-----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, V/daