payment or determination, is legal tender in Canada for the payment of public or private debts. "Canadian Employee Benefits Laws" means the Canada Pension Plan (Canada), the Pension Benefit Act (Ontario), the Health Insurance Act (Ontario), the Employment Standard Act (Ontario) and any other applicable federal, provincial or local counterparts or equivalents, to the extent same may be applicable to Borrower. "Capital Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations, rights in or other equivalents in the equity interests (however designated) in such Person, and any rights (other than debt securities convertible into an equity interest), warrants or options exercisable for, exchangeable for or convertible into such an equity interest in such Person. "Capitalized Lease Obligation" means any Indebtedness represented by obligations under a Capital Lease. "Cash Equivalents" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or the Government of Canada or issued by any agency thereof and backed by the full faith and credit of the United States or the Government of Canada, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 270 days from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank organized under the laws of Canada or the United States or any province or state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) certificates of deposit less than or equal to U.S. $100,000 in the aggregate issued by any other bank insured by the Canada Deposit Corporation. "Change of Control" means (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 35%, or more, of the Shares of Abraxas having the right to vote for the election of members of the Board of Directors, or (b) a majority of the members of the Board of Directors do not constitute Continuing Directors, (c) a "Change of Control" (as defined in the Senior Notes Indenture) shall have occurred or (d) Abraxas ceases to directly own and control 50% of the outstanding Shares of Borrower. "Closing Date" means the date of the making of the Loan hereunder. "Collateral" means, the assets and properties of Borrower described in Article 4 of the Debenture. "Collateral Documents" means the Debenture, the Mortgages and any other documents pursuant to which a security interest is granted by Borrower securing the obligations under this Agreement. "Collections" means all cash, cheques, notes, instruments and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds and tax refunds) of Borrower. "Commitment" means, with respect to each Lender, its Commitment and, with respect to all Lenders, all of their Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Commodity Hedging Agreement" means a commodity hedging or purchase agreement or similar arrangement entered into with the intent of protecting against fluctuations in commodity prices or the exchange of notional commodity obligations, either generally or under specific contingencies. "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Borrower to Agent. "Consolidated Net Interest Expense" means, with respect to Borrower, for any period, gross cash interest expense of Borrower for such period determined on a consolidated basis and in accordance with GAAP (including, without limitation, interest expense paid to Affiliates of Borrower, less (i) the sum of (A) cash interest income for such period and (B) cash gains for such period on Interest Rate Protection Agreements (to the extent not included in cash interest income above and to the extent not deducted in the calculation of gross cash interest expense), plus (ii) the sum of (A) cash losses for such period on Interest Rate Protection Agreements (to the extent not included in gross cash interest expense) and (B) the upfront cash costs or fees for such period associated with Interest Rate Protection Agreements (to the extent not included in gross cash interest expense), in each case. "Continuing Director" means (a) any member of the Board of Directors who was a director (or comparable manager) of Borrower on the Closing Date and (b) any individual who becomes a member of the Board of Directors of Borrower after the Closing Date if such individual was recommended, appointed or nominated for election to the Board of Directors of Borrower by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Borrower (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof. "Control Agreement" means a control agreement, in form and substance satisfactory to Agent, executed and delivered by Borrower, Agent and the applicable securities intermediary with respect to a Securities Account or bank. "Currency Protection Agreement" means a currency swap, cap or collar agreement or similar arrangement entered into with the intent of protecting against fluctuations in currency values, either generally or under specific contingencies. "Daily Balance" means, with respect to each day during the term of this Agreement, the amount of an Obligation owed at the end of such day. "DDA" means any chequing or other demand deposit account maintained by Borrower. "Debenture" has the meaning set forth in Section 4.1(a). "Default" means an event, condition or default that, with the giving of notice, the passage of time or both, would be an Event of Default. "Defaulting Lender" means any Lender that fails to make any Advance (or other extension of credit (if any)) that it is required to make hereunder on the date that it is required to do so hereunder. "Designated Account" means that certain DDA of Borrower identified on Schedule D-1. "Designated Account Bank" has the meaning set forth on Schedule D-1. "EBITDA" means, with respect to any fiscal period, Borrower's consolidated net earnings (or loss), minus extraordinary gains, plus interest expense, income taxes, non-cash expenses incurred in connection with the payment of Share compensation, non-cash expenses incurred in connection with the issuance of warrants or options to purchase the Shares of Borrower, and depletion depreciation and amortization for such period, as determined in accordance with GAAP. "Eligible Transferee" means (a) a commercial bank organized under the laws of the United States or Canada, or any state or province thereof, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of U.S. $50,000,000, provided that such bank is acting through a branch or agency located in Canada or the United States, (c) a finance company, insurance company or other financial institution or fund that is engaged in making, purchasing or otherwise investing in commercial loans or securities in the ordinary course of its business and (together with its Affiliates) having total assets in excess of U.S. $50,000,000, (d) any Affiliate (other than individuals) of a Lender that was party hereto as of the Closing Date, including, without limitation, a fund or account managed by such Lender or an Affiliate of such Lender or its investment manager (a "Related Fund"), and (e) so long as no Event of Default or Unmatured Default has occurred and is continuing, any other Person approved by Agent and Borrower (which approval by the Borrower shall not be unreasonably withheld or delayed) and (f) during the continuation of an Event of Default or Unmatured Default, any other Person approved by Agent. "Environmental Actions" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or Releases of Hazardous Materials from (a) any assets, properties, or businesses of Borrower or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by Borrower or any predecessor in interest. "Environmental Law" means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy, or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on Borrower, relating to the environment, employee health and safety, or Hazardous Materials, including the Canadian Environmental Protection Act (Canada); the Fisheries Act (Canada); the Environmental Protection and Enhancement Act (Alberta); the Environmental Protection Act (Ontario); the Water Resource Act (Ontario); the Waste Management Act (British Columbia); and any state, provincial and local or foreign counterparts or equivalents, in each case as amended from time to time. "Environmental Liabilities and Costs" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any Governmental Authority or any third party and which relate to any Environmental Action. "Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "Equipment" means all of Borrower's now owned or hereafter acquired right, title and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions and improvements to any of the foregoing. "Event of Default" has the meaning set forth in Section 8. "Exchange Act" means the Securities Exchange Act of 1934. "Existing Credit Agreement" means the Loan and Security Agreement, dated as of January 22, 2003, among Abraxas, the subsidiaries of Abraxas party thereto, the lenders thereunder, the Existing Credit Agreement Agent and GCF, as the specified appointee thereunder. "Existing Credit Agreement Agent" means Wells Fargo Foothill, Inc., as agent for Lenders under the Existing Credit Agreement, and any successor thereto as may be appointed pursuant to the terms of the Existing Credit Agreement. "Farmout" means an arrangement whereby the owner(s) of one or more oil, gas and/or mineral lease or other oil and natural gas working interest with respect to Farmout Property (referred to as the "farmor") agrees to transfer or assign an interest in such Farmout Property to one or more other Persons (referred to as the "farmee") in exchange for the farmee (1) drilling, or participating in the cost of the drilling of, one or more oil and/or natural gas wells, or undertaking other exploration or development activity or participating in the cost of such other activity, to attempt to obtain production of hydrocarbons from such Farmout Property, (2) agreeing to so drill or undertake such other activity, or agreeing to participate in the cost of such drilling or such other activity, with respect to such Farmout Property, or (3) obtaining production of Hydrocarbons from such Farmout Property, or participating in the costs of obtaining such production. "Farmout Agreement" means, with respect to a Farmout, the agreement or agreements governing such Farmout. "Farmout Property" means, with respect to a Farmout, the property from which production of Hydrocarbons is sought to be obtained through such Farmout. The Farmout Property with respect to a Farmout may consist of only certain specified depths, strata, zones or geological formations under one or more tracts of land, but shall not include any depths, strata, zones or geological formations under such tract(s) of land (i) that, at the time of such Farmout, are being produced or developed by the farmor or any of its Affiliates in the same field or area or (ii) that have been subject to production or development activity by the farmor or any of its Affiliates in the same field or area and such activity was discontinued with the desire or expectation of entering into a Farmout. "Farmout Property Value" means, with respect to a Farmout, the value of the Farmout Property of Borrower at the time the relevant Farmout Agreement is entered into determined as follows: (1) with respect to Farmout Property with a value not exceeding U.S. $500,000, as determined in good faith by the chief executive officer of Borrower and evidenced by an officers' certificate delivered to Agent; (2) with respect to Farmout Property with a value exceeding U.S. $500,000 but not exceeding U.S. $2.5 million, as determined in good faith by the Board of Directors of Borrower and evidenced by a resolution of such Board of Directors delivered to Agent; and (3) with respect to Farmout Property with a value exceeding U.S. $2.5 million, as reflected in an opinion or appraisal issued by an independent accounting or investment banking firm which is nationally recognized in Canada, or by a reputable independent appraisal or petroleum engineering firm, as appropriate under the circumstances, delivered to Borrower. "Fee Letter" means that certain fee letter, dated as of the Closing Date, between Borrower and Agent, in form and substance satisfactory to Agent. "GAAP" means generally accepted accounting principles as in effect from time to time in Canada, consistently applied. "GCF" means Guggenheim Corporate Funding, LLC, a Delaware limited liability company. "General Intangibles" means all of Borrower's now owned or hereafter acquired right, title and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, judgments, rights arising under common law, statutes or regulations, choses or things in action, goodwill, patents, designs, inventions, trade names, trade secrets, d/b/a's, Internet domain names, logos, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds and tax refund claims) and any and all supporting obligations in respect thereof, and any other personal property other than goods, Accounts and Negotiable Collateral. "Governing Documents" means, with respect to any Person, the certificate or articles of incorporation, by-laws or other organizational documents of such Person. "Governmental Authority" means any Canadian or foreign federal, provincial, state, municipal, local or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission or other similar dispute-resolving panel or body. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances", "hazardous materials", "hazardous wastes", "toxic substances" or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity" under Environmental Laws, (b) Hydrocarbons, including, without limitation, oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Hedging Agreement" means any Currency Protection Agreement, Interest Rate Protection Agreement or Commodity Hedging Agreement. "Hydrocarbons" means oil, gas, coal seam gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, all products and byproducts refined, separated, settled and dehydrated therefrom and all products and byproducts refined therefrom, including, without limitation, kerosene, liquefied petroleum gas, refined lubricating oils, diesel fuel, drip gasoline, natural gasoline, helium, sulfur, geothermal steam, water, carbon dioxide and all other minerals. "Hydrocarbon Interests" means all rights, titles, interests and estates now owned or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, oil, gas and casinghead gas leases or other liquid or gaseous hydrocarbon leases, mineral fee or lease interests, farm-outs, overriding royalty and royalty interests, net profit interests, oil payments, production payment interests and similar mineral interests, including any reserved or residual interest of whatever nature. "Income Tax Act (Canada)" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) including the regulations made and, from time to time, in force under that Act. "Indebtedness" means (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, interest rate swaps or other financial products, (c) all obligations under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of Borrower or its Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations for the deferred purchase price of assets, including trade debt (other than trade debt incurred in the ordinary course of business and paid in accordance with customary trade practices) and (f) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse) any obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Initial Reserve Report" means the report of the Petroleum Engineers dated June 30, 2004 with respect to the Oil and Gas Properties of Borrower. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Codes or under any other foreign federal, state, provincial or other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors or proceedings seeking reorganization, arrangement or other similar relief. "Interest Act (Canada)" means the Interest Act, R.S.C. 1985, c.1-15, as amended from time to time, including the regulations made and, from time to time, in force under that Act. "Interest Payment Date" has the meaning set forth in Section 2.5(c)(i). "Interest Rate" means, at any time of determination, the sum of the then applicable Base Rate and Spread. "Interest Rate Protection Agreement" means an interest rate swap, cap or collar agreement or similar arrangement entered into with the intent of protecting against fluctuations in interest rates or the exchange of notional interest obligations, either generally or under specific contingencies. "Inventory" means all Borrower's now owned or hereafter acquired right, title and interest with respect to inventory, including extracted Hydrocarbons and other goods held for sale or lease or to be furnished under a contract of service, goods that are leased by Borrower as lessor, goods that are furnished by Borrower under a contract of service and raw materials, work in process, or materials used or consumed in Borrower's business. "Investment" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances or capital contributions (excluding (a) commission, travel and similar advances to officers and employees of such Person made in the ordinary course of business and (b) bona fide Accounts arising in the ordinary course of business consistent with past practices), purchases, or other acquisitions for consideration, of Indebtedness or Shares and any other item that is or would be classified as an investment on a balance sheet prepared in accordance with GAAP. "Judgment Interest Act (Alberta)" means the Judgment Interest Act, R.S.A. 2000, c.J-1, as amended from time to time, including the regulations made and from time to time in force under that Act. "Lender" and "Lenders" have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1. "Lender Group" means, individually and collectively, each of Lenders and Agent. "Lender Group Expenses" means all (a) costs or expenses (including taxes and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by any one or more members of the Lender Group, (b) reasonable fees and charges paid or incurred by any one or more members of the Lender Group in connection with any one or more members of the Lender Group's transactions with Borrower, including fees and charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien and judgment searches and searches for registrations under the PPSA and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals, business valuations or examinations of Borrower's Oil and Gas Properties to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement) and environmental audits, (c) costs and expenses incurred by any one or more members of the Lender Group in the disbursement of funds to Borrower (by wire transfer or otherwise), (d) reasonable charges paid or incurred by any one or more members of the Lender Group resulting from the dishonor of cheques, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) reasonable audit fees and expenses of any one or more members of the Lender Group related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by any one or more members of the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or any one or more members of the Lender Group's relationship with Borrower or any guarantor of the Obligations, (h) Agent's reasonable fees and expenses (including reasonable lawyers' fees and disbursements on a solicitor and their own client basis) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents and (i) Agent's and each Lender's reasonable fees and expenses (including reasonable lawyers' fees and disbursements on a solicitor and their own client basis) incurred in terminating, enforcing (including reasonable lawyers' fees, disbursements and expenses on a solicitor and their own client basis incurred in connection with a "workout", a "restructuring" or an Insolvency Proceeding concerning Borrower or any of its Subsidiaries or in exercising rights or remedies under the Loan Documents) or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral. "Lender-Related Person" means, with respect to any Lender, such Lender, such Lender's Affiliates and the officers, directors, employees and agents of such Lender and such Affiliates. "Lien" means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including (a) the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including, purchase options, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting any Oil and Gas Properties or Real Property and (b) production or royalty payments or the like payable from Oil and Gas Properties. "Loan" has the meaning set forth in Section 2.2. "Loan Account" has the meaning set forth in Section 2.9. "Loan Amount" means U.S. $35,000,000. "Loan Documents" means this Agreement, the Collateral Documents, the Control Agreements, the Fee Letter, the Officers' Certificate, any note or notes executed by Borrower in connection with this Agreement or any of the other Loan Documents and payable to a member of the Lender Group and any other agreement entered into, now or in the future, by Borrower, on the one hand, and one or more members of the Lender Group, on the other hand, in connection with this Agreement or any of the other Loan Documents. "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, individually, or Borrower Parties taken as a whole, (b) a material impairment of Borrower's ability to perform its or their obligations under the Loan Documents to which it is or they are a party or of the Lender Group's or Agent's ability to enforce the Obligations or realize upon the Collateral or (c) a material impairment of the enforceability or priority of Agent's, as the case may be, Liens with respect to the Collateral as a result of an action or failure to act on the part of Borrower. "Material Contract" means, with respect to any Person, (i) each contract, agreement, note, indenture, mortgage, instrument, guaranty or other evidence of indebtedness to which such Person or any of its Subsidiaries is a party involving aggregate consideration payable to or by such Person or such Subsidiary of U.S. $250,000 or more (other than purchase orders in the ordinary course of the business of such Person or such Subsidiary and other than contracts that by their terms may be terminated by such Person or Subsidiary in the ordinary course of its business upon less than 60 days' notice without penalty or premium) and (ii) all other contracts, agreements, notes, indentures, mortgages, instruments, guarantees or evidences of indebtedness material to the business, operations, condition (financial or otherwise), performance, prospects or properties of such Person or such Subsidiary. "Maturity Date" has the meaning set forth in Section 3.2. "Moody's" means Moody's Investors Service, Inc. and any successor thereto. "Mortgages" means, individually and collectively, one or more mortgages, deeds of trust, debentures or deeds to secure debt, including without limitation, the Debenture, executed and delivered by Borrower in favor of Agent, for the benefit of, among other Persons, the Lender Group, in form and substance satisfactory to Agent, that encumber the Real Property Collateral, the Oil and Gas Properties and the related improvements thereto. "Negotiable Collateral" means all of Borrower's now owned and hereafter acquired right, title and interest with respect to letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents and chattel paper (including electronic chattel paper and tangible chattel paper) and any and all supporting obligations in respect thereof. "Net Cash Interest Coverage Ratio" means, as of any date of determination, the ratio of (i) EBITDA for such period to (ii) the Consolidated Net Interest Expense for such period. "New Notes" means Abraxas's Floating Rate Senior Secured Notes due 2009 issued by Abraxas pursuant to the New Notes Indenture. "New Notes Indenture" means the Indenture, dated as of the Closing Date, among Abraxas, each guarantor of the New Notes and the New Notes Trustee, as such may from time to time be amended, restated, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. "New Notes Trustee" means U.S. Bank, N.A., as trustee to the holders of the New Notes, and any successor thereto, as may be appointed pursuant to the terms of the New Notes Indenture. "Non-Resident Lender" means any Lender which is a non-resident as defined in subsection 248(1) of the Income Tax Act (Canada). "NYMEX" means the New York Mercantile Exchange or its successor entity. "NYMEX Strip Price" means the lower of (i) as of any date of determination the average of the 24 succeeding monthly futures contract prices, commencing with the month during which the determination date occurs, for each of the appropriate crude oil and natural gas categories included in the most recent Reserve Report provided by Borrower to Agent pursuant to Section 6.2(e), as quoted on the NYMEX; provided, that if the NYMEX no longer provides futures contract price quotes or has ceased to operate, the future contract prices used shall be the comparable futures contract prices quoted on such other nationally recognized commodities exchange as Agent shall designate and (ii) U.S. $27.43 per barrel of oil and U.S. $4.43 per MmBTU of natural gas produced from Oil and Gas Properties of Borrower provided, that with respect to the volume of Borrower's Hydrocarbons for which prices are fixed under an Acceptable Commodity Hedging Agreement, the NYMEX Strip Price for such volume of Hydrocarbons, if greater than the price determined above, shall be the price fixed under such Acceptable Commodity Hedging Agreement then in effect. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Codes, would have accrued), premiums, liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees (including the fees provided for in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Codes, would have accrued), lease payments, guarantees, covenants and duties of any kind and description owing by Borrower to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Group Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law or otherwise. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals replacements, substitutions and supplements thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding. "Officers' Certificate" means the representations and warranties of officers form submitted by Agent to Borrower, together with Borrower's completed responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Agent. "Oil and Gas Business" means (a) the acquisition, exploration, exploitation, development, operation and disposition of interests in Oil and Gas Properties and Hydrocarbons, (b) the gathering, marketing, treating, processing, storage, selling and transporting of any production from such interests or properties, including, without limitation, the marketing of Hydrocarbons obtained from unrelated Persons, (c) any business relating to or arising from exploration for or development, production, treatment, processing, storage, transportation or marketing of oil, gas and other minerals and products produced in association therewith, (d) any business relating to oilfield sales and service and (e) any activity that is ancillary or necessary or desirable to facilitate the activities described in clauses (a) through (d) of this definition. "Oil and Gas Properties" means all (a) Hydrocarbon Interests, (b) personal property and/or real property now or hereafter pooled or unitized with Hydrocarbon Interests, (c) presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including without limitation all units created under orders, regulations and rules of any Governmental Authority having jurisdiction) which may affect all or any portion of the Hydrocarbon Interests, (d) pipelines, gathering lines, compression facilities, tanks and processing plants, (e) oil wells, gas wells, water well, injection wells, platforms, spars or other offshore facilities, casings, rods, tubing, pumping units and engines, Christmas trees, derricks, separators, gun barrels, flow lines, gas systems (for gathering, treating and compression) and water systems (for treating, disposal and injection), (f) interests held in royalty trusts whether presently existing or hereafter created, (g) Hydrocarbons in and under and which may be produced, saved, processed or attributable to the Hydrocarbon Interests, the lands covered thereby and all Hydrocarbons in pipelines, gathering lines, tanks and processing plants and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests, (h) tenements, hereditaments, appurtenances and personal property and/or real property in any way appertaining, belonging, affixed or incidental to the Hydrocarbon Interests and all rights, titles, interests and estates described or referred to above, including any and all real property, now owned or hereafter acquired, used or held for use in connection with the operating, working or development of any of such Hydrocarbon Interests or personal property and/or Real Property and including any and all surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing and (i) oil, gas and mineral leasehold, fee and term interests, overriding royalty interests, mineral interests, royalty interests, net profits interests, net revenue interests, oil payments, production payments, carried interests, leases, subleases, farm-outs and any and all other interests in Hydrocarbons, in each case whether now owned or hereafter acquired directly or indirectly. "Originating Lender" has the meaning set forth in Section 14.1(e). "Participant" has the meaning set forth in Section 14.1(e). "Participant Register" has the meaning set forth in Section 14.1(i). "Permitted Discretion" means a determination made in good faith and in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment. "Permitted Dispositions" means (a) sales or other dispositions by Borrower or its Subsidiaries of Equipment that is substantially worn, damaged, no longer used, surplus, or obsolete in the ordinary course of Borrower's or its Subsidiaries' business, (b) sales by Borrower or its Subsidiaries of Inventory, including Hydrocarbons, to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents by Borrower in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, (d) the licensing by Borrower or its Subsidiaries, on a non-exclusive basis, of patents, trademarks, copyrights and other intellectual property rights in the ordinary course of Borrower's or its Subsidiaries' business, (e) releases or surrenders (in accordance with the terms of the relevant lease, where applicable) and sales or other dispositions of properties or leasehold interests in properties with no Proved Reserves, (f) releases or surrenders (in accordance with the terms of the relevant lease, where applicable) and sales or other dispositions of properties or leasehold interests in properties with Proved Undeveloped Reserves to the extent Agent consents to such releases, surrenders, sales or dispositions, (g) transfers or assignments of interests in Farmout Properties in accordance with the terms of Permitted Farmout Agreements, (h) sales or other dispositions of properties or leasehold interests in properties with Proved Reserves, other than Farmouts, with an aggregate PV-10 attributable to such reserves of less than $100,000, provided that the aggregate net cash proceeds received upon the consummation of such transaction pursuant to this clause (g) shall not exceed $500,000 in any 12 calendar month period, (i) Permitted PUD/PDNP Dispositions, (j) the disposition contemplated in the PrimeWest Farmout Agreements, and (k) such other sales or other dispositions as may be agreed to by Agent in its Permitted Discretion. "Permitted Farmout Agreement" means (i) the PrimeWest Farmout Agreements; and (ii) any other Farmout Agreement entered into by Borrower, as the farmor, in the ordinary course of business, (a) covering Farmout Property of Borrower that does not include proved oil or natural gas properties (other than those (i) proved by the efforts to obtain production taken pursuant to such Farmout Agreement or (ii) that are not then otherwise included in the Borrower's PV-10 or as a proved reserve in any reserve or other report prepared by or on behalf of us in amount which exceeds either U.S. $150,000 with respect to any individual property subject to such Farmout Agreement or U.S. $500,000 when aggregated with any other proved oil or natural gas property then subject to such Farmout Agreement or any other Farmout Agreement) and (b) that, as determined in good faith by the Board of Directors of Borrower and evidenced by a resolution of such Board of Directors delivered to Agent (or, solely with respect to any Farmout with a Farmout Property Value not exceeding U.S. $1,000,000, as determined in good faith by the chief executive officer of Borrower and evidenced by an officers' certificate delivered to Agent), is in the best interests of Borrower and does not adversely affect the ability of Borrower to perform its respective obligations under the Loan Documents. "Permitted Investments" means (a) investments in Cash Equivalents, (b) investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, (d) investments made in the ordinary course of, and of a nature that is customary in, the Oil and Gas Business as a means of actively exploiting, exploring for, acquiring, developing, processing, gathering, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit one to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of the Oil and Gas Business jointly with third parties, including, without limitation, the entry into operating agreements, working interests, royalty interests, mineral leases, processing agreements, Farmout Agreements, division orders, contracts for the sale, transportation or exchange of oil or natural gas, unitization and pooling declarations and agreements and area of mutual interest agreements, production sharing agreements or other similar or customary agreements, transactions, properties, interests and investments and expenditures in connection therewith; provided that for purposes of this clause (d), an investment in Shares, partnership or joint venture interests (other than interests arising from Permitted Farmout Agreements or other similar operating agreements entered into in the ordinary course of the Oil and Gas Business), limited liability company interests or other similar equity interests in a Person shall not constitute a Permitted Investment and (e) other Investments by Borrower in any Person so long as the aggregate fair market value of all such Investments (determined in good faith by the chief financial officer of the Company and measured as of the date each such Investment is made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (e) (net of returns of capital, dividends and interest paid on Investments and sales, liquidations and redemptions of Investments), does not exceed $100,000 after the Closing Date and (f) other Investments as may be agreed to by Agent. "Permitted Liens" means (a) Liens held by Agent for the benefit of Lender Group, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default or an Unmatured Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases, (e) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, performance bonds, regulatory compliance in connection with the Oil and Gas Business or leases incurred in the ordinary course of business and not in connection with the borrowing of money, (i) Liens granted as security for surety bonds, performance bonds or appeal bonds in connection with obtaining such bonds in the ordinary course of business, (j) Liens resulting from any judgment or award that is not an Event of Default or an Unmatured Default hereunder, (k) Liens with respect to the Real Property (not including Oil and Gas Properties) constituting easements, rights of way, zoning restrictions and other minor imperfections of title that do not materially interfere with or impair the use or operation thereof, (l) with respect to the Oil and Gas Properties, imperfections of title as described in title opinions delivered and which are acceptable to Agent, (m) Liens for royalties, overriding royalties, net profit interests, reversionary interests, operating agreements and other similar interests, properties, arrangements and agreements as they relate to Hydrocarbon Interests of Borrower, to the extent such Liens are customary in the Oil and Gas Business, are incurred in the ordinary course of business, do not secure Indebtedness for borrowed money and which secure sums which are not then required to be paid, (n) Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of Borrower on deposit with or in possession of such bank to the extent such Liens secure Indebtedness under Section 7.1(g), (o) Liens on cash and Cash Equivalents securing the performance obligations of Borrower under Hedging Agreements so long as the aggregate amount of obligations secured by such Liens at any time outstanding does not exceed $100,000, (p) Liens in favor of Persons financing unpaid insurance premiums so long as such Liens are limited to insurance policies with respect to which such premiums are financed, (q) non-consensual statutory Liens on pipeline or pipeline facilities, Hydrocarbons or properties and assets of Borrower which arise out of operation of law and are not in connection with the borrowing of money, (r) Liens pursuant to documents governing Permitted Farmout Agreements, (s) Liens not otherwise permitted under this Agreement incurred in the ordinary course of business of Borrower securing Indebtedness of Borrower in an aggregate principal amount at any time outstanding not to exceed $20,000 and (t) other Liens securing other obligations of Borrower to the extent permitted by Agent in its Permitted Discretion. "Permitted Protest" means the right of Borrower or any of its Subsidiaries, as applicable, to protest any Lien (other than any such Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a Canadian federal or provincial deemed trust) or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Borrower or any of its Subsidiaries, as applicable, in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity or priority of any of the Liens of Agent. "Permitted PUD/PDNP Dispositions" means releases, surrenders, sales or other dispositions of properties or leasehold interests in properties with Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves so long as (i) no Default, Unmatured Default or Event of Default shall have occurred and be continuing prior to and after giving effect to such release, surrender, sale or disposition, (ii) the ratio of (A) the net cash proceeds received by Borrower on the date of the consummation of such transaction as consideration for any such release, surrender, sale or disposition to (B) the PV-10 of the applicable Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves subject to such release, surrender, sale or disposition, as shown on the most recent Reserve Report, equals or exceeds 1.25 to 1.00, and (iii) the aggregate net cash proceeds received in connection with such releases, surrenders, sales or other dispositions do not exceed $200,000 after the Closing Date. "Permitted Purchase Money Indebtedness" means, as of any date of determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate principal amount outstanding at any one time not in excess of U.S. $500,000 (or such higher amount as may be agreed to by Agent). "Person" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Petroleum Engineers" means (i) DeGolyer & McNaughton, (ii) McDaniel & Associates Consultants Ltd. or (iii) such other petroleum engineers of recognized national standing as may be selected by Borrower with the prior consent of Agent. "PPSA" means the Personal Property Security Act (Alberta), R.S.A. 2000, c. P-7, as amended. "PrimeWest Farmout Agreements" means the farmout agreements dated January 23, 2003 between the Borrower and PrimeWest Energy Inc. as provided to the Agent by the Borrower prior to the Closing Date. "Projections" means forecasted (a) balance sheets, (b) profit and loss statements and (c) cash flow statements of Borrower Parties, all prepared on a basis consistent with Borrower Parties' historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Pro Rata Share" means: (a) with respect to a Lender's obligation to make the Loan and receive payments of principal, interest, fees, costs and expenses with respect thereto, (i) prior to the making of the Loan, the percentage obtained by dividing (x) such Lender's Commitment by (y) the aggregate amount of all Lenders' Commitments and (ii) from and after the making of the Loan, the percentage obtained by dividing (x) the principal amount of such Lender's portion of the Loan Amount by (y) the Loan Amount, and (b) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) the unpaid principal amount of such Lender's portion of the outstanding Loan by (ii) the aggregate unpaid principal amount of the outstanding Loan. "Proved Developed Non-Producing Reserves" means those Oil and Gas Properties designated as "proved developed non-producing" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Proved Developed Producing Reserves" means those Oil and Gas Properties designated as "proved developed producing" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Proved Reserves" means those Oil and Gas Properties designated as "proved" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "Proved Undeveloped Reserves" means those Oil and Gas Properties designated as "proved undeveloped" (in accordance with the Definitions for Oil and Gas Reserves approved by the board of directors of the Society for Petroleum Engineers, Inc. from time to time) in the Reserve Report. "PV-10" means, as of any date of determination, the sum of the present values of the amounts of net revenues before income taxes expected to be received in each of the months following the date of determination on the basis of estimated production from Proved Reserves during such months determined as follows: (i) each such monthly net revenue amount shall be calculated (x) on the basis of the applicable NYMEX Strip Price for the appropriate category of oil or gas as of such date of determination, adjusting such price to reflect (A) the appropriate Basis Differential with respect to Hydrocarbons produced from specific Oil and Gas Properties of Borrower and as set forth on Exhibit PV-10, as such Exhibit may from time to time be amended at the request of Borrower with the written consent of Agent, (B) the prices for fixed price contracts for such month and (C) Btu content, (y) assuming that production costs remain constant throughout the periods of the calculation of such monthly net revenues and (z) otherwise applying the financial accounting and reporting standards prescribed by the SEC for application of the successful efforts method of accounting for such revenues under Rule 4-10 of Regulation S-X as promulgated by the SEC from time to time; and (ii) the present value of each such monthly net revenue amount shall be determined by discounting each such monthly net revenue amount from the month in which it is expected to be received, on a monthly basis, to such date of determination at a rate of 10% per annum. "Purchase Money Indebtedness" means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 20 days after (or such other period as may be agreed to by Agent), the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. "Qualified Capital" means (a) common Shares of Borrower or (b) other Shares of Borrower that is not (i) stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is mandatorily redeemable at the sole option of the holder thereof, in whole or in part, in either case, or on prior to 91 days after the payment in full in cash of all Obligations after the termination of the Commitments or (ii) Shares that, by its terms, by the terms of any security into which it is convertible or exchangeable, by contract or otherwise, requires, or upon the happening of an event or passage of time would require, the payment of dividends (other than dividends paid (A) in Qualified Capital and/or (B) from a segregated reserve account funded solely from the amounts paid by the purchaser or purchasers of such Shares in connection with the issuance and sale thereof) on or prior to 91 days after the payment in full in cash of all Obligations after the termination of the Commitments. "Real Property" means any estates or interests in real property now owned or hereafter acquired by Borrower and the improvements thereto. "Real Property Collateral" means (i) the parcel or parcels of Real Property identified on Parts A and C of Schedule 5.22 and (ii) any Real Property hereafter (A) acquired by Borrower in the case of Real Property constituting Oil and Gas Properties or (B) owned in fee in the case of Real Property not constituting Oil and Gas Properties. "Record" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "Refinancing Documents" means, collectively, (i) this Agreement and the other Loan Documents, (ii) the New Notes; and the New Notes Indenture, (iii) the Revolving Credit Facility, (iv) the Abraxas Bridge Loan Credit Facility and (v) all agreements, instruments and other documents delivered in connection with the foregoing. "Register" has the meaning set forth in Section 14.1(h). "Registered Loan" has the meaning set forth in Section 2.12. "Registered Note" has the meaning set forth in Section 2.12. "Related Fund" has the meaning set forth in the definition of "Eligible Transferee". "Related Indebtedness" means (i) Indebtedness under the Loan Documents related to any fees and expenses incurred by any Borrower Party incurred in connection with the Loan Documents (including, but not limited to, those owed to any Person not an Affiliate of any Borrower Party) in connection with any amendment (including any amendment and restatement thereof), supplement, replacement, restatement or other modification from time to time, including any agreements (and related instruments and documents) extending the maturity of, refinancing, replacement or other restructuring of all or any portion of the Indebtedness under the Loan Documents (and related instruments and documents) or any successor or replacement agreements (and related instruments and documents) and (ii) any capitalized interest, fees or other expenses incurred by any Borrower Party whether or not charged to the Loan Account or any similar account created under the Loan Documents. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, seeping, migrating, dumping or disposing of any Hazardous Material (including the abandonment or discarding of barrels, containers and other closed receptacles containing any Hazardous Material) into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through or in the ambient air, soil, surface or ground water, or property. "Remedial Action" means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations or post-remedial operation and maintenance activities. "Report" has the meaning set forth in Section 16.17. "Required Lenders" means, at any time, Agent, if at such time Agent or an Affiliate of Agent is a Lender, together with Lenders whose Pro Rata Shares (as determined pursuant to paragraph (a) of the definition thereof) aggregate more than 50%. "Reserve Report" means a report of the Petroleum Engineers in the form of the Initial Reserve Report, setting forth, as of June 30 or December 31 of any calendar year, and as of any other date on which a Reserve Report is required or permitted to be obtained pursuant to this Agreement, (i) the volumetric quantity (calculated using the same pricing assumptions as used in the calculation of PV-10) and the PV-10 (and, solely with respect to the Reserve Report dated December 31 of any year, the SEC Value), of the oil and gas reserves attributable to the Oil and Gas Properties of Borrower, together with a projection of the rate of production and future net income, taxes, operating expenses and Capital Expenditures with respect thereto as of such date, and (ii) such other information as Agent may reasonably request, all in form and substance satisfactory to Agent. Any reference herein to a Reserve Report without reference to the date thereof shall, unless the context otherwise requires, refer to the most recent Reserve Report. "Reserve Report Delivery Date" means the date on which Agent receives from Borrower the most recent Reserve Report required to be delivered by Borrower in accordance with Section 6.2(e). "Revolving Credit Facility" means the loan agreement, dated as of the Closing Date, among Abraxas, the Subsidiaries of Abraxas party thereto, the lenders thereunder and as such may from time to time be amended, restated, supplemented, modified or otherwise changed in accordance with the terms of the Abraxas Bridge Loan Agreement. "Revolving Credit Facility Administration Agent" means Wells Fargo Foothill, Inc., as agent for the lenders under the Revolving Credit Facility and any successor thereto as may be appointed pursuant to the terms of the Revolving Credit Facility. "Revolving Credit Facility Documents" means the Revolving Credit Facility and each other agreement, instrument and document related thereto, as such may from time to time be amended, restated, supplemented, modified or otherwise changed in accordance with the terms of this Agreement. "SEC" means the United States Securities and Exchange Commission and any successor thereto. "SEC Value" means the future net revenues before income taxes from Proved Reserves, estimated utilizing the actual price for the appropriate category of oil or gas as of the date of determination and assuming that oil and natural gas prices and production costs thereafter remain constant, then discounted at the rate of 10% per year to obtain the present value and otherwise applying the financial accounting and reporting standards prescribed by the SEC for application of the successful efforts method of accounting under Rule 4-10 and Regulation S-X as promulgated by the SEC from time to time. "Section" means a section or subsection of this Agreement. "Securities Account" means a "securities account" as that term is defined in the Abraxas Bridge Loan Agreement. "Security" has the meaning attributed to it in Section 4.1 and includes any other Lien hereafter granted by Borrower to secure the payment of Indebtedness. "Shares" means all shares, options, warrants, interests, participations or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common Shares, preferred Shares or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Solvent" means, with respect to any Person on a particular date, that such Person is not an "insolvent person" as defined in the Bankruptcy and Insolvency Act (Canada). "Spread" means initially 625 bps (6.25%) and shall increase by 75 bps (0.75%) on April 29, 2005 and on the last day of each six month period thereafter during which any Obligation is outstanding. "Standard & Poor's" means Standard & Poor's Rating Services, a division of the McGraw-Hill Companies, Inc. and any successor thereto. "Subsidiary" means, with respect to any Person, a corporation, partnership, limited liability company or other entity in which that Person directly or indirectly owns or controls the Shares having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company or other entity. "Tax Payments" has the meaning set forth in Section 6.5. "Taxes" means all taxes of any kind or nature whatsoever including income taxes, capital taxes, minimum taxes, levies, imposts, stamp taxes, royalties, duties, charges to tax, value added taxes, commodity taxes, goods and services taxes, and all fees, deductions, compulsory loans, withholdings and restrictions or conditions resulting in a charge imposed, levied, collected, withheld or assessed as of the date hereof or at any time in the future by any Authorized Authority of or within any jurisdiction whatsoever having power to tax, together with penalties, fines, additions to tax and interest thereon and any instalments in respect thereof. "Unmatured Default" means an event, condition or default under Sections 8.2 or 8.11 that, after giving of notice by Agent to Borrower, would be an Event of Default. "U.S. Dollars" "U.S. $" means United States dollars. "Voidable Transfer" has the meaning set forth in Section 18.7. "Withholding Tax" means any amount on account of Taxes imposed or levied by or on behalf of the Government of Canada or any province or territory thereof or by any Authorized Authority therein or thereof having power to tax which the Borrower is required to deduct or withhold under Applicable Law in connection with the payment of any Obligations and all penalties, interest and other liabilities related thereto. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial or related covenant or a related definition, it shall be understood to mean Borrower and its Subsidiaries on a consolidated basis unless the context clearly requires otherwise. 1.3 Construction. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or". The words "hereof", "herein", "hereby", "hereunder" and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders and supplements thereto and thereof, as applicable (subject to any restriction on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders and supplements set forth therein or herein). Any reference herein to any law or other legislation or to any provision of any law or other legislation shall include any amendment, modification or re-enactment thereof, any law or other legislative provision substituted therefor and all regulations, rules and interpretations issued thereunder or pursuant thereto. Any reference herein to any Person shall be construed to refer to and include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.4 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference, and all references herein to this Agreement shall include such schedules and exhibits as so incorporated. 2. LOANS AND TERMS OF PAYMENT. 2.1 Loan. (a) Advance. Subject to the terms and conditions of this Agreement, each Lender agrees (severally, not jointly or jointly and severally) to make loans (the "Advances" and, collectively, the "Loan") to Borrower on the Closing Date in an amount equal to such Lender's Pro Rata Share of the Loan Amount; (b) Use of Proceeds. The Borrower shall use the proceeds of the Loan for a onetime cash distribution to Abraxas, which shall include the repayment of existing debt to Abraxas. 2.2 Borrowing Procedures. (a) Making of Advances. (i) Each Lender shall make the amount of such Lender's Pro Rata Share of the Borrowing available to Agent in immediately available funds, to Agent's Account, not later than 10:00 a.m. (Calgary time) on the Closing Date. After Agent's receipt of the proceeds of such Advances, upon satisfaction of the conditions precedent set forth in Section 3, Agent shall make the proceeds thereof available to Borrower on the Closing Date by transferring immediately available funds equal to such proceeds received by Agent to Borrower's Designated Account; provided, however, that, Agent shall not request any Lender to make, and no Lender shall make, any Advance if Agent shall have actual knowledge that one or more of the conditions precedent set forth in Section 3 will not be satisfied on the Closing Date unless such condition has been waived. (ii) Agent may assume that each Lender will make the amount of that Lender's Pro Rata Share of the Loan available to Agent in immediately available funds on the Closing Date pursuant to Section 2.2(a)(i), and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds pursuant to Section 2.2(a)(i) and Agent in such circumstances has made available to Borrower such amount, that Lender shall on the Business Day following the Closing Date make such amount available to Agent, together with interest at the Interest Rate for each day during such period. A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is so made available, such payment to Agent shall constitute such Lender's Advance on the date of the Borrowing for all purposes of this Agreement. If such amount is not made available to Agent on the Business Day following the Closing Date, Agent will notify Borrower of such failure to fund and, upon demand by Agent, Borrower shall pay such amount to Agent for Agent's account, together with interest thereon for each day elapsed since the date of the Borrowing, at a rate per annum equal to the Interest Rate. The failure of any Lender to make any Advance on the Closing Date shall not relieve any other Lender of any obligation hereunder to make an Advance on the Closing Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the Closing Date. (iii) Agent shall not be obligated to transfer to a Defaulting Lender any payment made by Borrower to Agent for the Defaulting Lender's benefit and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payment to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender's Advance was funded by the other members of the Lender Group) or, if so directed by Borrower and if no Default or Event of Default had occurred and is continuing (and to the extent such Defaulting Lender's Advance was not funded by the Lender Group), retain same to be re-advanced to Borrower as if such Defaulting Lender had made Advances to Borrower. Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrower for the account of such Defaulting Lender the amount of all such payments received and retained by it for the account of such Defaulting Lender. Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a "Lender" and such Lender's Commitment shall be deemed to be zero. This Section 2.2(a)(iii) shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent and Borrower shall have waived such Defaulting Lender's default in writing or (z) the Defaulting Lender makes its Pro Rata Share of the Advance and pays to Agent all amounts owing by such Defaulting Lender in respect thereof. The operation of this Section 2.2(a)(iii) shall not be construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder or to relieve or excuse the performance by Borrower of its duties and obligations hereunder to Agent or to Lenders other than such Defaulting Lender. Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be acceptable to Agent. In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no right to refuse to be replaced hereunder and agrees to execute and deliver a completed form of Assignment and Acceptance Agreement in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations without any premium or penalty of any kind whatsoever; provided further, however, that any such assumption of the Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups' or Borrower's rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund. (b) Notation. Agent shall record on its books the principal amount and type of the Advances owing to each Lender from time to time. In addition, each Lender is authorized, at such Lender's option, to note the date and amount of each payment or prepayment of principal of such Lender's Advances in its books and records, including computer records, such books and records constituting conclusive evidence, absent manifest error, of the accuracy of the information contained therein. (c) Lenders' Failure to Perform. All Advances shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit (if any)) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder. 2.3 Payments. (a) Payments by Borrower. (i) Except as otherwise expressly provided herein, all payments by Borrower shall be made to Agent's Account for the account of the Lender Group and shall be made in immediately available funds, no later than 11:00 a.m. (Calgary time) on the date specified herein. Any payment received by Agent later than 11:00 a.m. (Calgary time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) Unless Agent receives notice from Borrower prior to the date on which any payment is due to Lenders that Borrower will not make such payment in full as and when required, Agent may assume that Borrower has made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower does not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid. (b) Apportionment and Application of Payments. (i) Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including letter agreements, if any, between and/or among Agent and/or individual Lenders), aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations held by each Lender) and payments of fees and expenses shall be apportioned ratably among the Lenders (other than payments received while no Unmatured Default or Event of Default has occurred and is continuing and which relate to the payment of principal or interest of specific Obligations), and all proceeds of Accounts or other Collateral received by Agent, shall be applied (unless otherwise agreed by the Required Lenders) as follows: (A) first, to pay any Lender Group Expenses then due to Agent under the Loan Documents, until paid in full, (B) second, to pay any Lender Group Expenses then due to the Lenders under the Loan Documents, on a ratable basis, until paid in full, (C) third, to pay any fees then due to Agent (in each case for its separate account and after giving effect to any letter agreements between Agent and individual Lenders) under the Loan Documents, until paid in full, (D) fourth, to pay any fees then due to any or all of the Lenders (after giving effect to any letter agreements between Agent and individual Lenders) under the Loan Documents, on a ratable basis, until paid in full, (E) fifth, to pay interest due in respect of the Advances, until paid in full, (F) sixth, to pay the principal of all Advances, until paid in full, (G) seventh, to pay any other Obligations, until paid in full, and (H) eighth, to Borrower (to be wired to the Designated Account) or such other Person entitled thereto under applicable law. (ii) Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive. (iii) In each instance, so long as no Unmatured Default or Event of Default has occurred and is continuing, Section 2.3(b)(i) shall not be deemed to apply to any payment by Borrower specified by Borrower to be for the payment of specific Obligations then due and payable (or prepayable under any provision of this Agreement). (iv) For purposes of the foregoing, "paid in full" means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest and expense reimbursements, whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding. (v) In the event of a direct conflict between the priority provisions of this Section 2.3 and other provisions contained in any other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.3 shall control and govern. 2.4 Repayment of Obligations. (a) Promise to Pay. Borrower hereby promises to pay the Obligations (including principal, interest, fees, costs and expenses) in U.S. Dollars in full to the Lender Group as and when due and payable under the terms of this Agreement and the other Loan Documents. (b) Scheduled Principal Payments. Without limiting Sections 2.13 or 9.1(a), Borrower will make the following scheduled principal payments: (i) on the first anniversary hereof, U.S. $1,750,000; (ii) on the second anniversary hereof, U.S. $1,750,000; (iii) on the third anniversary hereof, U.S. $1,750,000; (iv) on the fourth anniversary hereof, U.S. $3,500,000; and (v) on the Maturity Date, the principal and any other amounts that remain outstanding hereunder. 2.5 Interest Rates; Payments and Calculations. (a) Interest Rates. Except as provided in clause (b) below, all Obligations, whether or not charged to the Loan Account pursuant to the terms hereof, shall bear interest on the Daily Balance thereof at a per annum rate equal to the Interest Rate. (b) Default Rate. Upon the occurrence and during the continuation of an Event of Default (and at the election of Agent or the Required Lenders), all Obligations, whether or not charged to the Loan Account pursuant to the terms hereof, shall bear interest on the Daily Balance thereof at a per annum rate equal to 4.00 percentage points above the per annum rate otherwise applicable hereunder. (c) Payment. (i) Interest in respect of the Obligations shall be due and payable, in arrears, on the first Business Day of each calendar quarter, beginning on January 1, 2005, at any time that Obligations are outstanding (each such date, an "Interest Payment Date"). All fees payable hereunder shall be due and payable on the date upon which such fees are due and payable hereunder. Borrower hereby authorizes Agent, from time to time without prior notice to Borrower, to, and Agent agrees that it may (at its sole and absolute discretion), charge such interest and fees, all Lender Group Expenses (as and when incurred), the fees and costs provided for in Section 2.10 (as and when accrued or incurred) and all other payments as and when due and payable under any Loan Document, to Borrower's Loan Account, which amounts thereafter shall be deemed to constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded by being charged to Borrower's Loan Account and shall thereafter be deemed to constitute an Advance hereunder and shall accrue interest at a per annum rate equal to the Interest Rate in existence from time to time. (ii) All interest accruing on Obligations pursuant to the terms of this Agreement shall be payable in immediately available funds on the respective Interest Payment Date. (d) Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360-day year for the actual number of days elapsed. The rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to any change in the Base Rate. (e) Maximum Rate of Return. Notwithstanding any provision herein to the contrary, in no event will the aggregate "interest" (as defined in Section 347 of the Criminal Code (Canada)) payable under this Agreement exceed the maximum effective annual rate of interest on the "credit advanced" (as defined in that Section 347) permitted under that section and, if any payment, collection or demand pursuant to this Agreement in respect of "interest" (as defined in that Section 347) is determined to be contrary to the provisions of that Section 347, such payment, collection or demand will be deemed to have been made by mutual mistake of Borrower and the applicable Lenders and the amount of such payment or collection will be refunded to Borrower. For purposes of this Agreement, the effective annual rate of interest will be determined in accordance with generally accepted actuarial practices and principles over the term of this Agreement on the basis of annual compounding of the lawfully permitted rate of interest and, in the event of dispute, a certificate of a Fellow of the Canadian Institute of Actuaries appointed by Agent will be prima facie evidence, for the purposes of such determination. 2.6 Cash Management. The Borrower shall establish and maintain cash management services in accordance with the terms of the Collateral Documents. 2.7 Crediting Payments. The receipt of any payment item by Agent shall not be considered a payment on account unless such payment item is a wire transfer of immediately available funds made to Agent's Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Agent only if it is received into Agent's Account on a Business Day on or before 11:00 a.m. (Calgary time). If any payment item is received into Agent's Account on a non-Business Day or after 11:00 a.m. (Calgary time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day. 2.8 Designated Account. Agent is authorized to make the Advances under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.5(c). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances made hereunder. Unless otherwise agreed by Agent and Borrower, any Advance made hereunder shall be made to the Designated Account. 2.9 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances made by (or deemed to be made by) Agent or the Lenders to Borrower or for Borrower's account and all other payment Obligations hereunder or under the other Loan Documents, including accrued interest, fees and expenses and Lender Group Expenses. In accordance with Section 2.7, the Loan Account will be credited with all payments received by Agent from Borrower or for Borrower's account. Agent shall render statements regarding the Loan Account to Borrower, including principal, interest, fees and an itemization of all charges and expenses constituting Lender Group Expenses owing, and each such statement shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within 30 days after receipt thereof by Borrower, Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 2.10 Fees and Charges. Borrower shall pay to Agent the following fees and charges, which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is terminated thereafter): (a) Closing Fees. Borrower will pay or cause to be paid to Agent a closing fee as and when due and payable under the terms of the Fee Letter. (b) Audit, Appraisal and Valuation Charges. For the separate account of Agent, Borrower shall pay audit, appraisal and valuation fees and charges as follows, a fee of U.S. $850 per day, per auditor (such fees for all auditors for any single financial audit not to exceed U.S. $5,000 in the aggregate), plus out-of-pocket expenses for each financial audit of Borrower performed by personnel employed by Agent, (ii) a fee of U.S. $1,500 per day per appraiser, plus out-of-pocket expenses, for each appraisal of the Collateral performed by personnel employed by Agent, and (iii) the actual charges paid or incurred by Agent if it elects to employ the services of one or more third Persons to perform financial audits of Borrower, to appraise the Collateral, or any portion thereof, to review or examine the Oil and Gas Properties of Borrower or to assess Borrower's business valuation, provided, that, (x) with respect of clause (i) above, so long as no Event of Default shall have occurred and be continuing, Borrower shall not be obligated to pay for more than four financial audits during any calendar year and (y) with respect to any Reserve Report requested by Borrower or Agent (in addition to the Reserve Reports required to be delivered semi-annually by Borrower to Agent pursuant to Section 6.2(e)), the party requesting the issuance of such Reserve Report shall pay the costs and expenses associated therewith in the absence of a continuing Default or Event of Default (and during a continuing Default, Unmatured Default or Event of Default, such Reserve Report shall be at Borrower's sole cost and expense). (c) Lender Group Expenses. Lender Group Expenses in accordance with Section 16.17, or, if earlier, upon demand of Agent or any Lender entitled thereto. 2.11 Capital Requirements. If, after the date hereof, any Lender determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by such Lender or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), the effect of reducing the return on such Lender's or such holding company's capital as a consequence of such Lender's Commitments hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital) by any amount deemed by such Lender to be material, then such Lender may notify Borrower and Agent thereof. Following receipt of such notice, Borrower agrees to pay such Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender's calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, such Lender may use any reasonable averaging and attribution methods. 2.12 Registered Loans and Registered Notes. Borrower agrees to record each Advance on the Register referred to in Section 14.1(h). Each Advance recorded on the Register (a "Registered Loan") may not be evidenced by promissory notes other than Registered Notes (as defined below). Upon the registration of any Advance, Borrower agrees, at the request of any Lender, to execute and deliver to such Lender a promissory note, in conformity with the terms of this Agreement, in registered form to evidence such Registered Loan, in form and substance reasonably satisfactory to Agent and such Lender, and registered as provided in Section 14.1(h) (a "Registered Note"), payable to the order of such Lender and otherwise duly completed. Once recorded on the Register, each Advance may not be removed from the Register so long as it or they remain outstanding, and a Registered Note may not be exchanged for a promissory note that is not a Registered Note. 2.13 Repayment of Advances. Without limiting Section 2.4(b), Borrower may prepay Advances at any time without payment of any prepayment premium or other prepayment fee, but subject to Section 3.4, if applicable, and to the following terms and conditions: (a) Borrower shall have provided 10 days' prior written notice to Agent of the prepayment date and the amount of such prepayment; (b) any such prepayment shall be in a minimum amount equal to the lesser of (x) U.S. $1,000,000 and (y) the aggregate unpaid principal amount of the Loan then outstanding; (c) except for any such prepayment in connection with the termination of this Agreement pursuant to Section 3.4, each such prepayment shall occur on and be effective as of an Interest Payment Date; and (d) any such prepayment shall be applied to the principal amounts payable in accordance with Section 2.4 in reverse order of maturity. 3. CONDITIONS; TERM OF AGREEMENT; TERMINATION OF AGREEMENT AND REDUCTION OF COMMITMENTS. 3.1 Conditions Precedent to the Making of the Loan. The obligation of the Lender Group (or any member thereof) to make the Loan (or otherwise to extend any credit provided for hereunder) is subject to the fulfillment, to the satisfaction of Agent, of each of the conditions precedent set forth below: (a) Agent shall have received and filed all personal property registry or other financing statements required by the Agent, duly executed or otherwise authorized by Borrower and Agent shall have received evidence reflecting the filing of all such financing statements; (b) Agent shall have received all personal property registry, Alberta Energy or other discharge documents relating to the security registrations made by the Existing Credit Agreement Agent along with an authorization to discharge addressed to Agent and its' legal counsel authorizing the filing of such discharge documents in respect of such security registrations; (c) Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect: (i) the Control Agreement, (ii) the Debenture, (iii) the Fee Letter, (iv) if the Closing Date is not the same date that this Agreement is executed and delivered by Borrower and the Lender Group, the Officers' Certificate; (d) Agent shall have received a certificate from an Authorized Person of Borrower (i) attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute the same; (e) Agent shall have received copies of Borrower's Governing Documents, as amended, modified or supplemented to the Closing Date, certified by an Authorized Person of Borrower; (f) Agent shall have received a certificate of status with respect to Borrower, dated within 10 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdiction of organization of Borrower, along with any other jurisdictions in which Borrower is registered to carry on business, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (g) Agent shall have received certificates of insurance, together with the endorsements thereto, as are required by Section 6.6, the form and substance of which shall be satisfactory to Agent; (h) Agent shall have received an opinion of Borrower's counsel in form and substance satisfactory to Agent; (i) Agent shall have received satisfactory evidence (including a certificate of an Authorized Person of Borrower) that all tax returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income and franchises (including Real Property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (j) Borrower shall pay all Lender Group Expenses incurred in connection with the transactions evidenced by this Agreement; (k) (i) Agent shall have received updated land records and/or title searches and abstracts of Oil and Gas Properties of Borrower, the review of which shall be satisfactory to Agent and (ii) Agent shall have received Mortgages on such Oil and Gas Properties of Borrower, for the benefit of the Lender Group, that are valid and enforceable first priority mortgage Liens on such Oil and Gas Properties of Borrower free and clear of all Liens except Permitted Liens; (l) Agent shall have received the Initial Reserve Report, which shall be satisfactory to the Lender Group; (m) Agent shall have received satisfactory evidence verifying all production taxes and royalty payments pertaining to each well comprising a part of the Oil and Gas Properties of Borrower are current; (n) Agent shall have received satisfactory evidence (including a certificate of an Authorized Person or Abraxas) that Abraxas shall have consummated the Abraxas Bridge Loan Facility pursuant to the terms and conditions of the Abraxas Bridge Loan Facility and is in compliance with all applicable laws, and all conditions precedent to the making of the "Loan" thereunder are met; (o) no Material Adverse Change shall have occurred; (p) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed or recorded and shall be in form and substance satisfactory to Agent; (q) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct on and as of the Closing Date, as though made on and as of the Closing Date (except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct on and as of such earlier date); (r) no Default or Event of Default shall have occurred and be continuing on the Closing Date, nor shall either result from the making of the Loan; and (s) no injunction, writ, restraining order or other order of any nature prohibiting, directly or indirectly, the extending of the Loan shall have been issued and remain in force by any Governmental Authority against Borrower, Agent, any Lender or any of their Affiliates. 3.2 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower, Agent and Lenders and shall continue in full force and effect for a term ending the day after the fifth (5th) anniversary of the Closing Date (the "Maturity Date"). The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.3 Effect of Termination. On the date of termination of this Agreement, all Obligations immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of its respective duties, Obligations or covenants hereunder and Agent's Liens in the Collateral (with respect to the Obligations) shall remain in effect until all Obligations have been fully and finally discharged and any obligation of Lender to provide additional credit hereunder has been terminated. When this Agreement has been terminated and all of the Obligations have been fully and finally discharged and any obligation of Lender to provide additional credit under the Loan Documents has been terminated irrevocably, Agent will, at Borrower's sole expense, execute and deliver any personal property registry discharge statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Liens of Agent, and all notices of security interests and liens previously filed, with respect to the Obligations. 3.4 Early Termination. Without limiting Section 2.13, Borrower shall have the option, at any time upon 10 days' prior written notice to Agent, to terminate this Agreement by paying to Agent, on any Business Day (which need not be an Interest Payment Date), in cash, the then outstanding Obligations, in full. If Borrower has sent a notice of termination pursuant to the provisions of this Section 3.4, then Borrower shall be irrevocably obligated to repay the Obligations, in full, on the date set forth as the date of termination of this Agreement in such notice. 4. SECURITY. 4.1 Security. The present and future Indebtedness of Borrower to Agent and Lenders under the Loan and all other Indebtedness of Borrower to Agent and Lenders, howsoever arising or incurred hereunder and under the Documents, will be secured by the following (collectively, the "Security"): (a) a demand debenture (the "Debenture") in the amount of Cdn. $75,000,000 from Borrower (the Debenture to be substantially in the form of Schedule 4.1), to be registered in all appropriate jurisdictions; and (b) such documents and instruments, as may be requested by Agent, in its sole discretion, providing a fixed Lien, including without limitation, caveats, security notices and such other similar documentation, to be filed or registered in such public registry offices in Canada or any province thereof. 4.2 Sharing of Security. Borrower and Lenders agree and acknowledge that the Security is being shared equally among Lenders to secure Indebtedness of Borrower under the Loan and any hedging transactions with any Lender on a pari passu basis; and that Agent will hold the Security for the benefit of Agent and Lenders hereunder. 4.3 Exclusivity of Remedies. Nothing herein contained or in the Security now held or hereafter acquired by Agent and Lenders, nor any act or omission of Agent and Lenders with respect to any such Security, will in any way prejudice or affect the rights, remedies or powers of Agent and Lenders with respect to any other security at any time held by Agent and Lenders. 4.4 Form of Security. The Security will be in such form or forms as will be required by Agent, acting reasonably, and will be registered in such offices in Canada or the U.S. or any province or state thereof as Agent may from time to time reasonably require to protect the Liens created thereby. Should Agent determine at any time and from time to time that the form and nature of the then existing Security is deficient in any way or does not fully provide Agent and Lenders with the Liens and priority to which each is entitled hereunder, Borrower will forthwith execute and deliver or cause to be executed and delivered to Agent, at Borrower's expense, such amendments to the Security or provide such new security as Agent may reasonably request. 4.5 After-Acquired Property. All property acquired by or on behalf of Borrower after the date of execution of the Security which forms part of the property of Borrower or any Subsidiary (hereafter collectively referred to as "After-Acquired Property"), will be subject to the Security without any further conveyance, mortgage, pledge, charge, assignment or other act on the part of the parties hereto. Without limiting the effect of the preceding sentence, Borrower will, or will cause such Subsidiary to, from time to time execute and deliver and Agent will register, all at Borrower's expense, such instruments supplemental to the Security, in form and substance satisfactory to Agent, acting reasonably, as may be necessary or desirable to ensure that the Security as amended and supplemented constitutes in favour of Agent and Lenders an effective Lien (including without limitation, a fixed Lien pursuant to Section 4.6) to the extent created by the Security over such After-Acquired Property as required hereunder, subject only to Permitted Encumbrances which under applicable law rank in priority thereto. 4.6 Undertaking to Grant Fixed Charge Security. If Lenders, acting reasonably, determine in their sole discretion that it is necessary for their adequate protection, Borrower, at the request of Agent, will forthwith grant or cause to be granted to Agent for the benefit of Agent and Lenders a further fixed Lien (subject only to Permitted Encumbrances which under applicable law rank in priority thereto) in such of Borrower's property as Agent will, in its sole discretion, determine as security for all then present and future Indebtedness of Borrower to Agent and Lenders under the Loan. In this connection, Borrower will: (a) provide Agent with such information as is reasonably required by Agent to identify the property to be charged pursuant to this Section 4.6; (b) do all such things as are reasonably required to grant, in favour of Agent and Lenders, a fixed Lien (subject only to Permitted Encumbrances which under applicable law rank in priority thereto) in respect of such property to be so charged pursuant to this Section 4.6; (c) provide Agent with all corporate or partnership resolutions and other action, as reasonably required, for Borrower or such Subsidiary to grant the fixed Lien (subject only to Permitted Encumbrances which under applicable law rank in priority thereto) in the property identified by Agent to be so charged; (d) provide Agent with such security instruments and other documents which Agent, acting reasonably, deems are necessary to give full force and effect to the provisions of this Section 4.6; (e) assist Agent in the registration or recording of such agreements and instruments in such public registry offices in Canada or any province thereof as Agent, acting reasonably, deems necessary to give full force and effect to the provisions of this Section 4.6; and (f) pay all reasonable costs and expenses incurred by Agent in connection with the preparation, execution and registration of all agreements, documents and instruments, including any amendments to the Security, made in connection with this Section 4.6. 4.7 Discharge of Security. Agent and Lenders will discharge the Security at Borrower's expense forthwith after all of Borrower's Indebtedness under the Loan has been unconditionally and irrevocably paid or satisfied in full and each such facility has been cancelled. 4.8 Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that perfection or priority of Agent's security interest is dependent on or enhanced by possession, Borrower, immediately upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to Agent. 4.9 Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time after the occurrence and during the continuation of an Event of Default, Agent or Agent's designee may (a) notify Account Debtors of Borrower that the Accounts, chattel paper or General Intangibles have been assigned to Agent or that Agent has a security interest therein or (b) collect the Accounts, chattel paper or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Borrower agrees that it will hold in trust for Lender Group, as Lender Group's trustee, any Collections that it receives and immediately will deliver said Collections to Agent in their original form as received by Borrower. 4.10 Power of Attorney. Borrower hereby irrevocably makes, constitutes and appoints Agent (and any of Agent's officers, employees or agents designated by Agent), as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign Borrower's name on any invoice or bill of lading relating to the Collateral, drafts against Account Debtors or notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse Borrower's name on any Collection item that may come into Lender Group's possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle and adjust all claims under Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts, chattel paper or General Intangibles directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group's obligations to extend credit hereunder are terminated. 4.11 Right to Inspect. Agent and each Lender (through any of their respective officers, employees or agents) shall have the right, upon notice to Borrower, which notice shall not be required upon the occurrence and during the continuance of an Event of Default, from time to time hereafter to inspect the Books and to check, test and appraise the Collateral and review and examine the Oil and Gas Properties of Borrower and its Subsidiaries in order to verify Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 4.12 Control Agreements. Borrower agrees that it will not transfer assets out of any Securities Accounts other than as permitted under Section 7.19 and, if to another securities intermediary, unless Borrower, Agent and the substitute securities intermediary have entered into a Control Agreement. Borrower hereby agrees to take any and all action that Agent requests in order for Agent to obtain control in accordance with Sections 9-104, 9-105, 9-106 and 9-107 of the New York Uniform Commercial Code with respect to any Securities Accounts, DDA's, chattel paper, investment property and letter-of-credit rights. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other investment property or DDA, electronic chattel paper or letter-of-credit rights shall be modified by Borrower without the prior written consent of Agent. Upon the occurrence and during the continuance of a Default or Event of Default, the Agent may notify any securities intermediary or depository to liquidate the applicable Securities Account or any related investment property maintained or held thereby and remit the proceeds thereof to Agent's Account. 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender Group to enter into this Agreement, Borrower, makes the following representations and warranties to the Lender Group, which shall be true, correct and complete on and as of the Closing Date, as though made on and as of the Closing Date (except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct on and as of such earlier date), and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Borrower has good and indefeasible title to the Collateral and the Real Property (other than Oil and Gas Properties constituting Real Property) or good and defensible title to Oil and Gas Properties constituting Real Property, free and clear of Liens except for Permitted Liens. 5.2 Equipment. All of the Equipment is used or held for use in the business of Borrower and is fit for such purposes. 5.3 Location of Inventory and Equipment. The Equipment is located only at the locations identified on Schedule 5.3, other than such Equipment in transit or temporarily removed to a location not identified therein for refurbishment or repair. There is no location at which Borrower has any Inventory, including Hydrocarbon products (except for Hydrocarbon products in transit), other than the locations identified on Schedules 5.3 and 5.22. Each of Schedule 5.3 and 5.22 contains a true, correct and complete list of each location at which Hydrocarbon products of Borrower are stored. 5.4 Inventory Records. Borrower keeps correct and accurate records itemizing and describing the type and quantity of its Inventory and the book value thereof. 5.5 Location of Chief Executive Office. The chief executive office of Borrower is located at the address indicated on Schedule 5.5. 5.6 Due Organization and Qualification; Subsidiaries. (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in each jurisdiction where the failure to be so qualified reasonably could be expected to have a Material Adverse Change. (b) Set forth on Schedule 5.6(b) is a complete and accurate description of the authorized Share capital of Borrower, by class, and a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 5.6(b), there are no subscriptions, options, warrants or calls relating to any of Borrower's Share capital, including any right of conversion or exchange under any outstanding security or other instrument. Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any Shares or any security convertible into or exchangeable for any of its Shares. (c) Except as set forth in Schedule 5.6(c), Borrower has no Subsidiaries or other ownership interest (including the right to share in the profits and losses) of any other Person. Set forth on Schedule 5.6(c) is a complete and accurate list of Borrower's direct and indirect Subsidiaries and any other person in which Borrower otherwise has an ownership interest, showing (i) the jurisdiction of their organization, (ii) the number of shares of each class of common and preferred Shares authorized for each of such Subsidiaries and (iii) the number and the percentage of the outstanding Shares of each such class owned directly or indirectly by Borrower. All of the outstanding Shares of each such Subsidiary has been validly issued and is fully paid and non-assessable. 5.7 Due Authorization; No Conflict. (a) Borrower has full corporate power and authority to execute and deliver this Agreement and each other Loan Document to which it is a party and to perform its obligations hereunder and thereunder. The execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to which it is a party have been duly authorized by all necessary action on the part of Borrower. (b) The execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to which it is a party do not and will not (i) violate any provision of any law or regulation applicable to Borrower, the Governing Documents of Borrower or any order, judgment or decree of any court or other Governmental Authority binding on Borrower or its properties or assets, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under, any material contractual obligation of Borrower (including, without limitation, any Material Contract of Borrower), (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Liens granted pursuant to this Agreement or (iv) require any approval of Borrower's interestholders or any approval or consent of any Person under any material contractual obligation of Borrower that has not been obtained by Borrower on or prior to the Closing Date. (c) Other than the filing of personal property registry or other financing statements, security notices and Mortgages, the execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to which Borrower is a party do not and will not require any registration with, consent or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (d) Borrower has duly executed and delivered this Agreement and, on the Closing Date, each other Loan Document to which Borrower is a party and each other document contemplated hereby and thereby to which Borrower is a party will be duly and validly executed by Borrower. This Agreement constitutes, and each other Loan Document to which Borrower is a party and each other document contemplated hereby and thereby to which Borrower is a party, when executed and delivered by Borrower will constitute, a legally valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. (e) On and after the Closing Date, Agent will have a validly created, first priority perfected (except for certain real property filings) Lien on all of the Collateral, subject only to Permitted Liens. 5.8 Litigation. Other than those matters disclosed on Schedule 5.8, there are no actions, suits or proceedings pending or, to the best knowledge of Borrower, threatened against Borrower except for matters that are fully covered by insurance (subject to customary deductibles). 5.9 No Material Adverse Change. All financial statements relating to Borrower that have been delivered by Borrower to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrower's financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change. 5.10 Fraudulent Transfer. (a) Borrower is Solvent. (b) No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay or defraud either present or future creditors of Borrower. 5.11 Employee Benefits. Borrower does not maintain or contribute to any Benefit Plan. Borrower has satisfied the minimum funding standards of the Canadian Employee Benefit Laws and any other applicable law relating to employee benefits with respect to each Benefit Plan to which it is obligated to contribute. No event has occurred with respect to such Benefit Plan that reasonably could be expected to result in a Material Adverse Change. Borrower is not required to provide security to any Benefit Plan under Canadian Employee Benefit Laws. 5.12 Environmental Condition. Except as set forth on Schedule 5.12, (a) to Borrower's knowledge, no assets of Borrower have ever been used by Borrower or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release or transport, any Hazardous Materials, where such production, storage, handling, treatment, release or transportation was in violation, in any material respect, of applicable Environmental Law, (b) to Borrower's knowledge, no properties or assets of Borrower have ever been designated or identified in any manner pursuant to environmental protection statute as a Hazardous Materials disposal site, (c) Borrower has not received notice that a Lien arising under any Environmental Law has attached to any revenues or to any Real Property owned or operated by Borrower and (d) Borrower has not received a summons, citation, notice or directive from any Governmental Authority concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.13 Brokerage Fees. Other than GCF and its Affiliates, neither Abraxas nor Borrower has utilized the services of any broker or finder in connection with Borrower's obtaining financing from the Lender Group under this Agreement, and, other than GCF and its Affiliates, no brokerage commission or finders' fee is payable by Borrower in connection herewith. 5.14 Intellectual Property. Borrower owns, or holds licenses in, all trademarks, trade names, copyrights, patents, patent rights and licenses that are necessary to the conduct of its business as currently conducted. Attached hereto as Schedule 5.14 is a true, correct and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights and copyright registrations as to which Borrower is the owner or an exclusive licensee. 5.15 Leases. Borrower enjoys peaceful and undisturbed possession under all leases material to the business of Borrower and to which it is a party or under which it is operating. All of such leases are valid and subsisting and no material default by Borrower exists under any of them. There are no leases, subleases, contracts or other operating agreements with respect to any Oil and Gas Property that allocate operating expenses to Borrower in excess of Borrower working interest of record in the particular Oil and Gas Property subject to such lease, the sublease, contract or other operating agreement. 5.16 DDAs. Set forth on Schedule 5.16 are all of Borrower's DDAs, including, with respect to each depository (i) the name and address of such depository and (ii) the account numbers of the accounts maintained with such depository. 5.17 Compliance with the Law. Borrower has not violated any law or failed to obtain any material license, permit, franchise or other authorization from any Governmental Authority necessary for the ownership of any of its Oil and Gas Properties or the conduct of its business. The Oil and Gas Properties of Borrower (and assets and properties utilized therewith) have been maintained, operated and developed in a good and workmanlike manner and in substantial conformity with all applicable laws and all rules, regulations and orders of all Governmental Authorities having jurisdiction and in substantial conformity with the provisions of all leases, subleases or other contracts comprising a part of the Hydrocarbon Interests and other contracts and agreements forming a part of such Oil and Gas Properties; specifically in this connection, (i) except as set forth on Schedule 5.17, after the Closing Date, no such Oil and Gas Property is subject to having allowable production reduced below the full and regular allowable production (including the maximum permissible tolerance) because of any overproduction (whether or not the same was permissible at the time) prior to the Closing Date and (ii) none of the wells comprising a part of such Oil and Gas Properties (or assets and properties utilized therewith) is deviated from the vertical by more than the maximum permitted by applicable laws, regulations, rules and orders of any Governmental Authority. 5.18 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Borrower in writing to Agent or any Lender (including all information contained in the schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein does not, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrower in writing to Agent or any Lender will not on the date as of which such information is dated or certified contain any untrue statement of a material fact, and does not or will not on such date, as the case may be, omit to state any material fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. As of the date on which any Projections are delivered to Agent, such Projections will represent Borrower's good faith best estimate of its future performance for the periods covered thereby. 5.19 Indebtedness. Set forth on Schedule 5.19 is a true and complete list of all Indebtedness of Borrower which will be outstanding on the Closing Date (after giving effect to the Loan), and Schedule 5.19 accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 5.20 Oil and Gas Imbalances. Except as set forth on Schedule 5.20, on a net basis there are not gas imbalances, take-or-pay oil and gas or other prepayments with respect to the Oil and Gas Properties of Borrower which would require Borrower either to make cash settlements for such production or deliver Hydrocarbons produced from such Oil and Gas Properties at some future time without then or thereafter receiving full payments therefor exceeding two percent (2%) of the current monthly production of oil and gas from the Oil and Gas Properties of Borrower in the aggregate. 5.21 Hedging Agreements. Schedule 5.21 sets forth a true and complete list of all Hedging Agreements (including commodity price swap agreements, forward agreements or contracts of sale which provide for prepayment for deferred shipment or delivery of Hydrocarbons or other commodities) of Borrower, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), all credit support agreements relating thereto (including any margin required or supplied) and the counterparty to each such agreement. 5.22 Location of Real Property and Leased Premises. (a) (i) Part A of Schedule 5.22 lists completely and correctly all Real Property (other than Oil and Gas Properties) owned in fee by Borrower and the respective addresses thereof, (ii) Part B of Schedule 5.22 lists completely and correctly all Real Property (other than Oil and Gas Properties) leased by Borrower and the respective addresses thereof and (iii) Part C of Schedule 5.22 lists completely and correctly all Oil and Gas Properties of Borrower with a PV-10 of at least U.S. $50,000, whether leased or owned by Borrower, and the respective legal descriptions, addresses (if any), counties and states thereof. (b) Borrower has a valid leasehold interest in each of the respective leases described on Schedule 5.22 and such schedule sets forth with respect to each such lease, the commencement date, termination date, renewal options (if any) and annual base rents. Each such lease is valid and enforceable in accordance with its terms in all material respects and is in full force and effect. No consent or approval of any landlord or other third party in connection with any such lease is necessary for Borrower to enter into and execute the Loan Documents to which it is a party, except as set forth on Schedule 5.22. Borrower is not in default of its obligations under any such lease and, to the knowledge of Borrower, no other party to any such lease is in default of its obligations thereunder, and neither Borrower nor any other party to any such lease has at any time delivered or received any notice of default which remains uncured under any such lease and no event has occurred which, with the giving of notice or the passage of time or both, would constitute a default under any such lease. (c) Borrower has good and defensible title to all of its Oil and Gas Properties set forth on Schedule 5.22 which constitute Real Property, and good and indefeasible title to all of its Oil and Gas Properties which constitute personal property, except for (i) such imperfections of title which do not in the aggregate materially detract from the value thereof to, or the use thereof in, the business of Borrower and (ii) Permitted Liens. The quantum and nature of the interest of Borrower in and to the Oil and Gas Properties as set forth in the Initial Reserve Report includes the entire interest of Borrower in such Oil and Gas Properties as of the date of the Initial Reserve Report and are complete and accurate in all material respects as of the date of the Initial Reserve Report; and there are no "back-in" or "reversionary" interests held by third parties which could materially reduce the interest of Borrower in such Oil and Gas Properties except as expressly set forth in the Initial Reserve Report. The ownership of the Oil and Gas Properties by Borrower shall not in any material respect obligate any Borrower to bear the costs and expenses relating to the maintenance, development or operations of each such Oil and Gas Property in an amount in excess of the working interest of record of Borrower in each Oil and Gas Property set forth in the Initial Reserve Report. (d) Borrower marketing, gathering, transportation, processing and treating facilities and equipment, together with any marketing, gathering, transportation, processing and treating contract in effect between and/or among Borrower and any other Person, are sufficient to gather, transport, process and/or treat reasonably anticipated volumes of production of Hydrocarbons from the Oil and Gas Properties of Borrower. 5.23 Material Contracts. Set forth on Schedule 5.24 is a complete and accurate list of all Material Contracts of Borrower, showing the parties and subject matter thereof and amendments and modifications thereto. Each such Material Contract (i) is in full force and effect and is binding upon and enforceable against Borrower thereto and, to the knowledge of Borrower, all other parties thereto in accordance with its terms, (ii) has not been otherwise amended or modified and (iii) is not in default due to the action of Borrower or, to the knowledge of Borrower, any other party thereto. 5.24 Permits, Etc. Borrower has, and is in compliance with, all permits, licenses, authorizations, approvals, entitlements and accreditations required for Borrower lawfully to own, lease, manage or operate, or to acquire, each business and the Real Property currently owned, leased, managed or operated, or to be acquired, by Borrower, except for such permits, licenses, authorizations, approvals, entitlements and accreditations the absence of which could not reasonably be expected to result in a Material Adverse Change. No condition exists or event has occurred which, in itself or with the giving of notice or lapse of time or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such permit, license, authorization, approval, entitlement or accreditation, and, to Borrower's knowledge, there is no claim that any thereof is not in full force and effect. 5.25 Employee and Labor Matters. Except as set forth on Schedule 5.26, there is (a) no unfair labor practice complaint pending or, to Borrower's knowledge, threatened against Borrower before any Governmental Authority and no grievance or arbitration proceeding pending or threatened against Borrower which arises out of or under any collective bargaining agreement, (b) no strike, labor dispute, slowdown, stoppage or similar action or grievance pending or, to the knowledge of Borrower, threatened against Borrower and (c) no union representation question existing with respect to the employees of Borrower and no union organizing activity taking place with respect to any of the employees of any of them. The hours worked and payments made to employees of Borrower have not been in violation of the applicable Canadian provincial employment standards legislation or any other applicable legal requirements. All material payments due from Borrower on account of workers compensation, wages and employee health and welfare insurance and other benefits have been paid or accrued as a liability on the books of Borrower. 5.26 Bonds and Insurance. Schedule 5.27 contains an accurate and complete description of all performance bonds related to operations on or pertaining to the Oil and Gas Properties of Borrower Parties and all material policies of insurance owned or held by Borrower Parties. Except as set forth on Schedule 5.27, all such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Such bonds and policies (i) are sufficient for compliance with all requirements of law and of all agreements to which Borrower is a party, (ii) are valid, outstanding and enforceable policies, (iii) provide adequate coverage in at least such amounts and against at least such risks (but including in any event public liability) as are required by Governmental Authorities and/or usually insured or bonded against in the same general area by companies engaged in the same or a similar business for the assets and operations of the Borrower Parties, (iv) will remain in full force and effect through the respective dates set forth on Schedule 5.27 without the payment of additional premiums except as set forth on Schedule 5.27 and (v) will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. Borrower has not been refused any bonds or insurance with respect to its assets or operations, nor has its coverage been limited below usual and customary bond or policy limits, by any bonding company or insurance carrier to which it has applied for any such bond or insurance or with which it has carried insurance during the last three years. 5.27 Nature of Business. Borrower is not engaged in any business other than the Oil and Gas Business within Canada. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations and the termination of this Agreement, Borrower shall and shall cause each of its Subsidiaries to do all of the following (unless otherwise agreed to by Agent or the Required Lenders): 6.1 Accounting System. Maintain a system of accounting that enables it to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent. Borrower also shall keep a joint interest billing and remittance system with respect to each of the Oil and Gas Properties on which a Borrower Party is the operator and a reporting system that shows, among other things, the value, revenues and profits/losses of the Oil and Gas Properties of Borrower Parties, volume of production and value of sales of Hydrocarbon production, the location and condition of the Equipment and the positions and liability exposure of Borrower Parties under all Hedging Agreements. 6.2 Collateral Reporting. Provide Agent (and if so requested by Agent, with copies for each Lender) with the following documents at the following times in form satisfactory to Agent: (a) daily notices of any dispute or claim that, if adversely determined, would, individually or in the aggregate, result in a liability to a Borrower Party in excess of U.S. $100,000; (b) as soon as available, but in any event within 30 days after the end of each month, (i) a detailed aging, by total, of the Accounts, including, among other things, lease operating expenses and royalty payments and (ii) a summary, by vendor of each Borrower Party's accounts payable and any book overdraft; (c) as soon as available, but in any event within 30 days after the end of each month, a report, in form and substance satisfactory to Agent, setting forth on a well-by-well or unit-by-unit basis and also on an aggregated basis (i) a statement of gross and net sales proceeds of all Hydrocarbons produced from the Oil and Gas Properties of each Borrower Party and pricing information (and in the aggregate only on a hedged and unhedged basis) relating thereto, (ii) the volume and/or quantity of Hydrocarbon products sold for the previous month, (iii) the severance, gross production, occupation and/or gathering taxes deducted from or paid out of the proceeds payable to Borrower Parties, (iv) the operating expenses, drilling costs and capital expenditures, (v) the number of wells operated (or the numbers of pooled units), drilled or abandoned, (vi) a statement of all funds received from the sale of Hydrocarbons representing amounts attributable to trust fund taxes or Hydrocarbon Interests of third parties and (vii) such other information as Agent may reasonably request; (d) as soon as available, but in any event within 30 days after the end of each month, a report, in form and substance satisfactory to Agent, setting forth, as of the last Business Day of such month, a summary of the hedging positions of each Borrower Party under all Hedging Agreements (including, without limitation, any contract of sale which provides for prepayment for deferred shipment or delivery of oil, gas or other commodities), including the type, term, effective date, termination date and notional principal amounts or volumes, the hedged price(s), interest rate(s) or exchange rate(s), as applicable, and any new credit support agreements relating thereto; (e) as soon as available, but in any event not later than 75 days after June 30th and December 31st of each year, a Reserve Report, prepared under the supervision of the chief engineer of Borrower who shall certify such Reserve Report to be true and accurate and to have been prepared in accordance with the procedures used in the Initial Reserve Report, and together with each such Reserve Report, a certificate of an Authorized Person of Borrower certifying that, to such Authorized Person's knowledge (i) the information contained in the Reserve Report and any other information delivered in connection therewith is true and correct, (ii) each Borrower Party owns good and defensible title to its Oil and Gas Properties evaluated in such Reserve Report and such Oil and Gas Properties are free and clear of all Liens except for Permitted Liens, (iii) except as set forth on an exhibit to the certificate, on a net basis there are no gas imbalances, take-or-pay or other prepayments with respect to the Oil and Gas Properties evaluated in such Reserve Report which would require any Borrower Party to deliver Hydrocarbons produced from such Oil and Gas Properties or make cash payments at some future time without then or thereafter receiving full payment therefor, (iv) except as set forth on an exhibit to the certificate, none of the Oil and Gas Properties of Borrower Parties have been sold since the date of the Reserve Report most recently delivered pursuant to this Section 6.2(e) (or if no such Reserve Report has been so delivered, since the date of the Initial Reserve Report), which exhibit shall list all of the Oil and Gas Properties of Borrower Parties sold and in such detail as is reasonably required by Agent, (v) attached as an exhibit to the certificate is a list of the Oil and Gas Properties of Borrower Parties added to and deleted from the Reserve Report most recently delivered pursuant to this Section 6.2(e) (or if no such Reserve Report has been so delivered, from the Initial Reserve Report) and a list of all Persons disbursing proceeds to a Borrower Party from its Oil and Gas Properties, (vi) all of the Oil and Gas Properties of each Borrower Party evaluated by such Reserve Report are subject to a Mortgage, and registered financing statements or security notices, that in each case create a first priority perfected Lien in such Oil and Gas Properties in favor of Agent for the benefit of the Lender Group, subject only to Permitted Liens that arise by operation of law and are Liens securing obligations for the payment of money not delinquent, (vii) none of the Oil and Gas Properties evaluated by such Reserve Report are subject to any Farmout or similar arrangement other than pursuant to a Permitted Farmout Agreement and (viii) except as set forth on an exhibit to such certificate, there has not been any change in the working interest or net revenue interest of any Borrower Party in any of the Oil and Gas Properties included on such Reserve Report; (f) as soon as available, but in any event not later than 45 days after the end of each quarter, a report, certified by an Authorized Person of Borrower: (i) setting forth the total amount actually paid by each Borrower Party during the preceding quarter for (A) plugging and abandonment costs for previous or ongoing plugging and abandonment operations pertaining to its Oil and Gas Properties and (B) general bond and supplemental bond payments pertaining to plugging and abandonment costs; and (ii) estimating the future payments for (A) and (B), above, for each of the succeeding two quarters; and (g) upon request by Agent, such other reports as to the Oil and Gas Properties of any Borrower Party, the other Collateral or the financial condition of any Borrower Party. 6.3 Financial Statements, Reports, Certificates. Deliver to Agent, with copies to each Lender: (a) as soon as available, but in any event within 30 days (45 days in the case of a month that is the end of one of the first 3 fiscal quarters in a fiscal year) after the end of each month during each of Borrower's fiscal years, (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering the operations of the Borrower Parties during such period, (ii) a certificate signed by the chief financial officer of Borrower to the effect that: (A) the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of the Borrower Parties; (B) the representations and warranties of Borrower contained in this Agreement and the other Loan Documents were true and correct on and as of the Closing Date (except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties were true and correct on and as of such earlier date); and (C) there does not exist any condition or event that constitutes a Default, Unmatured Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking or proposes to take with respect thereto), and (iii) for each month that is the date on which a covenant in Section 7.20 is to be tested, a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such period with the applicable covenants contained in Section 7.20; (b) as soon as available, but in any event within 90 days after the end of each of Borrower's fiscal years, (i) consolidated financial statements of the Borrower Parties for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualification (including, without limitation, (A) any going concern or like qualification or exception or (B) any qualification as to the scope of such audit), by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement and statement of cash flow and, if prepared, such accountants' letter to management), (ii) a certificate of such accountants addressed to Agent and the Lenders stating that such accountants do not have knowledge of the existence of any Default or Event of Default under Section 7.20; (c) as soon as available, but in any event within 30 days prior to the start of each of Borrower's fiscal years, copies of Borrower's Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its sole discretion, for the forthcoming 3 years, year by year, and for the forthcoming fiscal year, month by month, certified by the chief financial officer of Borrower as being such officer's good faith best estimate of the financial performance of Borrower during the period covered thereby; (d) if and when filed by Borrower, (i) all prospectuses, material change reports, press releases and other documents as required to be filed with any securities commission from time to time having jurisdiction over the Borrower; (ii) copies of Borrower's federal income tax returns, and any amendments thereto, filed with the Canada Revenue Agency, and (iii) any other information that is provided by Borrower to its shareholders; (e) if and when filed by any Borrower Party and as requested by Agent, satisfactory evidence of payment of applicable excise taxes in each jurisdiction in which (i) such Borrower Party conducts business or is required to pay any such excise tax, (ii) where such Borrower Party's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of such Borrower Party or (iii) where such Borrower Party's failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change; (f) promptly after sending or receipt thereof, copies of any material notice or other correspondence sent to, or received from, any Governmental Authority related to the Oil and Gas Properties of any Borrower Party, including, without limitation, notice of any new plugging and abandonment or other performance or other assurance bond requirements related to such Oil and Gas Properties; (g) promptly after the commencement thereof, but in any event within five (5) days after the service of process with respect thereto on any Borrower Party, notice of all actions, suits or proceedings brought by or against any Borrower Party before any Governmental Authority which, if determined adversely to such Borrower Party, could result in a Material Adverse Change; (h) as soon as Borrower has knowledge of any event or condition that constitutes a Default or an Unmatured Default or Event of Default, notice thereof and a statement of the curative action that Borrower proposes to take with respect thereto; and (i) upon the request of Agent, any other report reasonably requested relating to the financial condition of any of the Borrower Parties. In addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on both a consolidated and consolidating basis and agrees that no Subsidiary of Borrower will have a fiscal year different from that of Borrower. Borrower agrees that its independent chartered accountants are authorized to communicate with Agent and to release to Agent whatever financial information concerning the Borrower Parties that Agent reasonably may request. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Agent pursuant to or in accordance with this Agreement, and agrees that Agent may contact directly any such accounting firm or service bureau in order to obtain such information. 6.4 Maintenance of Properties. (a) Maintain and preserve all of its properties which are necessary or useful in the proper conduct to its business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder. (b) Cause to be done all things necessary to preserve and keep in good repair, working order and efficiency all the Oil and Gas Properties of each Borrower Party and other material assets including, without limitation, all equipment, machinery, facilities and marketing, gathering, transportation and processing assets and, from time to time, will make all the reasonably necessary repairs, renewals and replacements so that at all times the state and conditions of such Oil and Gas Properties and other material assets will be fully preserved and maintained, except to the extent a portion of such assets is no longer capable of producing Hydrocarbons in economically reasonable amounts. (c) Promptly (i) pay and/or discharge or cause to be paid and/or discharged, all rentals, royalties, expenses, taxes and Indebtedness accruing under the lease or other agreements affecting or pertaining to the Oil and Gas Properties of each Borrower Party, (ii) perform, observe and comply, or make reasonable and customary efforts to cause to be performed, observed and complied with, in accordance with usual and customary industry standards, the obligations required by each and all of the assignments, deeds, leases, sub-leases, contracts and agreements affecting its interests in such Oil and Gas Properties and the accompanying elements therefrom and other material properties so long as such properties are capable of producing Hydrocarbons and the accompanying elements in quantities and at prices providing for continued efficient and profitable operations of business and (iii) do all other things necessary to keep unimpaired, except for Permitted Liens, its rights with respect thereto and prevent any forfeiture thereof or a default thereunder, except to the extent a portion of such properties is no longer capable of producing Hydrocarbons in economically reasonable amounts. (d) Operate its Oil and Gas Properties and other material properties or cause or make reasonable and customary efforts to cause such Oil and Gas Properties and other material properties to be operated on a continuous basis for the production of Hydrocarbons and in a careful and efficient manner in accordance with the usual and customary practices of the industry and in substantial compliance with all applicable contracts and agreements and in compliance in all material respects with all material laws. (e) Operate and produce, as a reasonably prudent operator, the Oil and Gas Properties of Borrower Parties in accordance with good engineering practices and the following requirements: (i) the amount of Hydrocarbons produced from any well shall not exceed in any month the lower of (A) the maximum amount that such well is capable of producing at its maximum efficient rate of flow and (B) the respective allowable rate of flow under applicable orders, rules, regulations or laws, if any; (ii) the amount of Hydrocarbons produced from Borrower' Parties wells shall be sufficient to prevent a net migration of Hydrocarbons from the reservoirs to which Proved Reserves are attributed; and (iii) subject to field rules established by any Governmental Authority having or asserting jurisdiction, the amount of Hydrocarbons produced from Borrower' Parties wells shall be equitable and ratable, based on factors used in determining such field rules. (f) To the extent the interests in Oil and Gas Properties of a Borrower Party (other than working interests of record) are operated by Persons other than a Borrower Party, Borrower shall cause any owner or operator of such Oil and Gas Properties to comply with this Section 6.4; provided, however, that it shall not be a breach of this Section 6.4 if such owners or operators are not in compliance with this Section 6.4 on Oil and Gas Properties of a Borrower Party with an aggregate PV-10 for all such Oil and Gas Properties of less than U.S. $100,000. 6.5 Taxes. Cause all assessments, remittances, source deductions and taxes (including, without limitation, withholding taxes), whether real, personal or otherwise, due or payable by, or imposed, levied, or assessed against ("Tax Payments"), any Borrower Party or any of such Borrower Party's assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such Tax Payment shall be the subject of a Permitted Protest. Each Borrower Party will make timely payment or deposit of all Tax Payments required of it by Applicable Laws, including those laws concerning local, municipal, provincial and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that such Borrower Party has made such Tax Payments or deposits. Borrower shall deliver satisfactory evidence of payment of applicable excise taxes in each jurisdiction in which a Borrower Party is required to pay any such excise tax. 6.6 Insurance. (a) At Borrower's expense, maintain insurance respecting its assets wherever located, covering loss or damage by fire, theft, explosion and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrower also shall maintain public liability insurance, as well as insurance against larceny, embezzlement and criminal misappropriation to the extent Borrower maintains such insurance on the Closing Date or is otherwise required by Agent, in its reasonable discretion, to maintain such insurance after the Closing Date to the extent the premiums related thereto are not at levels commercially unreasonable. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrower shall deliver copies of all such policies to Agent with a satisfactory lender's loss payable endorsement naming Agent as first loss payee. Each policy of insurance or endorsement shall contain a Section requiring the insurer to give not less than 30 days' prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever. During the period of the drilling of wells and the construction of any other improvements comprising a part of the Oil and Gas Properties of any Borrower Party, Borrower shall, or, as applicable, shall cause its contractors or subcontractors to, obtain and maintain well control insurance (including coverage for costs and redrilling) and builder's risk insurance, as applicable, in such form and amounts as is customary in the industry and worker's compensation insurance covering all Persons employed by any Borrower Party or its agents or subcontractors of any tier in connection with any construction affecting such Oil and Gas Properties, including, without limitation, all agents and employees of any Borrower Party and such Borrower Party's subcontractors with respect to whom death or bodily injury claims could be asserted against any Borrower Party. (b) Borrower shall give Agent prompt notice of any loss covered by such insurance. So long as no Event of Default has occurred and is continuing, Borrower shall have the right to adjust losses of up to U.S. $100,000 in the aggregate. If an Event of Default shall have occurred and is continuing, Agent shall have the exclusive right to adjust any losses payable under any such insurance policies, and in any event shall have the exclusive right to adjust all losses in excess of U.S. $100,000 in the aggregate without any liability to any Borrower Party whatsoever in respect of such adjustments absent Agent's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, (i) in an amount not to exceed U.S. $600,000 per year and U.S. $1,800,000 in the aggregate over the term of this Agreement, shall, so long as no Default or Event of Default has occurred and is continuing, be paid to Borrower for repair, replacement or restoration of the assets to which the loss relates and (ii) relating to other properties or in excess of such amounts, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of the Obligations or shall be disbursed to Borrower under staged payment terms reasonably satisfactory to the Required Lenders for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items of property destroyed prior to such damage or destruction. (c) No Borrower Party will take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.6, unless Agent is included thereon as named insured with the loss payable to the Agent under a lender's loss payable endorsement or its equivalent. Borrower immediately shall notify Agent whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Agent. 6.7 Location of Inventory and Equipment. Keep the Equipment only at the locations identified on Schedule 5.3 and 5.22; provided, however, that Borrower may amend Schedule 5.3 so long as such amendment occurs by written notice to Agent not less than 30 days prior to the date on which Equipment is moved to such new location, so long as such new location is within Canada, and so long as, at the time of such written notification, Borrower provides any personal property registry or other financing statements or fixture filings necessary to perfect and continue perfected Agent's Liens on such assets and also provides to Agent a Collateral Access Agreement. 6.8 Compliance with Laws. Comply with the requirements of all Applicable Laws, rules, regulations and orders of any Governmental Authority, and other than laws, rules, regulations and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 6.9 Leases. Pay when due all rents and other amounts payable under any lease to which any Borrower Party is a party or by which any of the properties and assets of a Borrower Party are bound, unless such payments are the subject of a Permitted Protest. 6.10 Brokerage Commissions. Pay any and all brokerage commission or finders' fees incurred in connection with or as a result of Borrower's obtaining financing from the Lender Group under this Agreement. Borrower agrees and acknowledges that payment of all such brokerage commissions or finders' fees shall be the sole responsibility of Borrower, and Borrower agrees to indemnify, defend and hold Agent and the Lender Group harmless from and against any claim of any broker or finder arising out of Borrower's obtaining financing from the Lender Group under this Agreement. 6.11 Existence. At all times preserve and keep in full force and effect each Borrower Party's valid existence and good standing and any rights and franchises material to each Borrower Party's businesses. 6.12 Environmental. (a) Keep any property either owned or operated by any Borrower Party free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Agent documentation of such compliance which Agent reasonably requests, (c) promptly notify Agent of any release of a Hazardous Material in a quantity which is in violation of any Environmental Law from or onto property owned or operated by any Borrower Party and take any Remedial Actions required to abate said release or otherwise to come into compliance with applicable Environmental Law and (d) promptly provide Agent with written notice within 10 days of the receipt of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of any Borrower Party, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against any Borrower Party and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change. 6.13 Disclosure Updates. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, (a) notify Agent if any written information, exhibit or report furnished to the Lender Group contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made and (b) correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgement, filing or recordation thereof. 6.14 After Acquired Properties. With respect to any Oil and Gas Property of Borrower with a PV-10 of at least U.S. $50,000 acquired after the Closing Date by Borrower or any discovery and/or confirmation of the existence of Hydrocarbons in any property owned or leased by Borrower, promptly (and in any event within 30 days after the acquisition thereof): execute and deliver to Agent such amendments to the Mortgages or such other documents as Agent shall deem necessary or advisable to grant to Agent, for the benefit of the Lender Group, a perfected first priority Lien on such Oil and Gas Property; take all actions necessary or advisable to cause such Lien to be duly perfected in accordance with all applicable law, including, without limitation, the filing of Mortgages or personal property registry or other financing statements in such jurisdictions as may be requested by Agent; and (C) deliver to Agent title opinions and/or legal opinions relating to the matters described in Sections (A) and (B) immediately preceding, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to Agent. 6.15 Protection Against Drainage. To the extent that the Oil and Gas Properties of any Borrower Party (i) are operated by a Borrower Party, Borrower Parties shall act as a reasonably prudent operator in an effort to identify and prevent the occurrence of any drainage of Hydrocarbons from such Oil and Gas Properties and (ii) are not operated by a Borrower Party, Borrower Parties shall utilize their property and contractual rights as a reasonably prudent owner in an effort to identify and prevent the occurrence of any drainage of Hydrocarbons from such Oil and Gas Properties. 6.16 Additional Collateral Reviews. Borrower shall, from time to time upon the reasonable request of Agent, take such actions and execute and deliver such documents and instruments as Agent, as applicable, shall require to ensure that Agent shall, at all times, have received satisfactory title reviews (including, if requested, supplemental or new title opinions addressed to it), which title opinions shall be in form and substance acceptable to Agent in their sole discretions and shall include opinions regarding the before payout and after payout ownership interests held by Borrower, for all wells located on the Oil and Gas Properties covered thereby as to the ownership of Oil and Gas Properties of Borrower. 6.17 Hedging Agreements. Commencing two weeks after the Closing Date, maintain in effect one or more Commodities Hedging Agreements with respect to its Hydrocarbon production with one or more counterparties rated investment grade by Moody's and Standard & Poor's, or the equivalent by a rating agency acceptable to Agent or with a counterparty otherwise reasonably acceptable to Agent. The aggregate notional volumes of Hydrocarbons covered by such Commodities Hedging Agreements shall constitute not less than 25% and not more than 75% of the Borrower's Parties' aggregate estimated Hydrocarbon production volumes on an mcf equivalent basis (where one barrel of oil is equal to six mcf of gas) for the succeeding six calendar months on a rolling six calendar month basis for such period from Oil and Gas Properties classified as Proved Developed Producing Reserves as of the date of the most recent Reserve Report delivered pursuant to Section 6.2(e) plus the estimated production from anticipated drilling by Borrower Parties during such succeeding six months. Borrower shall use such Commodities Hedging Agreements solely as a part of its normal business operations as a risk management strategy and/or hedge against changes resulting from market conditions related to the oil and gas operations of Borrower Parties and not as a means to speculate for investment purposes on trends and shifts in financial or commodities markets. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations and the termination of this Agreement, Borrower will not and will not permit any of its Subsidiaries to do any of the following (unless otherwise agreed to by Agent or the Required Lenders): 7.1 Indebtedness. Create, incur, assume, permit, guarantee or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement and the other Loan Documents, (b) Indebtedness set forth on Schedule 5.19; (c) Permitted Purchase Money Indebtedness; (d) refinancings, renewals or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as (i) the terms and conditions of such refinancings, renewals or extensions do not, in Agent's judgment, materially impair the prospects of repayment of the Obligations by Borrower or materially impair Borrower's creditworthiness, (ii) such refinancings, renewals or extensions do not result in an increase in the principal amount of, or interest rate with respect to, the Indebtedness so refinanced, renewed or extended, (iii) such refinancings, renewals or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed or extended, nor are they on terms or conditions that, taken as a whole, are materially more burdensome or restrictive to Borrower, (iv) if the Indebtedness that is refinanced, renewed or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal or extension Indebtedness must include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the refinanced, renewed or extended Indebtedness and (v) if the Permitted Liens securing the Indebtedness that is refinanced, renewed or extended was subordinated to the Liens of Agent securing the Obligations, then the terms and conditions of such refinancing, renewal or extension shall include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the Indebtedness being refinanced, renewed or extended; (e) Indebtedness under Hedging Agreements incurred in the ordinary course of business of Borrower consistent with prudent business practice and not for speculative purposes and in accordance with this Agreement; (f) Indebtedness associated with bonds or surety obligations required by applicable law in connection with the operation of the Oil and Gas Properties of Borrower; (g) unsecured Indebtedness of the Borrower to Abraxas in an amount not to exceed at any time, U.S.$1,000,000; (h) Indebtedness arising from the honoring by a bank or other financial institution of a cheque, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that the aggregate amount of such Indebtedness is extinguished within two (2) Business Days of incurrence and does not at any time exceed U.S. $50,000 in the aggregate (or such longer period or greater amount which may be agreed to by Agent); (i) Indebtedness of Borrower or any of its Subsidiaries represented by letters of credit for the account of Borrower or any of its Subsidiaries, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business, to the extent such letters of credit are unsecured and subordinated, in form and substance satisfactory to Agent, to the Obligations; and (j) other unsecured Indebtedness of Borrower or any of its Subsidiaries in an aggregate principal amount at any time outstanding not to exceed U.S. $100,000 (or such greater amount which may be agreed to by Agent). 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed or extended under Section 7.1(d) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed or extended Indebtedness). 7.3 Restrictions on Fundamental Changes. (a) Enter into any merger, consolidation, reorganization or recapitalization or reclassification of its Shares. (b) Liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). (c) Convey, sell, lease, license, assign, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its assets. (d) Create or acquire any new Subsidiary. 7.4 Disposal of Assets. Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer or otherwise dispose of any of Borrower's or any of its Subsidiaries' assets, including, without limitation, sell, lease, license, assign, Farmout, convey or otherwise transfer any Oil and Gas Property or any interest in any Oil and Gas Property. 7.5 Change Name. Change Borrower's or any of its Subsidiaries' name, province of incorporation, corporate structure or identity or add any new fictitious name; provided, however, that a Borrower Party may change its name upon at least 30 days' prior written notice to Agent of such change and so long as, at the time of such written notification, Borrower provides any personal property registry or other financing statements, filings or Mortgages necessary to perfect and continue perfected the Liens of Agent in the Collateral. 7.6 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Agent. 7.7 Nature of Business. Make any change in the principal nature or location of its business as described in Section 5.27. 7.8 Payments, Prepayments and Amendments. (a) Except in connection with a refinancing permitted by Section 7.1(d), or prior to a Default, Unmatured Default or Event of Default has occurred and is continuing, with respect to Indebtedness permitted by Section 7.1(g) or with respect to scheduled payments of principal and interest on any other Indebtedness permitted hereunder; prepay, redeem, defease, purchase or otherwise acquire any Indebtedness of Borrower or any of its Subsidiaries, other than the Obligations in accordance with this Agreement. (b) Except in connection with a refinancing permitted by Section 7.1(d), directly or indirectly, amend, modify, alter, increase or change any of the terms or conditions of any agreement, instrument, document, indenture or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b) and (c). (c) (i) Except to remove private company restrictions or to implement a stock split, amend, modify or otherwise change its or its Subsidiaries' Governing Documents, including, without limitation, by the filing or modification of any certificate of designation, or any agreement or arrangement entered into by it with respect to any of its Shares (including any shareholders' agreement), or enter into any new agreement with respect to any of its Shares, or (ii) amend, modify or otherwise change any Material Contract, except any such amendments, modifications or changes or any such new agreements or arrangements pursuant to this paragraph (c) that, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Change. 7.9 Change of Control. Except upon an issuance of Capital Stock where the proceeds are in accordance with Section 7.24, used to prepay all obligations outstanding hereunder, cause, permit or suffer, directly or indirectly, any Change of Control. 7.10 Forward Sales. Except in accordance with the ordinary course of the Oil and Gas Business, and except for Permitted Dispositions, enter into or permit to exist any advance payment agreement or other arrangement pursuant to which any Borrower Party, having received full or substantial payment of the purchase price for a specified quantity of Hydrocarbons upon entering such agreement or arrangement, is required to deliver, in one or more installments subsequent to the date of such agreement or arrangement, such quantity of Hydrocarbons pursuant to and during the terms of such agreement or arrangement. 7.11 Distributions. Except for the proceeds of the Loan, make any distribution or declare or pay any dividends (in cash or other property, other than Shares) on, or purchase, acquire, redeem or retire any of Borrower's Shares, of any class, whether now or hereafter outstanding. 7.12 Accounting Methods. Modify or change its method of accounting (other than as may be required to conform to GAAP) or enter into, modify or terminate any agreement currently existing, or at any time hereafter entered into, with any third party accounting firm or service bureau for the preparation or storage of any Borrower Party's accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding the Collateral or any Borrower Party's financial condition. 7.13 Investments. Except for Permitted Investments, directly or indirectly, make or acquire any Investment or incur any liabilities (including contingent obligations) for or in connection with any Investment. 7.14 Transactions with Affiliates. Other than with respect to the transactions contemplated by the agreement identified in Part B of Schedule 5.24, directly or indirectly enter into or permit to exist any transaction with any Affiliate of Borrower except for transactions that are (i) in the ordinary course of Borrower's business, (ii) upon fair and reasonable terms, (iii) fully disclosed to Agent and (iv) no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 Suspension. Suspend or go out of a substantial portion of its business. 7.16 Compensation. Increase the annual fee or per-meeting fees paid to any member of its Board of Directors during any year by more than 20% (or such greater amount which may be agreed to by Agent) over the prior year; pay or accrue total cash compensation, during any year, to its officers and senior management employees in an aggregate amount in excess of 120% (or such greater amount which may be agreed to by Agent) of that paid or accrued in the prior year. 7.17 Use of Proceeds. Use the proceeds of the Advances for any purpose other than (i) as specified in Section 2.1(b) and (ii) to pay transactional fees, costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby. 7.18 Change in Location of Chief Executive Office; Equipment with Bailees. Relocate its chief executive office to a new location without providing 30 days' prior written notification thereof to Agent and so long as, at the time of such written notification, each Loan Party provides any personal property registry or other financing statement or fixture filing necessary to perfect and continue perfected the Liens of Agent in the Collateral and also provides to Agent a Collateral Access Agreement with respect to such new location. The Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman or similar party without Agent's prior written consent. 7.19 Securities Accounts. Establish or maintain any Securities Account unless Agent shall have received a Control Agreement in respect of such Securities Accounts; provided, that Borrower may maintain a Securities Account not subject to a Control Agreement if (x) the only asset in such account is the common Shares of Borrower which Shares are subject to a prospectus filed with the applicable securities commission and which class is publicly traded on a national securities exchange in the United States or Canada and (y) Shares held in all such accounts will be limited to Shares held in such accounts on the Closing Date and proceeds thereof. Borrower shall not transfer assets out of any Securities Account; provided, however, that, so long as no Event of Default has occurred and is continuing or would result therefrom, Borrower may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement or any Collateral Document. 7.20 Financial Covenants. Net Cash Interest Coverage Ratio. Permit the Net Cash Interest Coverage Ratio of Borrower to be less than the amount set forth in the following table for the applicable period set forth opposite thereto: Applicable Period Cash Interest Coverage Ratio For the 4 fiscal quarters ending at the end of each fiscal quarter 1.25 to 1.00 7.21 Oil and Gas Imbalances. Enter into any contracts or agreements which warrant production of Hydrocarbons (other than Hedging Agreements otherwise permitted hereunder) and will not hereafter allow gas imbalances, take-or-pay or other prepayments with respect to its Oil and Gas Properties which would require any Borrower Party to deliver Hydrocarbons produced on Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor to exceed, during any monthly period two percent (2%) of the current aggregate monthly gas production for such monthly period from the Oil and Gas Properties of any Borrower Party. 7.22 Environmental. Permit the use, handling, generation, storage, treatment, Release or disposal of Hazardous Materials at any Real Property owned, operated or leased by any Borrower Party, except in compliance in all material respects with Environmental Laws. 7.23 Limitation on Leases. Create, incur, assume or suffer to exist any obligation for the payment of rent or hire of Oil and Gas Properties of any kind whatsoever (real or personal, including capital leases but excluding leases of Hydrocarbon Interests and leases directly related to oil and gas field operations), under leases or lease agreements which would cause the aggregate amount of all payments made by such Person pursuant to such leases or lease agreements to exceed U.S. $450,000 (or such greater amount agreed to by Agent), in any period of twelve (12) consecutive calendar months in the aggregate. 7.24 Issuance of Capital Stock. (a) Borrower agrees that for so long as any Obligation remains outstanding, Borrower shall not enter into any arrangement or to consummate any transaction pursuant to which any shares of Capital Stock of Borrower will be issued (other than issuances of stock options and common stock pursuant to stock option exercises by employees, officers and directors of Borrower and issuance of shares of common stock to employees, officers and directors of Borrower in the ordinary course of business), whether in a public or private transaction and whether as an initial or follow-on issuance, unless such issuance is of Qualified Stock and all of the net proceeds from such issuance are first applied to satisfy any Obligations then outstanding. (b) Borrower agrees that it will not enter into any contract, instrument, agreement or other arrangement which conflicts with, or otherwise restricts, the obligations of Borrower under this Section 7.24. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (other than any event described in Sections 8.2 or 8.11, which shall constitute an event of default upon notice to Borrower by Agent of any such event) (each, an "Event of Default") under this Agreement: 8.1 If Borrower fails to pay when due and payable, or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Codes, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses or other amounts constituting Obligations); 8.2 (i) If Borrower fails to perform, keep or observe any term, provision, condition, covenant or agreement contained in Sections 6.1, 6.4, 6.5, 6.8 and 6.15 of this Agreement, or comparable provisions of the other Loan Documents, and such failure continues for 15 days, (ii) if Borrower fails to perform, keep, or observe any term, provision, condition, covenant or agreement contained in Sections 6.2, 6.3, 6.7 and 6.9 of this Agreement, or comparable provisions of the other Loan Documents, and such failure continues for 5 days or (iii) if Borrower otherwise fails to perform, keep or observe any other term, provision, condition, covenant or agreement contained in this Agreement or in any of the other Loan Documents; 8.3 If any material portion of a Borrower Party's assets is attached, seized, subjected to a writ or distress warrant, levied upon or comes into the possession of any third Person; 8.4 If an Insolvency Proceeding is commenced by a Borrower Party; 8.5 If an Insolvency Proceeding is commenced against a Borrower Party and any of the following events occur: (a) such Borrower Party consents to the institution of such Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Agent (including any successor agent) and each other member of the Lender Group shall be relieved of their obligations (if any) to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, a Borrower Party or (e) an order for relief shall have been entered therein; 8.6 If a Borrower Party is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.7 If a notice of Lien, levy or assessment is filed of record with respect to (a) any of Borrower's assets (other than their Proved Developed Producing Reserves) in an amount or with respect to assets in excess of U.S. $100,000, or (b) any of Borrower Party's Proved Developed Producing Reserves, by the Province of Alberta or any department, agency or instrumentality thereof, or by any state, county, municipal or governmental agency , or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon (x) any of a Borrower Party's assets (other than their Proved Developed Producing Reserves), in an amount or with respect to assets in excess of U.S. $100,000 or (y) any of a Borrower Party's Proved Developed Producing Reserves, and the same is not paid before such payment is delinquent; 8.8 If a judgment or other claim in excess of U.S. $100,000 (to the extent not bonded or insured by a bonding or insurance company acceptable to Agent) in the aggregate becomes a Lien or encumbrance upon any material portion of a Borrower Party's assets; 8.9 If there is a continuing default under any material agreement to which a Borrower Party is a party and such default (a) occurs at the final maturity of the obligations thereunder or (b) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of the obligations of a Borrower Party thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein; 8.10 If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness and except as permitted under Section 7.8; 8.11 If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement or Record made to any member of the Lender Group by Borrower or any officer, employee, agent or director of a Borrower Party; 8.12 If there is a loss, suspension or revocation of, or failure to renew, any license or permit now held or hereafter acquired by a Borrower Party and such loss, suspension, revocation or failure to renew could reasonably be expected to have a Material Adverse Change; 8.13 If this Agreement, any Collateral Document or any other agreement, instrument or document that purports to create a Lien in favor of Agent, for the benefit of the Lender Group, shall for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; or 8.14 Any provision of any Loan Document shall at any time for any reason be declared by a court of competent jurisdiction to be null and void or invalid or unenforceable, or the validity or enforceability thereof shall be contested in a proceeding by Borrower, or a proceeding shall be commenced by Borrower, or by any Governmental Authority having jurisdiction over Borrower, seeking to establish the invalidity or unenforceability thereof, or Borrower shall deny that it has any liability or obligation purported to be created under any Loan Document. 8.15 If any Borrower Party fails to perform, keep, or observe any term, provision, condition, covenant or agreement contained in clause (h) of Section 6.3. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Unmatured Default or Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents or under any other agreement between Borrower and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Liens of Agent in the Collateral and without affecting the Obligations; (d) Exercise any of its remedies under the Debenture; (e) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation, set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by the Lender Group or (ii) Indebtedness at any time owing to or for the credit or the account of Borrower held by the Lender Group; (f) Hold, as cash collateral, any and all balances and deposits of Borrower held by the Lender Group, to secure the full and final repayment of all of the Obligations and apply, to the extent permitted by applicable law, such cash collateral to repay the Obligations; (g) Without limitation or exclusion to any other rights granted hereunder, Agent and the Lender Group shall have all other rights and remedies available at law or in equity or pursuant to any other Loan Document. 9.2 Remedies Cumulative. The rights and remedies of Agent and the Lender Group under this Agreement, the other Loan Documents and all other agreements shall be cumulative. Agent and the Lender Group shall have all other rights and remedies not inconsistent with this Agreement as provided, by law or in equity. No exercise by Agent or the Lender Group of one right or remedy shall be deemed an election, and no waiver by Agent or the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by Agent or the Lender Group shall constitute a waiver, election or acquiescence by it. 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, assessments, remittances, source deductions, insurance premiums or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to Borrower, may do any or all of the following: (a) make payment of the same or any part thereof, (b) set up such reserves in Borrower's Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure or (c) in the case of the failure to comply with Section 6.6 hereof, obtain and maintain insurance policies of the type described in Section 6.6 and take any action with respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Unmatured Default or Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by Agent or the Lender Group on which Borrower may in any way be liable. 11.2 The Lender Group's Liability for Collateral. Borrower hereby agrees that the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency or other Person and (b) all risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend and hold Agent-Related Persons, the Lender-Related Persons with respect to each Lender, each Participant (subject to Section 14.1(e)(v)), and each of their respective officers, directors, employees, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable lawyers fees (on a solicitor and their own client basis) and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, amendment, waiver or administration of this Agreement, any of the other Loan Document or the transactions contemplated hereby or thereby and (b) with respect to any investigation, litigation or proceeding related to this Agreement, any other Loan Document or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrower was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrower with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON. 11.4 Annual Rates of Interest. For the purposes of the Interest Act (Canada), whenever interest payable pursuant to this Agreement is calculated on the basis of a period other than a calendar year (the "Interest Period"), each rate of interest determined pursuant to such calculation expressed as an annual rate is equivalent to such rate as so determined multiplied by the actual number of days in the calendar year in which the same is to be ascertained and divided by the number of days in the Interest Period. 12. NOTICES. Unless otherwise provided in this Agreement, all notices, demands or service of documents by Borrower or Agent to the other relating to this Agreement, any other Loan Document and any action or proceeding related thereto shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Borrower or Agent, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrower or Agent, as the case may be, at its address set forth below: If to Borrower: GREY WOLF EXPLORATION INC. 1500, 144 - 4th Avenue S.W. Calgary, Alberta T2P 3N4 Attn: Vincent J. Tkachyk Fax No. (403) 218-1497 with copies to: OSLER, HOSKIN & HARCOURT LLP Suite 1900, 333 - 7th Avenue S.W. Calgary, Alberta T2P 2Z1 Attn: Mark R. Smith Fax No. (403) 260-7024 If to Agent: GUGGENHEIM CORPORATE FUNDING, LLC 135 East 57th Street New York, New York 10022 Attn: Managing Director - Abraxas Fax No. 212-644-8396 Agent and Borrower may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 12 shall be deemed given when received. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE PROVINCE OF ALBERTA WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. (b) EACH OF THE PARTIES HEREBY AGREES THAT ANY LEGAL ACTION OR PROCEEDING AGAINST BORROWER WITH RESPECT TO THIS AGREEMENT, OR ANY OF THE LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE PROVINCE OF ALBERTA OR IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK AND EACH PARTY SUBMITS AND ATTORNS TO, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. (c) EACH PARTY WAIVES ANY RIGHT TO STAY OR TO DISMISS ANY ACTION OR PROCEEDING BROUGHT BEFORE SAID COURTS ON THE BASIS OF FORUM NON CONVENIENS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER GROUP TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE LENDER GROUP TO BRING PROCEEDINGS AGAINST BORROWER IN THE COURTS OF ANY JURISDICTION. (d) BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 13.2 Waiver of Judgment Interest Act (Alberta). To the extent permitted by applicable Law, the provisions of the Judgment Interest Act (Alberta) will not apply to the Loan Documents and are hereby expressly waived by Borrower. 13.3 Deemed Reinvestment Not Applicable. For the purposes of the Interest Act (Canada), the principle of deemed reinvestment of interest will not apply to any interest calculation under the Loan Documents, and the rates of interest stipulated in this Agreement are intended to be nominal rates and not effective rates or yields. 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 14.1 Assignments and Participations. (a) Any Lender may, with the written consent of Agent (provided that no written consent of Agent shall be required in connection with any assignment and delegation by a Lender to an Eligible Transferee), assign and delegate to one or more assignees (each an "Assignee") all, or any part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of U.S. $1,000,000 (except such minimum amount shall not apply to any Affiliate of a Lender or to a Related Fund or account managed by a Lender); provided, however, that Borrower and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Borrower and Agent a fully executed Assignment and Acceptance, and (iii) the assignor Lender or Assignee has paid to Agent for Agent's separate account a processing fee in the amount of U.S. $5,000. Anything contained herein to the contrary notwithstanding, the consent of Agent shall not be required (and payment of any fees shall not be required) if (x) such assignment is in connection with any merger, consolidation, sale, transfer or other disposition of all or any substantial portion of the business or loan portfolio of such Lender or (y) the assignee is an Affiliate of a Lender or a Related Fund. (b) From and after the date that Agent notifies the assignor Lender (with a copy to Borrower) that it has received a fully executed Assignment and Acceptance and payment (if applicable) of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from its obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall affect a novation between Borrower and the Assignee. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (2) such assigning Lender 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 this Agreement or any other Loan Document furnished pursuant hereto, (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, 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 this Agreement, (5) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance and receipt and acknowledgement by Agent of such fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions or other Persons not Affiliates of such Lender (a "Participant") participating interests in its Obligations owing to such Lender, the Commitment of such Lender, and the other rights and interests of that Lender (the "Originating Lender") hereunder and under the other Loan Documents (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the Originating Lender shall remain a "Lender" for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and interests of the Originating Lender hereunder shall not constitute a "Lender" hereunder or under the other Loan Documents and the Originating Lender's obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower, Agent, and Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no originating Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or substantially all of the Collateral (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant, (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums in respect of the Obligations hereunder in which such Participant is participating or (F) subordinate the Liens of Agent to the Liens of any other creditor of Borrower, and all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Unmatured Default or Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrower, the Collections or the Collateral or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by Lenders among themselves. The provisions of this Section 14.1(e) are solely for the benefit of the Lender Group, and Borrower shall not have any rights as a third party beneficiary of such provisions. (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose to a third party all documents and information which it now or hereafter may have relating to Borrower or Borrower's business. (g) Any other provision in this Agreement notwithstanding, any Lender residing in the United States may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR ss. 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. (h) Borrower shall maintain, or cause to be maintained, a register (the "Register") on which it enters the name of a Lender as the registered owner of each Advance held by such Lender. A Registered Loan (and the Registered Note, if any, evidencing the same) may be assigned or sold in whole or in part only by registration of such assignment or sale on the Register (and each Registered Note shall expressly so provide). Any assignment or sale of all or part of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by registration of such assignment or sale on the Register, together with the surrender of the Registered Note, if any, evidencing the same duly endorsed by (or accompanied by a written instrument of assignment or sale duly executed by) the holder of such Registered Note, whereupon, at the request of the designated assignee(s) or transferee(s), one or more new Registered Notes in the same aggregate principal amount shall be issued to the designated assignee(s) or transferee(s). Prior to the registration of assignment or sale of any Registered Loan (and the Registered Note, if any evidencing the same), Borrower shall treat the Person in whose name such Registered Loan (and the Registered Note, if any, evidencing the same) is registered as the owner thereof for the purpose of receiving all payments thereon and for all other purposes, notwithstanding notice to the contrary. In the case of an assignment or delegation covered by Section 14.1(a)(y), the assigning Lender shall maintain a comparable Register on behalf of Borrower. (i) In the event that a Lender sells participations in the Registered Loan, such Lender shall maintain a register on which it enters the name of all participants in the Registered Loans held by it (the "Participant Register"). A Registered Loan (and the Registered Note, if any, evidencing the same) may be participated in whole or in part only by registration of such participation on the Participant Register (and each Registered Note shall expressly so provide). Any participation of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by the registration of such participation on the Participant Register. 14.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties hereto; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to Section 14.1 hereof, no consent or approval by Borrower is required in connection with any such assignment. 15. AMENDMENTS; WAIVERS. 15.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment or consent shall, unless in writing and signed (or otherwise authorized) by all of the Lenders affected thereby and Borrower, do any of the following: (a) increase or extend any Commitment of any Lender, (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due hereunder or under any other Loan Document, (c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document, (d) change the percentage of the Commitments that is required to take any action hereunder, (e) amend, modify or waive this Section 15 or any provision of the Agreement providing for consent or other action by all Lenders, (f) [Intentionally omitted], (g) change the definition of "Required Lenders" or "Pro Rata Share", (h) [Intentionally omitted], (i) release Borrower from any obligation for the payment of money, (j) change, modify or waive the definition of "PV-10", "Related Indebtedness" or "Proved Developed Reserves Amount", or (k) amend, modify or waive any of the provisions of Sections 2.3(b), 3.4 or 16 (or change any definition of a term used in such Section in a manner adverse to any such Lender), and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, affect the rights or duties of Agent, as applicable, under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrower, shall not, subject to Section 14.1(a), require consent by or the agreement of Borrower. 15.2 Replacement of Holdout Lender. (a) If any action to be taken by the Lender Group, Agent hereunder or under any other Loan Document requires the unanimous consent, authorization or agreement of all Lenders, and a Lender ("Holdout Lender") fails to give its consent, authorization or agreement, then Agent, upon at least 5 Business Days' prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a "Replacement Lender"), and the Holdout Lender shall have no right to refuse to be replaced hereunder. Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given. (b) Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance Agreement, subject only to the Holdout Lender being repaid its share of the outstanding Obligations without any premium or penalty of any kind whatsoever. If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance Agreement prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance Agreement. The replacement of any Holdout Lender shall be made in accordance with the terms of Section 14.1. Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender's Pro Rata Share of Advances (if any). 15.3 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to exercise any right, remedy or option under this Agreement or any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or any Lender on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement or any other Loan Document. Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have. 16. AGENT; LENDER GROUP. 16.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints GCF as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 16. Except as otherwise specifically provided in Section 16.17, the provisions of this Section 16 are solely for the benefit of Agent and Lenders, and Borrower shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word "Agent" is for convenience only, that GCF is merely the representative of Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply and distribute the Collections as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management arrangements as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections, (f) perform, exercise and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the Obligations, the Collateral or the Collections or otherwise related to any of same as provided in the Loan Documents, and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents. 16.2 Delegation of Duties. Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made without gross negligence or willful misconduct. 16.3 Liability of Agent Persons. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby or thereby (except for its own gross negligence or willful misconduct) or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Borrower or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Books or properties of Borrower or the books or records or properties of any of Borrower's Subsidiaries or Affiliates. 16.4 Reliance by Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all of Lenders. 16.5 Notice of Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default, Unmatured Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees and expenses required to be paid to Agent for the account of the Lenders and with respect to Defaults, Unmatured Defaults and Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default, Unmatured Default or Event of Default, and stating that such notice is a "notice of default". Agent promptly will notify the Lenders of its receipt of any such notice or of any Unmatured Default or Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Unmatured Default or Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Unmatured Default or Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 16.4, Agent shall take such action with respect to such Unmatured Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default, Unmatured Default or Event of Default as it shall deem advisable. 16.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons. 16.7 Costs and Expenses; Indemnification. Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers and obligations pursuant to the Loan Documents, including court costs, reasonable lawyers' fees and expenses, costs of collection by outside collection agencies and auctioneer fees and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrower is obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from Collections received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities resulting solely from such Agent-Related Person's gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any Defaulting Lender in failing to make an Advance or other extension of credit hereunder (if any). Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender's ratable share of any costs or out-of-pocket expenses (including lawyers fees' and expenses on a solicitor and their own client basis) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations or legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertakings in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent. 16.8 Agent-Related Persons in Individual Capacity. Agent-Related Persons may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally engage in any kind of banking, lending, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Document as though GCF was not a party hereto, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, Agent-Related Persons may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Document that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them. The terms "Lender" and "Lenders" include GCF in its individual capacity. 16.9 Successor Agent. (a) Agent may resign as Agent upon 45 days' notice to the Lenders. If Agent resigns under this Agreement, the Required Lenders and Agent shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. (b) Nothing contained in this Section 16.9 shall be construed to limit or eliminate Agent's right to resign as an Agent in accordance with this Section 16.9. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. Each of the resigning Agent and Borrower agrees to cooperate with the successor Agent in effecting the appointment of such successor Agent, including executing such documents and instruments of transfer, and taking such other actions, in each case without recourse, representation or warranty to the resigning Agent, as reasonably requested by such successor Agent. 16.10 Lender in Individual Capacity. Any Lender and its respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Document as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Document that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender not shall be under any obligation to provide such information to them. 16.11 Withholding Taxes. (a) Until the Agent is delivered an opinion, acceptable to it in its sole discretion, of a nationally recognized Canadian law firm that no amount is required to be withheld or deducted pursuant to Part XIII of the Income Tax Act (Canada) with respect to payment of the Obligations; for the purposes of Subsection 16.11(b), the Borrower acknowledges and agrees that subject to the application of the Canada - United States Tax Convention (1980), it is required to withhold and remit pursuant to Part XIII of the Income Tax Act (Canada), 25% of the amount of each payment of the Obligations (other than a repayment of principal) made to a Non-Resident Lender; and further the Borrower agrees that it shall withhold and remit such amounts in accordance with the provision of Subsection 16.11(b) and Part XIII of the Income Tax Act (Canada). (b) All payments of the Obligations made hereunder or under the other Loan Documents by or on behalf of the Borrower to Non-Resident Lenders or to Agent on their behalf will be made free and clear of and without withholding or deduction for or on account of any Withholding Tax unless the Borrower is required to withhold or deduct Taxes by Applicable Law or by the interpretation or administration thereof. If the Borrower or Agent is so required to withhold or deduct any amount for or on account of Withholding Taxes from any payment of the Obligations, the Borrower will pay as additional interest such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by each affected Non-Resident Lender after such withholding or deduction (including with respect to Additional Amounts) will not be less than the amount such Lender would have received if such Withholding Taxes had not been withheld or deducted; provided, however, that no Additional Amounts will be payable with respect to a payment made to a Non-Resident Lender (an "Excluded Lender") (i) with which the Borrower does not deal at arm's length (for purposes of the Income Tax Act (Canada)) at the time of the making of such payment, (ii) which is subject to such Withholding Taxes by reason of its failure to comply with any certification, identification, information, documentation or other reporting requirement if compliance is required by Applicable Law, regulation, administrative practice or an applicable treaty as a precondition to exemption from, or a reduction in the rate of deduction or withholding of, such Withholding Taxes, or (iii) which is subject to such Withholding Taxes by reason of its carrying on business in or being connected with Canada or any province or territory thereof otherwise than by the mere holding of its interest in the Loan to which payments relate or the receipt of payments thereunder. The Borrower will make such withholding or deduction and remit the full amount deducted or withheld to the relevant Authorized Authority as and when required in accordance with Applicable Law. The Borrower will pay all Taxes, interest and other liabilities which arise by virtue of any failure of the Borrower to withhold, deduct and remit to the relevant Authorized Authority on a timely basis the full amount required in accordance with Applicable Law. The Borrower will furnish to the relevant Non-Resident Lender and Agent, within 30 days after the date the payment of any Withholding Taxes is due pursuant to Applicable Law, certified copies of tax receipts evidencing such payment by the Borrower. (c) If any Non-Resident Lender is required to pay Tax under Part XIII of the Income Tax Act (Canada) or any successor provisions in respect of any payment of the Obligations by or on behalf of the Borrower in circumstances where the Borrower is not required to make a withholding with respect to such Tax (for instance, in accordance with Section 803 of the Regulations to the Income Tax Act (Canada)), then the Borrower shall, upon demand by any such Non-Resident Lender indemnify such Non-Resident Lender (other than a Lender (i) with which the Borrower does not deal at arm's length (for purposes of the Income Tax Act (Canada)) at the time of the making of such payment, (ii) which is subject to such Taxes by reason of its failure to comply with any certification, identification, information, documentation or other reporting requirement if compliance is required by Applicable Law, regulation, administrative practice or an applicable treaty as a precondition to exemption from, or a reduction in the rate of deduction of withholding of, such Taxes, or (iii) which is subject to such Withholding Taxes by reason of its carrying on business in or being connected with Canada or any province or territory thereof otherwise than by the mere holding of its interest in the Credit Facility to which payments relate or the receipt of payments thereunder for the payment of any such Taxes, together with any interest, penalties and expenses in connection therewith. All such amounts shall be payable by the Borrower on demand and shall bear interest at the rate borne by the Credit Facility calculated from the date incurred by the applicable Non-Resident Lender to the date paid by the Borrower. (d) If the Borrower pays any amount pursuant to Section 16.11(b) with respect to any payment to a Non-Resident Lender or, with the prior written consent of such Lender, provides any security therefor pursuant to Applicable Law, and the Borrower at its expense wishes to contest the exigibility of the relevant Taxes and furnishes to such Non-Resident Lender an opinion of tax counsel satisfactory to such Non-Resident Lender, acting reasonably, to the effect that there exists a reasonable basis for contesting such Taxes, the Borrower may contest such Taxes, provided that: (i) the Borrower has otherwise complied with this Section 16.11; (ii) the Borrower has delivered to such Non-Resident Lender such additional security or assurances as such Non-Resident Lender may require, acting reasonably, in order to be satisfied that such Non-Resident Lender will not incur any liability by reason of any contestation, including legal fees, disbursements, interest and penalties; and (iii) the institution, conduct and continuation of such proceedings (including the settlement or compromise of same) will remain within the sole discretion of such Non-Resident Lender and will forthwith be abandoned if such Non-Resident Lender so requires, acting reasonably, having regard to its overall tax and related interests. (e) If, following any payment made by the Borrower pursuant to Section 16.11(b) hereof to a Non-Resident Lender, any such Non-Resident Lender shall receive or be granted a material credit against or remission for any other tax payable by it by reason of the payment of the tax which the Borrower has indemnified the Non-Resident Lender for (and such Non-Resident Lender is able to readily identify such credit or remission as being attributable to its loan hereunder), such Non-Resident Lender shall, to the extent that it can do so without prejudice to the retention of the amount of such credit or remission and without prejudice to the right of such Non-Resident Lender to obtain any other relief or allowance which may be available to it, reimburse the Borrower with such amount as such Non-Resident Lender, acting reasonably, determines to be the amount of money attributable to such credit or remission that may be paid by such Non-Resident Lender to leave it (after such reimbursement) in no worse position than it would have been in had there been no such deduction or withholding or payment of tax which resulted in the payment under Section 16.11(b) above. Such Non-Resident Lender may charge to the Borrower (and may deduct from amounts reimbursable to the Borrower hereunder) a fee reasonably determined by such Non-Resident Lender to compensate it for any additional effort expended or cost incurred in determining such credit or remission or allocating it to the Borrower. Notwithstanding the foregoing, no Non-Resident Lender shall be obligated to disclose to the Borrower, or any of its agents, any computation made by such Non-Resident Lender in connection with this Section 16.11(e) or any information regarding such Non-Resident Lender's tax status or affairs. 16.12 Collateral Matters (a) Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrower of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Borrower certifies to Agent that the sale or disposition is not prohibited under Section 7.4 (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which Borrower owned no interest at the time the security interest was granted or at any time thereafter or (iv) constituting property leased to Borrower under a lease that has expired or is terminated in a transaction permitted under this Agreement. Notwithstanding the foregoing, so long no Unmatured Default or Event of Default shall have occurred and be continuing, Agent shall, for the benefit and at the request of Borrower, release its Lien on Collateral in a transaction constituting a Permitted Disposition. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders or (z) otherwise, the Required Lenders. Upon request by Agent or Borrower at any time, the Lenders will confirm in writing Agent's authority, as the case may be, to release any such Liens on particular types or items of Collateral pursuant to this Section 16.12; provided, however, that (1) the Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent's opinion, as the case may be, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation or warranty and (2) such release shall not in any manner discharge, affect or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrower in respect of) all interests retained by Borrower, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (b) Agent shall not have any obligation whatsoever to any of Lenders to assure that the Collateral exists or is owned by Borrower or is cared for, protected or insured or has been encumbered, or that Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, absent Agent's, as the case may be, gross negligence or willful misconduct as finally determined by a court of competent jurisdiction, in its sole discretion given Agent's own interest in the Collateral in its capacity as one of Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 16.13 Restrictions on Actions by Lenders; Sharing of Payments. (a) Each of the Lenders agrees that it shall not, without the express consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrower or any deposit accounts of Borrower now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral the purpose of which is, or could be, to give such Lender any preference or priority against the other Lenders with respect to the Collateral. (b) If, at any time or times any Lender shall receive (i) by payment, foreclosure or setoff or otherwise any proceeds of Collateral or any payments with respect to the Obligations arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's Pro Rata Share portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 16.14 Agency for Perfection. Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Liens of Agent in assets which, in accordance with Section 35 of the PPSA can be perfected only by possession. Should any Lender obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon the request of Agent therefor shall deliver such Collateral to Agent. 16.15 Payments to Lenders. All payments to be made by Agent to Lenders shall be made by bank wire transfer or internal transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, or interest of the Obligations. 16.16 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement, and the other Loan Documents relating to the Collateral, for the benefit of the Lender Group. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement, or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of Lenders. 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By becoming a party to this Agreement, each Lender: (a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports") prepared by or at the request of Agent, and Agent shall so furnish each Lender with such Reports, (b) expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report and (ii) shall not be liable for any information contained in any Report, (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon the Books, as well as on representations of Borrower's personnel, (d) agrees, for the benefit of the Lender Group and, notwithstanding Section 16.1, the Loan Parties, to keep all Reports and other material, non-public information regarding Borrower and its Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner; it being understood and agreed by Borrower that in any event such Lender may make disclosures (a) to counsel for and other advisors, accountants and auditors to such Lender, (b) reasonably required by any bona fide potential or actual Assignee or Participant in connection with any contemplated or actual assignment or transfer by such Lender of an interest herein or any participation interest in such Lender's rights hereunder, (c) of information that has become public by disclosures made by Persons other than such Lender, its Affiliates, assignees, transferees or Participants or (d) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation or court order; provided, however, that, unless prohibited by applicable law, statute, regulation, or court order, such Lender shall notify Borrower of any request by any court governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of any such non-public material information concurrent with, or where practicable, prior to the disclosure thereof, and (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any other Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrower, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a loan or loans of Borrower, and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrower to Agent that has not been contemporaneously provided by Borrower to such Lender, and, upon receipt of such request, Agent promptly shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrower, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's notice to Agent, whereupon Agent promptly shall request of Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender. 16.18 Several Obligations; No Liability. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of the Lenders to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 16.7, no member of the Lender Group shall have any liability for the acts or any other member of the Lender Group. No Lender shall be responsible to Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 17. JUDGMENT CURRENCY. 17.1 Deficiency. If, for the purposes of obtaining judgment in any court or any other related purpose hereunder, it is necessary to convert an amount due hereunder in the currency in which it is due (the "Original Currency") into another currency (the "Second Currency"), the rate of exchange applicable will be the daily noon day rate quoted by the Bank of Canada on the relevant date to purchase in Calgary, Alberta the Original Currency with the Second Currency and includes any premium and costs of exchange payable by the purchaser in connection with such purchase. Each Party (the "First Party") agrees that its obligations in respect of any Original Currency due from it to another Party hereunder will, notwithstanding any judgment or payment in the Second Currency, be discharged only to the extent that on the Banking Day following the receipt of any sum so paid in the Second Currency, the other Parties may, in accordance with normal banking procedures, purchase in the Calgary, Alberta foreign exchange market the Original Currency with the amount of the second Currency so paid; and if the amount of the Original Currency so purchased is less than the amount originally due in the Original Currency, the First Party agrees that the deficiency will be a separate and continuing obligation of it, independent from its obligations under this Agreement, and will constitute in favour of the other Parties a cause of action which will continue in full force and effect notwithstanding any such judgment, or order to the contrary, and the First Party agrees, notwithstanding any such judgment, or order to the contrary, and the First Party agrees, notwithstanding any such payment or judgment, to indemnify the other Parties against any such loss or deficiency. The Borrower acknowledges and agrees that any Indebtedness it may incur or suffer under this Section 17 will be secured by the Security unless earlier discharged as provided herein. 17.2 Excess. The Lenders through the Agent will pay to the Borrower the amount, if any, after netting out all amounts due by the Borrower hereunder, which the Lenders may realize in excess of what is owed to them by virtue of the conversion of the Original Currency into the Second Currency. 18. GENERAL PROVISIONS. 18.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower, Agent and each Lender whose signature is provided for on the signature pages hereof. 18.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 18.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 18.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 18.5 Amendments in Writing. This Agreement only can be amended by a writing signed by Agent (on behalf of the requisite Lenders) and Borrower. 18.6 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or electronic mail shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile or electronic mail also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 18.7 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or Guarantor or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Codes relating to fraudulent conveyances, preferences or other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrower or Guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 18.8 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. * * * * * (The remainder of this page was intentionally left blank) IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. BORROWER: GREY WOLF EXPLORATION INC. By: -------------------------------------------- Name: Title: AGENT AND LENDERS: GUGGENHEIM CORPORATE FUNDING, LLC, as Agent and as a Lender By: -------------------------------------------- Name: Title: SOF INVESTMENTS, L.P. as a Lender By: ------------------------------------------ Name: Title: EX-10 9 warrant2.txt WARRANT DURHAM CAPITAL EXHIBIT 10.7 WARRANT to Purchase 100,000 shares of Common Stock of ABRAXAS PETROLEUM CORPORATION Original Issue Date: October 28, 2004 NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE OR OF THE SECURITIES ISSUABLE UPON EXERCISE THEREOF SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) THE HOLDER OF THE SECURITIES PROPOSED TO BE TRANSFERRED SHALL HAVE DELIVERED TO THE COMPANY EITHER A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION OR AN OPINION OF COUNSEL (WHO MAY BE AN EMPLOYEE OF SUCH HOLDER) EXPERIENCED IN SECURITIES MATTERS TO THE EFFECT THAT SUCH PROPOSED TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT OR (C) SUCH TRANSFER IS PURSUANT TO RULE 144 OR RULE 144A UNDER THE ACT AND SUCH HOLDER(S) SHALL HAVE DELIVERED TO THE COMPANY A CERTIFICATE SETTING FORTH THE BASIS FOR APPLYING SUCH RULE TO THE PROPOSED TRANSFER. WARRANT ABRAXAS PETROLEUM CORPORATION THIS IS TO CERTIFY THAT DURHAM CAPITAL CORPORATION, or registered assigns, is entitled, at any time prior to the Expiration Date (such term, and certain other capitalized terms used herein being hereinafter defined), to purchase from ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (the "Company"), ONE HUNDRED THOUSAND (100,000) shares of the Common Stock of the Company (such number of shares being subject to adjustment from time to time as provided herein), at an initial purchase price of $0.01 per share (such initial purchase price being subject to adjustment from time to time as provided herein and as so adjusted, the "Exercise Price"), all on the terms and conditions and pursuant to the provisions hereinafter set forth. 1. DEFINITIONS As used in this Warrant, the following terms have the respective meanings set forth below. "Affiliate" of any Person means a Person (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with such Person, (b) which beneficially owns or holds more than five percent (5.0%) of the outstanding shares of any class of voting stock of such Person or (c) more than five percent (5.0%) of the outstanding shares of any class of voting stock (or, in the case of a Person which is not a corporation, more than five percent (5.0%) of the equity interest) of which is beneficially owned or held by such Person. The term "control" as used with respect to any Person means 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, by contract or otherwise. "After-Tax Basis" when referring to a payment that is required hereunder (the "target amount"), shall mean a total payment (the "total amount") that, after deduction of all federal, state and local taxes that are required to be paid by the recipient in respect of the receipt or accrual of such total amount, is equal to the target amount. "Agreed Rate" shall mean 10% per annum. "Appraised Value" per share of Common Stock as of a date specified herein shall mean the value of such a share as of such date as determined by an investment bank of nationally recognized standing selected by the Majority Warrant Holders and reasonably acceptable to the Company. If the investment bank selected by the Majority Warrant Holders is not reasonably acceptable to the Company, and the Company and the Majority Warrant Holders cannot agree on a mutually acceptable investment bank, then the Company and the Majority Warrant Holders shall each choose one such investment bank and the respective chosen firms shall jointly select a third investment bank, which shall make the determination. The Company shall pay the costs and fees of each such investment bank (including any such investment bank selected by the Majority Warrant Holders), and the decision of the investment bank making such determination of Appraised Value shall be final and binding on the Company and all affected holders of Warrants or Warrant Stock. Such Appraised Value shall be determined as a pro rata portion of the value of the Company taken as a whole, based on the higher of (A) the value derived from a hypothetical sale of the entire Company as a going concern by a willing seller to a willing buyer (neither acting under any compulsion) and (B) the liquidation value of the entire Company. No discount shall be applied on account of (i) any Warrants or Warrant Stock representing a minority interest, (ii) any lack of liquidity of the Common Stock or the Warrants, (iii) the fact that the Warrants or Warrant Stock may constitute "restricted securities" for securities law purposes or (iv) the existence of any call option. "Bank Holding Company Act" shall mean the Bank Holding Company Act of 1956, as amended. 2 "Book Value" per share of Common Stock as of a date specified herein shall mean the consolidated book value of the Company and its Subsidiaries as of such date divided by the number of shares of Common Stock Outstanding on such date. Such book value shall be determined in accordance with GAAP, except that there shall be no reduction in such book value by reason of any amount that may be required either as an offset to or reserve against retained earnings or as a deduction from book value as a result of the issuance, existence, anticipated exercise of, or anticipated cost to the Company of the repurchase of, any of the Warrants. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York. "Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. "Common Stock" shall mean (except where the context otherwise indicates) the Common Stock of the Company, par value $0.01 per share, as constituted on the Original Issue Date, and any capital stock into which such Common Stock may thereafter be changed, and shall also include (i) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of any Common Stock upon any reclassification thereof which is also not preferred as to dividends or liquidation over any other class of stock of the Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation (as defined in Section 4.3 hereof) received by or distributed to the holders of Common Stock of the Company in the circumstances contemplated by Section 4.3 hereof. "Company" means Abraxas Petroleum Corporation, a Nevada corporation, and any successor corporation. "Company Default" means (a) the breach of any warranty or the inaccuracy at the time when made of any representation made by the Company herein or (b) the failure by the Company to comply with any covenant of the Company contained herein. "Continuously Effective", with respect to a specified registration statement, shall mean that it shall not cease to be effective and available for Transfers of Warrant Stock thereunder for longer than either (i) any ten (10) consecutive business days, or (ii) an aggregate of fifteen (15) business days during the period specified in the relevant provision of Section 9 hereof. "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities that are convertible into or exchangeable for, with or without payment of additional consideration in cash or property, shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "Current Market Price" shall mean as of any specified date the average of the daily market prices of the Common Stock of the Company for the shorter of (x) the twenty (20) consecutive Business Days immediately preceding such date or (y) the period commencing on the Business Day next following the first public announcement of any event giving rise to an adjustment of the Exercise Price 3 pursuant to Section 4 below. The "daily market price" for each such Business Day shall be: (i) if the Common Stock is then listed on a national securities exchange or is listed on NASDAQ and is designated as a National Market System security, the last sale price, regular way, on such day on the principal stock exchange or market system on which such Common Stock is then listed or admitted to trading, or, if no such sale takes place on such day, the average of the closing bid and asked prices for the Common Stock on such day as reported on such stock exchange or market system or (ii) if the Common Stock is not then listed or admitted to trading on any national securities exchange or designated as a National Market System security on NASDAQ but is traded over-the-counter, the average of the closing bid and asked prices for the Common Stock as reported on NASDAQ or the Electronic Bulletin Board or in the National Daily Quotation Sheets, as applicable. "Demand Registration" shall have the meaning set forth in Section 9.2(a) hereof. "Demanding Holders" shall have the meaning set forth in Section 9.2(a) hereof. "Designated Office" shall have the meaning set forth in Section 11 hereof. "Dilution Fee" shall have the meaning set forth in Section 12 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Exercise Date" shall have the meaning set forth in Section 2.1 hereof. "Exercise Notice" shall have the meaning set forth in Section 2.1 hereof. "Exercise Period" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1 hereof. "Exercise Price" shall mean, in respect of a share of Common Stock at any date herein specified, the initial Exercise Price set forth in the preamble of this Warrant as adjusted from time to time pursuant to Section 4 hereof. "Expiration Date" shall mean the tenth anniversary of the Original Issue Date. "Fair Value" per share of Common Stock as of any specified date shall mean the higher of (i) the Book Value per share of Common Stock as of such date and (ii) (A) if the Common Stock is publicly traded on such date, the Current Market Price per share or (B) if the Common Stock is not publicly traded on such date, (1) the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Company and set forth in a written notice to each Holder or (2) if any such Holder objects in writing to such price as determined by the Board of Directors within thirty (30) days after receiving notice of same, the Appraised Value per share as of such date. 4 "Financial Holding Company" shall mean a bank holding company that meets the requirements of Section 4(l)(1) of the Bank Holding Company Act. "Fully Diluted Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding on such date and all shares of Common Stock issuable in respect of (x) the Warrants outstanding on such date, (y) any Convertible Securities outstanding on such date and (z) any other Stock Purchase Rights outstanding on such date, in each case regardless of whether or not the conversion, exchange, subscription or purchase rights associated with such Convertible Securities or Stock Purchase Rights are presently exercisable. "GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect. "Glass-Steagall Act" shall mean Section 24 (Seventh) and Section 378 of Title 12 (12 U.S.C. ss.ss. 24 (Seventh) 378), or any similar federal legislation. "Holder" shall mean (a) with respect to this Warrant, the Person in whose name the Warrant set forth herein is registered on the books of the Company maintained for such purpose and (b) with respect to any other Warrant or shares of Warrant Stock, the Person in whose name such Warrant or Warrant Stock is registered on the books of the Company maintained for such purpose. "Insolvency Event" shall mean any proceeding being instituted by or against the Company seeking a declaration or order for relief, or entailing a finding, that the Company is insolvent or bankrupt, or seeking reorganization, liquidation, dissolution, winding-up, charter revocation or other similar relief with respect to the Company or any of its properties, assets or debts, or seeking the appointment of a receiver, trustee, custodian, liquidator, sequestrator or similar official for the Company or any of its properties or assets, or the Company becoming insolvent or bankrupt or generally unable to pay its debts as they become due, or the Company voluntarily suspending its business or making a general assignment for the benefit of creditors; provided that an Insolvency Event shall not be deemed to have occurred on account of any such proceeding which is involuntary on the part of the Company unless same shall not have been dismissed or stayed within 60 days. "Lien" shall mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Uniform Commercial Code or comparable law of any jurisdiction). "Majority Warrant Holders", with respect to a given determination, shall mean the Holders of Warrants and/or Warrant Stock representing more than fifty percent (50%) of all Warrants and/or Warrant Stock (with any such Warrants 5 being deemed to represent, for the purposes of such calculation, the shares of Warrant Stock then issuable upon exercise thereof) directly affected by such determination. "Majority Selling Holders" shall mean those Selling Holders whose Warrants and/or Warrant Stock included in a registration under Section 9 hereof represents a majority of the Warrants and/or Warrant Stock (with any such Warrants being deemed to represent, for the purposes of such calculation, the shares of Warrant Stock then issuable upon exercise thereof) included therein by all Selling Holders. "NASD" shall mean the National Association of Securities Dealers, Inc., or any successor corporation thereto. "NASDAQ" shall mean the NASDAQ quotation system, or any successor reporting system. "Opinion of Counsel" means a written opinion of counsel (who may be an employee of a Holder) experienced in Securities Act or bank regulatory matters, as the case may be, chosen by the Holder of this Warrant or Warrant Stock issued upon the exercise hereof and reasonably acceptable to the Company. "Original Issue Date" shall mean the date on which the Original Warrants were issued, as set forth on the cover page of this Warrant. "Original Warrants" shall mean the Warrants originally issued by the Company on the Original Issue Date to the Lenders. "Other Property" shall have the meaning set forth in Section 4.3 hereof. "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company or any Subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "Outstanding", when used with respect to Warrant Stock for the purposes of Section 9 hereof shall have the meaning set forth in Section 9.1(d) hereof. "Person" shall mean any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Piggyback Registration" shall have the meaning set forth in Section 9.3(a) hereof. 6 "Register", "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering by the Commission of effectiveness of such registration statement or document. "Registration Expenses" shall have the meaning set forth in Section 9.6(a) hereof. "Restricted Common Stock" shall mean shares of Common Stock which are, or which upon their issuance on the exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 8.2(a) hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Holders" shall mean, with respect to a specified registration under Section 9 hereof, WS Holders whose Registrable Securities are included in such registration. "Share Withholding Option" has the meaning set forth in Section 2.1 hereof. "Shelf Registration" shall have the meaning set forth in Section 9.2(a) hereof. "Stock Purchase Rights" shall mean any options, warrants or other securities or rights to subscribe to or exercisable for the purchase of shares of Common Stock or Convertible Securities, whether or not immediately exercisable. "Subsidiary" means any corporation or association (a) more than fifty percent (50%) (by number of votes) of the voting stock of which is at the time owned by the Company or by one or more Subsidiaries or by the Company and one or more Subsidiaries, or any other business entity in which the Company or one or more Subsidiaries or the Company and one or more Subsidiaries own more than a fifty percent (50%) interest either in the profits or capital of such business entity or (b) whose net earnings, or portions thereof, are consolidated with the net earnings of the Company and are recorded on the books of the Company for financial reporting purposes in accordance with GAAP. "Transfer" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a "sale" thereof within the meaning of the Securities Act. "Violation" has the meaning set forth in Section 9.7(a) hereof. "Warrant Price" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1 hereof, multiplied by (ii) the Exercise Price as of the date of such exercise. 7 "Warrants" shall mean the Original Warrants and all warrants issued upon transfer, division or combination of, or in substitution for, such Original Warrants or any other such Warrant. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised. "Warrant Stock" generally shall mean the shares of Common Stock issued, issuable or both (as the context may require) upon the exercise of Warrants until such time as such shares of Common Stock have either been (i) Transferred in a public offering pursuant to a registration statement filed under the Securities Act or (ii) Transferred in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof with all transfer restrictions and restrictive legends with respect to such Common Stock being removed in connection with such transaction. "Warrant Stock" for the purposes of Section 9 hereof shall have the meaning set forth in Section 9.1(b) hereof. "WS Holder" shall have the meaning set forth in Section 9.1(a) hereof. 8 2. EXERCISE OF WARRANT 2.1. Manner of Exercise. (a) From and after the Original Issue Date and until 5:00 P.M., New York time, on the Expiration Date, the Holder of this Warrant may from time to time exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder (as determined pursuant to Section 4.2 hereof). In order to exercise this Warrant, in whole or in part, the Holder shall (i) deliver to the Company at the Designated Office (x) a written notice of the Holder's election to exercise this Warrant (an "Exercise Notice"), which Exercise Notice shall be irrevocable and specify the number of shares of Common Stock to be purchased and (y) this Warrant, and (ii) pay to the Company the Warrant Price (the date on which both such delivery and payment shall have first taken place being hereinafter sometimes referred to as the "Exercise Date"). Such Exercise Notice shall be in the form of Annex A hereto and shall be duly executed by the Holder or its duly authorized agent or attorney. (b) Upon receipt of such Exercise Notice, Warrant and payment, the Company shall, as promptly as practicable, and in any event within five (5) Business Days thereafter, execute (or cause to be executed) and deliver (or cause to be delivered) to the Holder a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as the exercising Holder shall reasonably request in the Exercise Notice and shall be registered in the name of the Holder or (upon payment by the Holder of any applicable transfer taxes then due and owing) such other name as shall be designated in the Exercise Notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the Exercise Date. (c) Payment of the Warrant Price shall be made by, at the option of the Holder, one or more of the following methods: (i) by delivery of a certified or official bank check in the amount of such Warrant Price; (ii) by instructing the Company to withhold a number of shares of Warrant Stock then issuable upon exercise of this Warrant with an aggregate Fair Value equal to such Warrant Price (the "Share Withholding Option"); or (iii) by surrendering to the Company shares of Common Stock previously acquired by the Holder with an aggregate Fair Value equal to such Warrant Price. In the event of any withholding of Warrant Stock or surrender of Common Stock pursuant to clause (ii) or (iii) above where the number of shares whose Fair Value is equal to the Warrant Price is not a whole number, the number of shares withheld by or surrendered to the Company shall be rounded up to the nearest whole share and the Company shall make a cash payment to the Holder based on the incremental fraction of a share being so withheld by or surrendered to the Company in an amount determined in accordance with Section 2.3 hereof. 9 (d) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing the shares of Common Stock being issued, deliver to the Holder a new Warrant in the name of Holder evidencing the rights of the Holder to purchase the unpurchased shares of Common Stock called for by this Warrant. Such new Warrant shall in all other respects be identical with this Warrant. 2.2. Payment of Taxes. All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable, issued without violation of any preemptive rights and free and clear of all Liens (other than any created by actions of the Holder). The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof, unless such tax or charge is imposed by law upon the Holder, in which case such taxes or charges shall be paid by the Holder and the Company shall reimburse the Holder therefor on an After-Tax Basis. 2.3. Fractional Shares. The Company shall not be required to issue a fractional share of Common Stock upon exercise of any Warrant. As to any fraction of a share that the Holder of one or more Warrants, the rights under which are exercised in the same transaction, would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of (i) the Current Market Price of one share of Common Stock on the Exercise Date, if the Common Stock is then publicly traded or (ii) the Book Value per share of Common Stock based on the most recent available consolidated balance sheet of the Company, if the Common Stock is not then publicly traded. 2.4. Continued Validity and Application. A Holder of shares of Warrant Stock issued upon the exercise of this Warrant, in whole or in part, including any transferee of such shares (other than a transferee in whose hands such shares no longer constitute Warrant Stock as defined herein), shall continue, with respect to such shares, to be entitled to all rights and to be subject to all obligations that are applicable to such Holder by the terms of this Warrant. The Company shall, at the time of any exercise of this Warrant or any transfer of Warrant Stock, upon the request of the Holder of the shares of Warrant Stock issued in connection with such exercise or transfer, acknowledge in writing, in a form reasonably satisfactory to such Holder, its continuing obligation to afford to such Holder such rights referred to in this Section 2.4; provided, however, that if such Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Holder all such rights. 2.5. Limitation on Holder's Exercise. (a) Notwithstanding anything in this Warrant to the contrary, the Holder of this Warrant, if subject to the Bank Holding Company Act or any provision of the Glass-Steagall Act, may exercise this Warrant only if the Notice of Exercise is accompanied by an Opinion of Counsel of such Holder to the effect that, as of the date of delivery of such opinion, no federal or state regulatory clearances are required for such Holder to exercise this Warrant or, in the event any such federal or state regulatory clearances are required prior to the exercise of this Warrant, to the effect that all such clearances have 10 been obtained or, if not then obtained, that no statute or regulation or regulatory policy or guidelines known to such counsel would by their terms preclude the obtaining of such clearances or make it unlikely that such clearances would be obtained or make it likely that such clearances would, if obtained, contain material conditions adverse to such Holder; provided, however, that no Holder subject to the Bank Holding Company Act shall exercise this Warrant in any manner that would thereafter result in such Holder and any of its Affiliates not qualified as a Small Business Investment Company, as such term is defined in the Small Business Investment Act, owning in the aggregate five percent (5%) or more of the Common Stock then outstanding or such greater percentage as may then be in accordance with any then applicable rule, regulation or policy of the Federal Reserve Board relating to equity investments by bank holding companies. Notwithstanding the foregoing, the five percent (5%) limitation shall not apply to a Holder who is a Financial Holding Company and no Opinion of Counsel is required to accompany a Notice of Exercise from a Financial Holding Company. In the event that federal or state regulatory clearances are required prior to the exercise of this Warrant by the Holder hereof, the Company shall cooperate fully with such Holder in providing such information to any regulatory agency as such agency may require. In the event any such regulatory clearance is withheld or denied, such Holder may continue to hold this Warrant until its expiration or may sell or otherwise transfer this Warrant in accordance with the terms hereof. (b) Each and every exercise of this Warrant is contingent upon such issuance of Warrant Stock upon exercise being exempt from (or otherwise not subject to) the registration requirements of the Securities Act and any applicable State securities or "Blue Sky" laws. 3. TRANSFER, DIVISION AND COMBINATION 3.1. Transfer. Subject to compliance with Section 8 hereof, each transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the Designated Office, together with a written assignment of this Warrant in the form of Annex B hereto duly executed by the Holder or its duly authorized agent or attorney. Upon such surrender and delivery, the Company shall, subject to Section 8, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the rights of the assignor to purchase the shares of Common Stock called for by this Warrant not so assigned and this Warrant shall promptly be cancelled. Such new Warrant or Warrants shall in all other respects be identical with this Warrant. A Warrant, if properly assigned in compliance with Section 8, may be exercised by the new Holder for the purchase of shares of Common Stock without having a new Warrant issued. 3.2. Division and Combination. Subject to compliance with the applicable provisions of this Warrant, this Warrant may be divided or combined with other Warrants upon presentation hereof at the Designated Office, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its duly authorized agent or attorney. Subject to compliance with the applicable provisions of this Warrant 11 as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. 3.3. Expenses. The Company shall prepare, issue and deliver at its own expense any new Warrant or Warrants required to be issued under this Section 3. 3.4. Maintenance of Books. The Company agrees to maintain, at the Designated Office, books for the registration and transfer of the Warrants. 4. ANTIDILUTION PROVISIONS The number of shares of Common Stock for which this Warrant is exercisable and the Exercise Price shall be subject to adjustment from time to time as set forth in this Section 4. 4.1. Stock Dividends, Subdivisions and Combinations. If at any time the Company shall (i) pay a dividend in, or make a distribution of, additional shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of such Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of such Common Stock, then the Exercise Price shall be adjusted to equal the product of the Exercise Price in effect immediately prior to such event multiplied by a fraction the numerator of which is equal to the number of shares of Common Stock Outstanding immediately prior to the adjustment and the denominator of which is equal to the number of shares of Common Stock Outstanding immediately after such adjustment. 4.2. Adjustment of Number of Shares Purchasable. Upon any adjustment of the Exercise Price as provided in Section 4.1 hereof, the Holder hereof shall thereafter be entitled to purchase upon the exercise of this Warrant, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock (calculated to the nearest 1/100th of a share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable on the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. 4.3. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is any change whatsoever in, or distribution with respect to, the Outstanding Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, (i) shares of common stock of the successor or acquiring corporation or of the Company (if it is the surviving corporation) or (ii) any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property") are to be received by or distributed to the holders of Common Stock of the Company who are holders immediately prior to such 12 transaction, then the Holder of this Warrant shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In such event, the aggregate Exercise Price otherwise payable for the shares of Common Stock issuable upon exercise of this Warrant shall be allocated among the shares of common stock and Other Property receivable as a result of such reorganization, reclassification, merger, consolidation or disposition of assets in proportion to the respective fair market values of such shares of common stock and Other Property as determined in good faith by the Board of Directors of the Company. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be reasonably deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of any shares of the common stock of such successor or acquiring corporation for which this Warrant thus becomes exercisable, which modifications shall be as equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.3, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class that is not preferred as to dividends or assets over any other class of stock of such corporation and that is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities that are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.3 shall similarly apply to successive reorganizations, reclassification, mergers, consolidations or disposition of assets. 4.4. Other Dilutive Events. In case any event shall occur as to which the other provisions of this Section 4 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof (including, without limitation, the issuance of securities other than Common Stock which have the right to participate in distributions to the holders of Common Stock, the granting of "phantom stock" rights or "stock appreciation rights" or the repurchase of outstanding shares of Common Stock, Convertible Securities or Stock Purchase Rights for a purchase price exceeding the fair market value thereof), then, in each such case, the Company shall (i) make a determination as to the adjustment, if any, required to be made on a basis consistent with the essential intent and principles established herein as a result of such event in order to preserve the purchase rights represented by the Warrants (the "Adjustment"), (ii) provide the Holders with prompt notice of any Adjustment or any determination that no Adjustment is required and (iii) make such Adjustment, if any. If the Majority Warrant Holders objects to any adjustment (or failure to make an adjustment) made by the Company pursuant to the preceding sentence of this Section 4.4 and provides notice of such objection to the Company within 30 days of such Holder's receipt of notice of such 13 adjustment (or determination that no adjustment is required), the Majority Warrant Holders may select an independent investment banking firm of nationally recognized standing and reasonably acceptable to the Company to determine if the Adjustment (or determination that no adjustment is required) is correct and, if not correct, to make a determination as to the adjustment, if any, required to be made on a basis consistent with the essential intent and principles established herein as a result of such event in order to preserve the purchase rights represented by the Warrants. If the investment bank selected by the Majority Warrant Holders is not reasonably acceptable to the Company, and the Company and the Majority Warrant Holders cannot agree on a mutually acceptable investment bank, then the Company and the Majority Warrant Holders shall each choose one such investment bank and the respective chosen firms shall jointly select a third investment bank, which shall make the determination. The Company shall pay the costs and fees of each such investment bank (including any such investment bank selected by the Majority Warrant Holders), and the decision of the investment bank making such determination shall be final and binding on the Company and all affected holders of Warrants or Warrant Stock. Promptly after receipt of the opinion of such investment bank as to any such required adjustments, the Company shall take any actions necessary to implement same. 4.5. Other Provisions Applicable to Adjustments Under this Section. The following provisions shall be applicable to the adjustments provided for pursuant to this Section 4: (a) When Adjustments To Be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring such an adjustment shall occur. For the purpose of any such adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (b) Record Date. In case the Company shall take a record of the holders of the Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Convertible Securities or Stock Purchase Rights or (ii) to subscribe for or purchase Common Stock, Convertible Securities or Stock Purchase Rights, then all references in this Section 4 to the date of the issuance or sale of such shares of Common Stock, Convertible Securities or Stock Purchase Rights shall be deemed to be references to such record date. (c) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest 1/100th of a share. (d) When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution to which the provisions of Section 4.1 would apply, but shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 14 (e) Maximum Exercise Price. Except as provided in Section 4.1 above, at no time shall the Exercise Price per share of Common Stock exceed the amount set forth in the first paragraph of the preamble of this Warrant. (f) Certain Limitations. Notwithstanding anything herein to the contrary, the Company agrees not to enter into any transaction that, by reason of any adjustment under Section 4.1 above, would cause the Exercise Price to be less than the par value of the Common Stock, if any, unless the Company first reduces the par value of the Common Stock to be less than the Exercise Price that would result from such transaction. (g) Notice of Adjustments. Whenever the number of shares of Common Stock for which this Warrant is exercisable or the Exercise Price shall be adjusted pursuant to this Section 4, the Company shall forthwith prepare a certificate to be executed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated, specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.3) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any related change in the Exercise Price, after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to each Holder in accordance with Section 13.2. The Company shall keep at its principal office or at the Designated Office, if different, copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by any Holder or any prospective transferee of a Warrant designated by a Holder thereof. (h) Independent Application. Except as otherwise provided herein, all subsections of this Section 4 are intended to operate independently of one another (but without duplication). If an event occurs that requires the application of more than one subsection, all applicable subsections shall be given independent effect without duplication. 4.6. Pre-emptive Rights. In the event that the Company at any time grants any pre-emptive rights to any holder of equity securities of the Company to purchase any shares of Common Stock, Convertible Securities or Stock Purchase Rights, the Company shall grant similar pre-emptive rights to each holder of Warrant Stock then outstanding or thereafter issued. 5. NO IMPAIRMENT; REGULATORY COMPLIANCE AND COOPERATION (a) The Company shall not by any action, including, without limitation, amending its charter documents or through any reorganization, reclassification, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other similar voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Holder against impairment. Without limiting the generality of the foregoing, the Company shall take all such action as may be necessary or 15 appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, free and clear of all Liens, and shall use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (b) Notwithstanding any other provision of this Warrant, the Company shall not, without the written consent (which consent shall not be unreasonably withheld) of any Holder hereof and any holders of Warrant Stock issued hereunder known by the Company to be subject to the Bank Holding Company Act (other than a Financial Holding Company) redeem, purchase or otherwise acquire, directly or indirectly, or convert or take any action with respect to the voting rights of, any shares of any class of its capital stock or any securities convertible into or exchangeable for any shares of any class of its capital stock, so as to increase the proportion of the Company's voting stock which this Warrant entitles the Holder to purchase or which such holder of Warrant Stock then owns. Such a Holder or holder of Warrant Stock will be deemed to have reasonably withheld such consent if, in its reasonable opinion, after giving effect to such action, such Person would have a "Regulatory Problem" (as defined below). In addition, the Company shall not become a party to any merger, consolidation, recapitalization or other transaction pursuant to which the Holder hereof or a holder of Warrant Stock issued hereunder would be required to take any voting securities, or any securities convertible into voting securities, which might reasonably be expected to cause such holder to have a Regulatory Problem. For purposes of this paragraph, a Holder of this Warrant or a holder of Warrant Stock issued hereunder will be deemed to have a "Regulatory Problem" when such holder and such holder's Affiliates would own, control or have power over a greater quantity of securities of any kind issued by the Company than is permitted under any requirement of any governmental authority binding on such Person. 6. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY From and after the Original Issue Date, the Company shall at all times reserve and keep available for issuance upon the exercise of the Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock issuable pursuant to the terms hereof, when issued upon exercise of this Warrant with payment therefor in accordance with the terms hereof, shall be duly and validly issued and fully paid and nonassessable, not subject to preemptive rights and shall be free and clear of all Liens. Before taking any action that would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction over such action. If any shares of Common Stock required to be reserved for issuance upon exercise of Warrants require registration or qualification with any governmental authority under any federal or state law (other than under the Securities Act or any state securities law) before such shares may be so issued, the Company will in good faith and as expeditiously as possible and at its expense endeavor to cause such shares to be duly registered. 16 7. NOTICE OF CORPORATE ACTIONS; TAKING OF RECORD; TRANSFER BOOKS 7.1. Notices of Corporate Actions. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or distribution, or any right to subscribe for, purchase or otherwise acquire any shares of capital stock of any class or any other securities, (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger involving the Company and any other Person or any transfer or other disposition of all or substantially all the assets of the Company to another Person or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company or (d) any amendment of the Certificate of Incorporation of the Company, the Company shall mail to each Holder of a Warrant in accordance with the provisions of Section 13.2 hereof a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, disposition, dissolution, liquidation or winding-up is to take place, the time, if any such time is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for the securities or Other Property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, disposition, dissolution, liquidation or winding-up and a description in reasonable detail of the transaction. Such notice shall be mailed to the extent practicable at least thirty (30), but not more than ninety (90) days' prior to the date therein specified. In the event that the Company at any time sends any other notice to the holders of its Common Stock, it shall concurrently send a copy of such notice to each Holder of a Warrant. 7.2. Taking of Record. In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision of any Section hereof refers to the taking of a record of such holders, the Company will in each such case take such a record and will take such record as of the close of business on a Business Day. 7.3. Closing of Transfer Books. The Company shall not at any time, except upon dissolution, liquidation or winding up of the Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. 8. TRANSFER RESTRICTIONS The Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 8. 8.1. Restrictions on Transfers. (a) Neither this Warrant nor any Warrant Stock issued upon the exercise hereof shall be transferable by any holder that is subject to the Bank Holding Company Act (other than a Financial Holding Company) without the prior written consent of the Company (which consent shall not unreasonably be withheld) except 17 (i) to an Affiliate of such holder, (ii) to a successor corporation to such holder as a result of a merger or consolidation with, or sale of substantially all of the assets of, such holder, (iii) as is or may be required by such holder to comply with any Federal or state law or any rule or regulation of any governmental or public body or authority, (iv) to Persons which are subject to the provisions of the Bank Holding Company Act (provided that the transferor receives an Opinion of Counsel, in form and substance satisfactory to it, to the effect that such transferor will not have failed to comply with the Bank Holding Company Act by making such transfer), (v) to Persons which are not subject to the provisions of the Bank Holding Company Act or Persons who are subject to the Bank Holding Company Act but qualify as a Financial Holding Company (provided that such Persons shall each acquire in such transfer Warrants exercisable as to, or shares of Common Stock representing, not more than two percent (2%) of the then outstanding shares of Common Stock or such greater percentage as may then be in accordance with any then applicable policy of the Federal Reserve Board relating to equity investments by bank holding companies), (vi) to Persons which, at the time of such transfer and without giving effect to such transfer, have the power to vote a majority of the outstanding shares of voting stock of or otherwise control the Company or (vii) in a public offering pursuant to an effective registration statement under the Securities Act or in a "brokers' transaction" pursuant to Rule 144 under the Securities Act. In addition, a transferor that is subject to the Glass-Steagall Act shall not effect any transfer of this Warrant in violation of any provision of the Glass-Steagall Act. (b) In addition to the restrictions set forth in Section 8.1(a) above, neither this Warrant nor any shares of Restricted Common Stock issued upon the exercise hereof shall be Transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from the registration provisions thereof. No Transfer of this Warrant or any such shares of Restricted Stock other than pursuant to such an effective registration statement shall be valid or effective unless (a) the holder of the securities proposed to be transferred shall have delivered to the Company either a no-action letter from the Commission or an Opinion of Counsel to the effect that such proposed Transfer is exempt from the registration requirements of the Securities Act or (b) such Transfer is being made pursuant to Rule 144 or Rule 144A under the Securities Act and such holder shall have delivered to the Company a certificate setting forth the basis for applying such Rule to the proposed Transfer. Each certificate, if any, evidencing such shares of Restricted Common Stock issued upon any such Transfer, other than in a public offering pursuant to an effective registration statement, shall bear the restrictive legend set forth in Section 8.2(a), and each Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 8.2(b), unless the Holder delivers to the Company an Opinion of Counsel to the effect that such legend is not required for the purposes of compliance with the Securities Act. Holders of the Warrants or the Restricted Common Stock, as the case may be, shall not be entitled to Transfer such Warrants or such Restricted Common Stock except in accordance with this Section 8.1. 8.2. Restrictive Legends. (a) Except as otherwise provided in this Section 8, each certificate for Warrant Stock initially issued upon the exercise of this Warrant, and each certificate for Warrant Stock issued to any subsequent transferee of any such 18 certificate, shall be stamped or otherwise imprinted with two legends in substantially the following forms: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) THE HOLDER OF THE SECURITIES PROPOSED TO BE TRANSFERRED SHALL HAVE DELIVERED TO THE COMPANY AN OPINION OF COUNSEL (WHO MAY BE AN EMPLOYEE OF SUCH HOLDER) EXPERIENCED IN SECURITIES MATTERS TO THE EFFECT THAT SUCH PROPOSED TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT OR (C) SUCH TRANSFER IS PURSUANT TO RULE 144 OR RULE 144A UNDER THE ACT AND SUCH HOLDER(S) SHALL HAVE DELIVERED TO THE COMPANY A CERTIFICATE SETTING FORTH THE BASIS FOR APPLYING SUCH RULE TO THE PROPOSED TRANSFER." "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ENTITLED TO THE BENEFIT OF AND ARE SUBJECT TO CERTAIN OBLIGATIONS SET FORTH IN THE WARRANT PURSUANT TO THE EXERCISE OF WHICH SUCH SHARES WERE ISSUED. A COPY OF SUCH WARRANT IS AVAILABLE AT THE EXECUTIVE OFFICES OF THE COMPANY." (b) Except as otherwise provided in this Section 8, each Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE OR OF THE STOCK ISSUABLE UPON EXERCISE THEREOF SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) THE HOLDER OF THE SECURITIES PROPOSED TO BE TRANSFERRED SHALL HAVE DELIVERED TO THE COMPANY EITHER A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION OR AN OPINION OF COUNSEL (WHO MAY BE AN EMPLOYEE OF SUCH HOLDER) EXPERIENCED IN SECURITIES MATTERS TO THE EFFECT THAT SUCH PROPOSED TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT OR (C) SUCH TRANSFER IS PURSUANT TO RULE 144 OR RULE 144A UNDER THE 19 ACT AND SUCH HOLDER SHALL HAVE DELIVERED TO THE COMPANY A CERTIFICATE SETTING FORTH THE BASIS FOR APPLYING SUCH RULE TO THE PROPOSED TRANSFER." 8.3. Termination of Securities Law Restrictions. Notwithstanding the foregoing provisions of this Section 8, the restrictions imposed by Section 8.1(b) upon the transferability of the Warrants and the Restricted Common Stock and the legend requirements of Section 8.2 shall terminate as to any particular Warrant or shares of Restricted Common Stock when the Company shall have received from the Holder thereof an Opinion of Counsel to the effect that such legend is not required in order to ensure compliance with the Securities Act. Whenever the restrictions imposed by Sections 8.1(b) and 8.2 shall terminate as to this Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive from the Company, at the expense of the Company, a new Warrant bearing the following legend in place of the restrictive legend set forth hereon: "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED IN SECTIONS 8.1(b) AND 8.2 HEREOF TERMINATED ON [______________], 20__, AND ARE OF NO FURTHER FORCE AND EFFECT." All Warrants issued upon registration of transfer, division or combination of, or in substitution for, any Warrant or Warrants entitled to bear such legend shall have a similar legend endorsed thereon. Wherever the restrictions imposed by this Section shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the Holder thereof shall be entitled to receive from the Company, at the Company's expense, a new certificate representing such Common Stock not bearing the restrictive legend set forth in Section 8.2(a). 9. REGISTRATION RIGHTS 9.1. Certain Definitions. For the purposes of this Section 9: (a) "Blackout Period" means any period or periods, not to exceed an aggregate of 30 days if, (x) an event occurs and is continuing as a result of which a registration statement as then amended or supplemented, or any related prospectus as then amended or supplemented, would, in the good faith judgment of the Board of Directors of the Company, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading and (y) (1) the Board of Directors of the Company determines in good faith that the disclosure of such event at such time would have a material adverse effect on the business, operations or prospects of the Company or (2) the disclosure otherwise relates to a material business transaction which has not yet been publicly disclosed. (b) The Holders of Warrants and the holders of Warrant Stock are collectively referred to as "WS Holders". 20 (c) "Warrant Stock" shall be deemed to include not only shares of Common Stock already included in the general definition of such term, but also (i) any other securities issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange by the Company generally for, or in replacement by the Company generally of, any shares of Warrant Stock and (ii) any securities issued in exchange for any such Warrant Stock in any merger or reorganization of the Company, but in the either such case only so long as such securities have not been registered and Transferred pursuant to the Securities Act or Transferred in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions and restrictive legends with respect to such securities are removed in connection with such Transfer. (d) Each WS Holder shall be deemed to "hold", as of any specified date, the aggregate of (i) the number of shares of Warrant Stock held by such WS Holder as of such date plus (ii) the number of shares of Warrant Stock issuable upon exercise of any Warrants held by such WS Holder as of such date. (e) The total number of shares of Warrant Stock deemed "outstanding" as of a specified date will be equal to (i) the total number of shares of Warrant Stock Outstanding as of such date plus (ii) the number of shares of Warrant Stock issuable upon exercise of all outstanding Warrants as of such date. (f) "Registrable Securities" shall mean any shares of Warrant Stock. 9.2. Demand Registration. (a) In the event the Company receives at any time a written request from one or more WS Holders holding in the aggregate at least a majority of the number of shares of Warrant Stock then outstanding (the "Demanding Holders") that the Company file a registration statement under the Securities Act for the sale or other disposition of Registrable Securities (a "Demand Registration"), the Company shall promptly give written notice of such request to each other WS Holder and each such WS Holder may elect, by giving written notice of such election to the Company within ten (10) Business Days after receipt of the Company's notice, to have some or all of the Registrable Securities held by it included in such registration. At the option of the Demanding Holders, such request may specify that the requested registration will be for an offering on a delayed or continual basis pursuant to Rule 415 under the Securities Act (a "Shelf Registration"). (b) Following receipt of such a request for a Demand Registration, the Company shall: (1) File the requested registration statement with the Commission as promptly as practicable, and shall use the Company's best efforts to have the registration declared effective under the Securities Act as soon as reasonably practicable, in each instance giving due regard to the need 21 to prepare current financial statements, conduct due diligence and complete other actions that are reasonably necessary to effect a registered public offering; and (2) Use the Company's best efforts to keep the such registration statement Continuously Effective (x) if a Demand Registration, for up to two hundred seventy (270) days or until such earlier date as of which (i) all Registrable Securities covered by such registration statement shall have been disposed of in the manner described in the registration statement or under Rule 144 under the Securities Act or (ii) all the Registrable Securities remaining to be sold under such registration statement have been available for immediate sale to the public under Rule 144(k) under the Securities Act or any successor provision for a period of one hundred twenty (120) consecutive days, and (y) if a Shelf Registration, for three years or until such earlier date as of which (i) all Registrable Securities covered by such registration statement shall have been disposed of in the manner described in the registration statement or under Rule 144 under the Securities Act or (ii) all the Registrable Securities remaining to be sold under such registration statement have been available for immediate sale to the public under Rule 144(k) under the Securities Act or any successor provision for a period of one hundred twenty (120) consecutive days. Notwithstanding the foregoing, if for any reason the effectiveness of a Demand Registration is suspended or postponed as permitted by Subsection (d) below, the foregoing period shall be extended by the aggregate number of days of such suspension or postponement. (c) The Company shall not be required to effect a registration of Registrable Securities pursuant to a Demand Registration: (i) on more than two occasions; (ii) at any time within six months after the effective date of any registration statement filed by the Company under the Securities Act for any offering of Common Stock (other than a registration statement on Form S-4 or Form S-8 or any successor forms); (iii) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; and (iv) during the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a Company-initiated registration; provided that the Company is actively employing, in good faith, all reasonable efforts to cause such registration statement to become effective. For purposes of this Subsection (c), registration shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective, (ii) if after such registration statement has become effective, such registration or the related offer, sale or distribution of Registrable Securities thereunder is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Selling Holders and such interference is not thereafter eliminated or (iii) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of the Selling Holders. If the Company shall have complied with its obligations under this Section 9, a right to demand a registration pursuant to this Section 9.2 shall be deemed to have been satisfied (i) if a Demand 22 Registration other than a Shelf Registration, upon the earlier of (x) the date as of which all of the Registrable Securities included therein shall have been disposed of pursuant to the registration statement and (y) the date as of which such Demand Registration shall have been Continuously Effective for a period of two hundred seventy (270) days, and (ii) if a Shelf Registration, upon the effective date of a Shelf Registration, provided no stop order or similar order, or proceedings for such an order, is thereafter entered or initiated. (d) The Company shall be entitled to postpone for up to 90 days the filing of any Demand Registration statement otherwise required to be prepared and filed pursuant to this Section 9.2, if the Board of Directors of the Company determines, in its good faith reasonable judgment, that such registration and the Transfer of Warrant Stock contemplated thereby would materially interfere with, or require premature disclosure of, any financing, acquisition, divestiture, reorganization or other material transaction involving the Company or any of its wholly owned subsidiaries and the Company promptly gives the Demanding Holders notice of such determination; provided, however, that the Company shall not have postponed pursuant to this Subsection (d) the filing of any other Demand Registration statement otherwise required to be prepared and filed pursuant to this Section 9.2 during the 12-month period ended on the date of the relevant request pursuant to Subsection (a) above. (e) A registration pursuant to this Section 9.2 shall be on such appropriate registration form of the Commission as shall (i) be selected by the Company and be reasonably acceptable to the Majority Selling Holders and (ii) permit the disposition of the Warrant Stock in accordance with the intended method or methods of disposition specified in the request made pursuant to Subsection (a) above. If any registration pursuant to this Section 9.2 involves an underwritten offering (whether on a "firm", "best efforts" or "all reasonable efforts" basis or otherwise), or an agented offering, the Majority Selling Holders shall have the right to select the underwriter or underwriters and manager or managers to administer such underwritten offering or the placement agent or agents for such agented offering; provided, however, that each Person so selected shall be reasonably acceptable to the Company. 9.3. Piggyback Registration. (a) If at any time prior to the date that (i) all Registrable Securities have been sold pursuant to a Demand Registration or Rule 144 under the Securities Act or (ii) all remaining Registrable Securities are available for sale under Rule 144(k) under the Securities Act for a period of one hundred eighty (180) consecutive days, the Company proposes to register (including for this purpose a registration effected by the Company for shareholders of the Company other than the WS Holders) securities under the Securities Act in connection with the public offering solely for cash on Form S-1, S-2 or S-3 (or any replacement or successor forms), the Company shall promptly give each WS Holder written notice of such registration (a "Piggyback Registration"). Upon the written request of each WS Holder given within 15 days following the date of such notice, the Company shall cause to be included in such registration statement and use its best efforts to register under the Securities Act, using such registration statement, all the Registrable Securities that each such WS Holder shall have requested to be registered. The Company shall have the absolute right to withdraw or cease to prepare or file any registration 23 statement for any offering referred to in this Section 9.3 without any obligation or liability to any WS Holder. (b) If the managing underwriter shall advise the Company in writing (with a copy to each Selling Holder) that, in its opinion, the amount of Registrable Securities requested to be included in such registration would materially adversely affect such offering, or the timing thereof, then the Company will include in such registration, to the extent of the amount and class which the Company is so advised can be sold without such material adverse effect in such offering: First, all securities proposed to be sold by the Company for its own account; second, the Warrant Stock requested to be included in such registration by WS Holders pursuant to this Section 9.3, and all other securities being registered pursuant to the exercise of contractual rights comparable to the rights granted in this Section 9.3, pro rata based on the estimated gross proceeds from the sale thereof; and third, all other securities requested to be included in such registration. (c) Each WS Holder shall be entitled to have its Registrable Securities included in an unlimited number of Piggyback Registrations pursuant to this Section 9.3. 9.4. Registration Procedures. Whenever required under Section 9.2 or Section 9.3 hereof to effect the registration of any Registrable Securities, the Company shall, as expeditiously as practicable: (a) Prepare and file with the Commission a registration statement with respect to such Warrant Stock and use the Company's best efforts to cause such registration statement to become effective; provided, however, that before filing a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of the registration statement and prior to effectiveness thereof, the Company shall furnish to one firm of counsel for the Selling Holders (selected by Majority Selling Holders) copies of all such documents in the form substantially as proposed to be filed with the Commission at least four (4) business days prior to filing for review and comment by such counsel, which opportunity to comment shall include an absolute right to control or contest disclosure if the applicable Selling Holder reasonably believes that it may be subject to controlling person liability under applicable securities laws with respect thereto. (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act and rules thereunder with respect to the disposition of all securities covered by such registration statement. If the registration is for an underwritten offering, the Company shall amend the registration statement or supplement the prospectus whenever required by the terms of the underwriting agreement entered into pursuant to Section 9.4(f). Subject to Rule 415 under the Securities Act, if the registration statement is a Shelf Registration, the Company shall amend the registration statement or supplement the prospectus so that it will remain current and in compliance with the requirements of the Securities Act for three years after its effective date, and if during such period any event or development occurs as a result of which the registration statement or prospectus contains a misstatement of a material 24 fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Company shall promptly notify each Selling Holder, and (except during a Blackout Period) amend the registration statement or supplement the prospectus so that each will thereafter comply with the Securities Act and furnish to each Selling Holder of Registrable Securities such amended or supplemented prospectus, which each such Holder shall thereafter use in the Transfer of Warrant Stock covered by such registration statement. Pending such amendment or supplement each such Selling Holder shall cease making offers or Transfers of Registrable Securities pursuant to the prior prospectus. In the event that any Registrable Securities included in a registration statement subject to, or required by, this Agreement remain unsold at the end of the period during which the Company is obligated to use its best efforts to maintain the effectiveness of such registration statement, the Company may file a post-effective amendment to the registration statement for the purpose of removing such Registrable Securities from registered status. (c) Furnish to each Selling Holder of Registrable Securities, without charge, such numbers of copies of the registration statement, any pre-effective or post-effective amendment thereto, the prospectus, including each preliminary prospectus and any amendments or supplements thereto, in each case in conformity with the requirements of the Securities Act and the rules thereunder, and such other related documents as any such Selling Holder may reasonably request in order to facilitate the disposition of Registrable Securities owned by such Selling Holder. (d) Furnish to each Selling Holder of Warrant Stock, without charge, such numbers of copies of the registration statement, any pre-effective or post-effective amendment thereto, the prospectus, including each preliminary prospectus and any amendments or supplements thereto, in each case in conformity with the requirements of the Securities Act and the rules thereunder, and such other related documents as any such Selling Holder may reasonably request in order to facilitate the disposition of Registrable Securities owned by such Selling Holder. (e) Use the Company's best efforts (i) to register and qualify, or qualify for exemption from registration for, the securities covered by such registration statement under such other securities or Blue Sky laws of such states or jurisdictions as shall be reasonably requested by the managing underwriter (as applicable, or if inapplicable, the Majority Selling Holders), and (ii) to obtain the withdrawal of any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the qualification (or exemption from qualification) of the offer and transfer of any of the Registrable Securities in any jurisdiction, at the earliest possible moment; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (f) In the event of any underwritten or agented offering, enter into and perform the Company's obligations under an underwriting or agency agreement (including indemnification and contribution obligations of underwriters or agents), in usual and customary form, with the managing underwriter or underwriters of or agents for such offering. The Company shall also cooperate 25 with the Majority Selling Holders and the managing underwriter for such offering in the marketing of the Warrant Stock, including making available, upon reasonable prior notice and subject to such confidentiality restrictions as the Company shall deem reasonably necessary, the Company's officers, accountants, counsel, premises, books and records for such purpose. (g) Promptly notify each Selling Holder of any stop order issued or threatened to be issued by the Commission in connection therewith and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (h) Make generally available to the Company's security holders copies of all periodic reports, proxy statements, and other information referred to in Section 9.9(a) and an earnings statement satisfying the provisions of Section 11(a) of the Securities Act no later than 90 days following the end of the 12-month period beginning with the first month of the Company's first fiscal quarter commencing after the effective date of each registration statement filed pursuant to this Section 9. (i) Make available for inspection by any Selling Holder, any underwriter participating in such offering and the representatives of such Selling Holder and underwriter (but not more than one firm of counsel to such Selling Holders), all financial and other information as shall be reasonably requested by them, and provide the Selling Holder, any underwriter participating in such offering and the representatives of such Selling Holder and underwriter the opportunity to discuss the business affairs of the Company with its principal executives and independent public accountants who have certified the audited financial statements included in such registration statement, in each case all as necessary to enable them to exercise their due diligence responsibility under the Securities Act; provided, however, that information that the Company determines, in good faith, to be confidential and which the Company advises such Person in writing, is confidential shall not be disclosed unless such Person signs a confidentiality agreement reasonably satisfactory to the Company or the related Selling Holder of Registrable Securities agrees to be responsible for such Person's breach of confidentiality on terms reasonably satisfactory to the Company. (j) Use the Company's best efforts to obtain a so-called "comfort letter" from its independent public accountants, and legal opinions of counsel to the Company addressed to the Selling Holders, in customary form and covering such matters of the type customarily covered by such letters, and in a form that shall be reasonably satisfactory to Majority Selling Holders. The Company shall furnish to each Selling Holder a signed counterpart of any such comfort letter or legal opinion. Delivery of any such opinion or comfort letter shall be subject to the recipient furnishing such written representations or acknowledgements as are customarily provided by selling shareholders who receive such comfort letters or opinions. (k) Provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement. 26 (l) Use all reasonable efforts to cause the Registrable Securities covered by such registration statement (i) if the Common Stock is then listed on a securities exchange or included for quotation in a recognized trading market, to continue to be so listed or included for a reasonable period of time after the offering, and (ii) to be registered with or approved by such other United States or state governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Selling Holders of Registrable Securities to consummate the disposition of such Registrable Securities. (m) Use the Company's reasonable efforts to provide a CUSIP number for the Common Stock prior to the effective date of the first registration statement including Registrable Securities. (n) Take such other actions as are reasonably required in order to expedite or facilitate the disposition of Registrable Securities included in each such registration. 9.5. Selling Holders' Obligations. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 9 with respect to the Registrable Securities of any Selling Holder that such Selling Holder shall: (a) Furnish to the Company such information regarding such Selling Holder, the number of Registrable Securities owned by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Selling Holder's Registrable Securities, and to cooperate with the Company in preparing such registration; (b) Agree to sell their Registrable Securities to the underwriters at the same price and on substantially the same terms and conditions as the Company or the other Persons on whose behalf the registration statement was being filed have agreed to sell their securities, and to execute the underwriting agreement agreed to by the Majority Selling Holders (in the case of a registration under Section 9.2) or the Company and the Majority Selling Holders (in the case of a registration under Section 9.3); (c) upon receipt of any notice from the Company of a stop order as described in Section 9.4(g), immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such registration statement until the withdrawal of the stop order referred to in Section 9.4(g), and use commercially reasonable efforts to maintain the confidentiality of such notice and its contents; (d) to the extent required by applicable law, deliver a prospectus to the purchaser of such Registrable Securities; (e) notify the Company when it has sold all of the Registrable Securities held by it; (f) notify the Company in the event that any information supplied by such Holder in writing for inclusion in such registration statement or related prospectus is untrue or omits to state a material fact required to be stated in such prospectus in order to make the statements therein, in light of the 27 circumstances under which they were made, not misleading; immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such registration statement until the filing of an amendment or supplement to such prospectus as may be necessary so that such prospectus does not contain an untrue statement of material fact or omit to state a material fact required to be stated in such prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and use commercially reasonable efforts to assist the Company as may be appropriate to make such amendment or supplement effective for such purpose; and (g) discontinue any disposition pursuant to a Demand Registration of Registrable Securities during a Blackout Period. 9.6. Expenses of Registration. Expenses incurred in connection with registrations under this Section 9 shall be allocated and paid as follows: (a) With respect to each Demand Registration (including any Shelf Registration), the Company shall bear and pay all expenses incurred in connection with any registration, filing, or qualification of Registrable Securities with respect to such Demand Registration for each Selling Holder, including all registration, filing and NASD fees, all "road show" expenses (to the extent not paid by the underwriters), all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the reasonable fees and disbursements of counsel for the Company, and of the Company's independent public accountants, including the expenses of "cold comfort" letters required by or incident to such performance and compliance, and the reasonable fees and disbursements, not exceeding $15,000, of one firm of counsel for the Selling Holders of Registrable Securities (the "Registration Expenses"), but excluding underwriting discounts and commissions relating to Registrable Securities (which shall be paid on a pro rata basis by the Selling Holders) provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 9.2 if the registration is subsequently withdrawn at the request of the Majority Selling Holders (in which case all Selling Holders shall bear such expense), unless WS Holders whose Registrable Securities constitute a majority of the Registrable Securities then outstanding agree that such withdrawn registration shall constitute the exercise of their one demand registration under Section 9.2 hereof. The counsel for the Selling Holders shall be selected by Demanding Holders owning a majority of the Registrable Securities owned by Demanding Holders to be included in a Demand Registration and, in the case of a Piggyback Registration, by Selling Holders owning a majority of the Registrable Securities to be included in such registration; provided that in the case of a Piggyback Registration, the Selling Holders and any other holders of securities to be included in such registration shall endeavor in good faith to select one firm of counsel to represent all such selling securities holders. (b) The Company shall bear and pay all Registration Expenses incurred in connection with any Piggyback Registrations pursuant to Section 9.3 for each Selling Holder, but excluding underwriting discounts and commissions relating to Registrable Securities (which shall be paid on a pro rata basis by the Selling 28 Holders of Registrable Securities) and any attorney's fees and expenses of counsel to the Holders exceeding $15,000. (c) Any failure of the Company to pay any Registration Expenses as required by this Section 9.6 shall not relieve the Company of its obligations under this Section 9. 9.7. Indemnification; Contribution. If any Registrable Securities are included in a registration statement under this Section 9: (a) To the extent permitted by applicable law, the Company shall indemnify and hold harmless each Selling Holder, each Person, if any, who controls such Selling Holder within the meaning of the Securities Act, and each officer, director, partner, and employee of such Selling Holder and such controlling Person, against any and all losses, claims, damages, liabilities and expenses (joint or several), including reasonable attorneys' fees and disbursements and expenses of investigation, incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may become subject under the Securities Act, the Exchange Act or other federal or state laws, insofar as such losses, claims, damages, liabilities and expenses arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) Any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein, or any amendments or supplements thereto; (ii) The omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) Any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any applicable state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any applicable state securities law; provided, however, that the indemnification required by this Section 9.7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense (A) if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or expense to the extent that it is determined by a court of competent jurisdiction by a final non-appealable order to have solely arisen out of or be based upon a Violation which occurred in reliance upon and in conformity with written information furnished to the Company by the indemnified party expressly for use in connection with such registration, (B) it is based on a failure of such person to deliver or cause to be delivered the final prospectus contained in the registration statement and made available by the Company, if such delivery is required by applicable law, or (C) it arises from the fact that such person delivered or caused to be delivered a prospectus which either contained an untrue statement of a material fact or omitted to state a material fact required to be stated in such prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading and the Company shall have previously provided or made available to 29 such person a supplement to such prospectus or an amended prospectus which would have corrected any such untrue statement or omission. The Company shall also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers, directors, agents and employees and each person who controls such persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the Selling Holders. (b) To the extent permitted by applicable law, each Selling Holder shall indemnify and hold harmless the Company, each of its directors, each of its officers who shall have signed the registration statement, each Person, if any, who controls the Company within the meaning of the Securities Act, any other Selling Holder, any controlling Person of any such other Selling Holder and each officer, director, partner, and employee of such other Selling Holder and such controlling Person, against any and all losses, claims, damages, liabilities and expenses (joint and several), including reasonable attorneys' fees and disbursements and expenses of investigation, incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may otherwise become subject under the Securities Act, the Exchange Act or other federal or state laws, insofar as such losses, claims, damages, liabilities and expenses are determined by a court of competent jurisdiction by a final non-appealable order to have solely arisen out of or be based upon a Violation that occurred in reliance upon and in conformity with written information furnished by such Selling Holder expressly for use in connection with such registration; provided, however, that (x) the indemnification required by this Section 9.7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense if settlement is effected without the consent of the relevant Selling Holder of Registrable Securities, which consent shall not be unreasonably withheld, and (y) in no event shall the amount of any indemnity under this Section 9.7(b) exceed the net proceeds from the applicable offering received by such Selling Holder. (c) Promptly after receipt by an indemnified party under this Section 9.7 of notice of the commencement of any action, suit, proceeding, investigation or threat thereof made in writing for which such indemnified party may make a claim under this Section 9.7, such indemnified party shall deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and disbursements and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time following the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 9.7 but shall not relieve the indemnifying party of any liability that it may have to any indemnified party otherwise than pursuant to this Section 9.7. Any fees and expenses incurred by the indemnified party (including any fees and expenses incurred in connection with investigating 30 or preparing to defend such action or proceeding) shall be paid to the indemnified party, as incurred, within thirty (30) days of written notice thereof to the indemnifying party (regardless of whether it is ultimately determined that an indemnified party is not entitled to indemnification hereunder). Any such indemnified party shall have the right to employ separate counsel in any such action, claim or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be the expenses of such indemnified party unless (i) the indemnifying party has agreed to pay such fees and expenses or (ii) the indemnifying party shall have failed to promptly assume the defense of such action, claim or proceeding or (iii) the named parties to any such action, claim or proceeding (including any impleaded parties) include both such indemnified party and the indemnifying party, and such indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or in addition to those available to the indemnifying party and that the assertion of such defenses would create a conflict of interest such that counsel employed by the indemnifying party could not faithfully represent the indemnified party (in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action, claim or proceeding on behalf of such indemnified party, it being understood, however, that the indemnifying party shall not, in connection with any one such action, claim or proceeding or separate but substantially similar or related actions, claims or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all such indemnified parties, unless in the reasonable judgment of such indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such action, claim or proceeding, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels). No indemnifying party shall be liable to an indemnified party for any settlement of any action, proceeding or claim without the written consent of the indemnifying party, which consent shall not be unreasonably withheld. (d) If the indemnification required by this Section 9.7 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to in this Section 9.7: (i) The indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any Violation has been committed by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Violation. The amount paid or payable by a party as a result of the losses, claims, 31 damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 9.7(a) and Section 9.7(b), any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. (ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 9.7(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in Section 9.7(d)(i) above. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (e) If indemnification is available under this Section 9.7, the indemnifying parties shall indemnify each indemnified party to the full extent provided in this Section 9.7 without regard to the relative fault of such indemnifying party or indemnified party or any other equitable consideration referred to in Section 9.7(d) above. (f) The indemnification required by this Section 9.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. (g) The obligations of the Company and the Selling Holders of Registrable Securities under this Section 9.7 shall survive the completion of any offering of Registrable Securities pursuant to a registration statement under this Section 9, and otherwise. 9.8. Holdback. Each WS Holder entitled pursuant to this Section 9 to have Registrable Securities included in a registration statement prepared pursuant to this Section 9, if so requested by the managing underwriter in connection with an offering of any Registrable Securities, shall not effect any public sale or distribution of shares of Common Stock, Convertible Securities or Stock Purchase Rights (excluding any sale pursuant to Rule 144 or Rule 144A under the Securities Act and any sale as part of such underwritten or agented registration), during the 5-day period prior to, and during the 90-day period beginning on, the date such registration statement is declared effective under the Securities Act by the Commission, provided that such WS Holder is timely notified of such effective date in writing by the Company or such managing underwriter. 9.9. Additional Covenants of the Company. The Company hereby agrees and covenants as follows: (a) The Company shall file as and when applicable, on a timely basis, all reports required to be filed by it under the Exchange Act. If the Company is not required to file reports pursuant to the Exchange Act, upon the request of any WS Holder, the Company shall make publicly available the information specified in subparagraph (c)(2) of Rule 144 of the Securities Act, and take such further action as may be reasonably required from time to time and as may 32 be within the reasonable control of the Company, to enable the WS Holders to Transfer Warrants or Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 under the Securities Act or any similar rule or regulation hereafter adopted by the Commission. In addition, promptly upon the request of any WS Holder, the Company shall provide such WS Holder with such financial statements, reports and other information as may be required to permit such WS Holder to Transfer shares of Registrable Securities to Qualified Institutional Investors pursuant to Rule 144A of the Securities Act. (b) The Company shall not, and shall permit its majority owned subsidiaries to, effect any public sale or distribution of any shares of Common Stock, Convertible Securities or Stock Purchase Rights during the 5 Business Days prior to, and during the ninety (90) day period beginning on, the commencement of a public distribution of Registrable Securities pursuant to any registration statement prepared pursuant to this Section 9 (other than by the Company pursuant to such registration if the registration is pursuant to Section 9.3). The Company shall not effect any registration of its securities (other than on Form S-4, Form S-8, or any successor forms to such forms or pursuant to such other registration rights agreements as may be approved in writing by the Majority Selling Holders), or effect any public or private sale or distribution of any of its securities, including a sale pursuant to Regulation D under the Securities Act, whether on its own behalf or at the request of any holder or holders of such securities from the date of a request for a Demand Registration pursuant to Section 9.2 until the earlier of (x) ninety (90) days following the date as of which all securities covered by such Demand Registration statement shall have been Transferred, and (y) one hundred eighty (180) days following the effective date of such Demand Registration statement, unless the Company shall have previously notified in writing all Selling Holders of the Company's desire to do so, and the Majority Selling Holders or the managing underwriter, if any, shall have consented thereto in writing. (c) Any agreement entered into on or after the Original Issue Date pursuant to which the Company or any of its majority owned subsidiaries issues or agrees to issue any Common Stock (including, without limitation, any employee stock option, stock purchase agreement, merger agreement or other agreement) shall contain a provision whereby any holder receiving such securities who will hold more than one percent (1%) of the amount of such securities then outstanding shall agree not to effect any public sale or distribution of any such securities during the periods described in the second sentence of Section 9.9(b), in each case including a sale pursuant to Rule 144 under the Securities Act (unless such Person is prevented by applicable statute or regulation from entering into such an agreement). (d) The Company shall not, directly or indirectly, (x) enter into any merger, consolidation or reorganization in which the Company shall not be the surviving corporation or (y) Transfer or agree to Transfer all or substantially all the Company's assets, unless prior to such merger, consolidation, reorganization or asset Transfer, the surviving corporation or the Transferee, respectively, shall have agreed in writing to assume the obligations of the Company under this Agreement, and for that purpose references hereunder to "Registrable Securities" shall be deemed to include the securities which the WS Holders would be entitled to receive in exchange for Registrable Securities pursuant to any such merger, consolidation or reorganization. 33 (e) The Company shall not grant to any Person (other than a WS Holder) any registration rights with respect to securities of the Company, or enter into any agreement, that would entitle the holder thereof to have securities owned by it included in a Demand Registration (including any Shelf Registration). 10. LOSS OR MUTILATION Upon receipt by the Company from any Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and an indemnity reasonably satisfactory to it and, in case of mutilation, upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to such Holder; provided, however, in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. 11. OFFICE OF THE COMPANY As long as any of the Warrants remain outstanding, the Company shall maintain an office or agency, which may be the principal executive offices of the Company (the "Designated Office"), where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. Such Designated Office shall initially be the office of the Company at 500 N. Loop, 1604 East, Suite 100, San Antonio, Texas 78232. The Company may from time to time change the Designated Office to another office of the Company or its agent within the United States by notice given to all registered holders of Warrants at least ten (10) Business Days prior to the effective date of such change. 12. DILUTION FEE In the event that the Company at any time after the Original Issue Date shall pay a dividend or make any other distribution with respect to its Common Stock (or any other shares of the capital stock of the Company for which this Warrant becomes exercisable pursuant to Section 4 above) whether in the form of cash, evidences of indebtedness, securities or other property (other than a stock dividend subject to the provisions of Section 4.1 above), then the Holder of this Warrant shall be entitled to receive a dilution fee (a "Dilution Fee") payable in cash on the date of payment of such dividend or other distribution equal to the number of shares of Common Stock (or such other shares of stock) issuable upon exercise of this Warrant on such date multiplied by the sum of (x) the amount of cash and (y) the fair value of any evidences of indebtedness, securities or other property distributed with respect to each share of Common Stock (or such other stock). The "fair value" of any such evidences of indebtedness, securities or other property shall mean the fair market value thereof, as determined by the Board of Directors of the Company in good faith and supported, upon the request of the Majority Warrant Holders, by an opinion of an investment banking firm or appraisal firm of recognized national standing selected by the Company and acceptable to such Majority Warrant Holders. The fees and expenses of such investment banking firm or appraisal firm shall be paid by the Company. 13. MISCELLANEOUS 34 13.1. Nonwaiver. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Company or the Holder shall operate as a waiver of such right or otherwise prejudice the rights, powers or remedies of such Person. 13.2. Notice Generally. Any notice, demand, request, consent, approval, declaration, delivery or communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) if to any Holder of this Warrant or of Warrant Stock issued upon the exercise hereof, at its last known address appearing on the books of the Company maintained for such purpose; (b) if to the Company, at its Designated Office; or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or three (3) Business Days after the same shall have been deposited in the United States mail, or one (1) Business Day after the same shall have been delivered to Federal Express or another overnight courier service. 13.3. Indemnification. If the Company fails to make, when due, any payments provided for in this Warrant, the Company shall pay to the Holder hereof (a) interest at the Agreed Rate on any amounts due and owing to such Holder and (b) such further amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees and expenses incurred by such Holder in collecting any amounts due hereunder. The Company shall indemnify, save and hold harmless the Holder hereof and the Holders of any Warrant Stock issued upon the exercise hereof from and against any and all liability, loss, cost, damage, reasonable attorneys' and accountants' fees and expenses, court costs and all other out-of-pocket expenses incurred in connection with or arising from a Company Default. This indemnification provision shall be in addition to the rights of such Holder or Holders to bring an action against the Company for breach of contract based on such Company Default. 13.4. Limitation of Liability. No provision hereof, in the absence of affirmative action by the Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder to pay the Exercise Price for any Warrant Stock other than pursuant to an exercise of this Warrant or any liability as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 13.5. Remedies. Each Holder of Warrants and/or Warrant Stock, in addition to being entitled to exercise its rights granted by law, including recovery of damages, shall be entitled to specific performance of its rights 35 provided under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees, in an action for specific performance, to waive the defense that a remedy at law would be adequate. 13.6. Successors and Assigns. Subject to the provisions of Sections 3.1, 8.1 and 8.2, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the permitted successors and assigns of the Holder hereof. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and to the extent applicable, all Holders of shares of Warrant Stock issued upon the exercise hereof (including transferees), and shall be enforceable by any such Holder. 13.7. Amendment. This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of the Company and the Majority Warrant Holders, provided that no such Warrant may be modified or amended to reduce the number of shares of Common Stock for which such Warrant is exercisable or to increase the price at which such shares may be purchased upon exercise of such Warrant (before giving effect to any adjustment as provided therein) without the written consent of the Holder thereof. 13.8. Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. 13.9. Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 13.10. GOVERNING LAW; JURISDICTION. IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS WARRANT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, EXCEPT WITH RESPECT TO THE VALIDITY OF THIS WARRANT, THE ISSUANCE OF WARRANT STOCK UPON EXERCISE HEREOF AND THE RIGHTS AND DUTIES OF THE COMPANY WITH RESPECT TO REGISTRATION OF TRANSFER, WHICH SHALL BE GOVERNED BY THE LAWS OF NEVADA. THE COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK SHALL HAVE, EXCEPT AS SET FORTH IN THE PROVISO TO THIS SENTENCE, EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY AND THE HOLDER OF THIS WARRANT PERTAINING TO THIS WARRANT OR TO ANY MATTER ARISING OUT OF OR RELATING 36 TO THIS AGREEMENT, PROVIDED, THAT IT IS ACKNOWLEDGED THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK COUNTY, NEW YORK. 37 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. ABRAXAS PETROLEUM CORPORATION By: ----------------------------------------------- Name: Title: [SEAL] Attest: By:_________________________ Name: Title: 38 ANNEX A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of [______] shares Common Stock of Abraxas Petroleum Corporation and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to [_______] whose address is [___________________________________________________] and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. --------------------------------- (Name of Registered Owner) --------------------------------- (Signature of Registered Owner) --------------------------------- (Street Address) --------------------------------- (City) (State) (Zip Code) NOTICE: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. Annex A ANNEX B ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: Number of Shares of Name and Address of Assignee Common Stock and does hereby irrevocably constitute and appoint ______________________ attorney-in-fact to register such transfer onto the books of Abraxas Petroleum Corporation maintained for the purpose, with full power of substitution in the premises. Dated:___________________ Print Name:___________________ Signature: ___________________ Witness:______________________ NOTICE: The signature on this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. Annex B TABLE OF CONTENTS Page 1. DEFINITIONS...........................................................2 2. EXERCISE OF WARRANT...................................................9 2.1. Manner of Exercise...........................................9 2.2. Payment of Taxes............................................10 2.3. Fractional Shares...........................................10 2.4. Continued Validity and Application..........................10 2.5. Limitation on Holder's Exercise.............................10 3. TRANSFER, DIVISION AND COMBINATION...................................11 3.1. Transfer....................................................11 3.2. Division and Combination....................................11 3.3. Expenses....................................................12 3.4. Maintenance of Books........................................12 4. ANTIDILUTION PROVISIONS..............................................12 4.1. Stock Dividends, Subdivisions and Combinations..............12 4.2. Adjustment of Number of Shares Purchasable..................12 4.3. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets....................................12 4.4. Other Dilutive Events.......................................13 4.5. Other Provisions Applicable to Adjustments Under this Section................................................14 4.6. Pre-emptive Rights..........................................15 5. NO IMPAIRMENT; REGULATORY COMPLIANCE AND COOPERATION.................15 6. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY............................16 7. NOTICE OF CORPORATE ACTIONS; TAKING OF RECORD; TRANSFER BOOKS........17 7.1. Notices of Corporate Actions................................17 7.2. Taking of Record............................................17 7.3. Closing of Transfer Books...................................17 8. TRANSFER RESTRICTIONS................................................17 8.1. Restrictions on Transfers...................................17 8.2. Restrictive Legends.........................................18 8.3. Termination of Securities Law Restrictions..................20 9. REGISTRATION RIGHTS..................................................20 i 9.1. Certain Definitions.........................................20 9.2. Demand Registration.........................................21 9.3. Piggyback Registration......................................23 9.4. Registration Procedures.....................................24 9.5. Selling Holders' Obligations................................27 9.6. Expenses of Registration....................................28 9.7. Indemnification; Contribution...............................29 9.8. Holdback....................................................32 9.9. Additional Covenants of the Company.........................32 10. LOSS OR MUTILATION...................................................34 11. OFFICE OF THE COMPANY................................................34 12. DILUTION FEE.........................................................34 13. MISCELLANEOUS........................................................34 13.1. Nonwaiver...................................................35 13.2. Notice Generally............................................35 13.3. Indemnification.............................................35 13.4. Limitation of Liability.....................................35 13.5. Remedies....................................................35 13.6. Successors and Assigns......................................36 13.7. Amendment...................................................36 13.8. Severability................................................36 13.9. Headings....................................................36 13.10. GOVERNING LAW; JURISDICTION.................................36 ANNEX A SUBSCRIPTION FORM.....................................................1 ANNEX B ASSIGNMENT FORM.......................................................1 ii -----END PRIVACY-ENHANCED MESSAGE-----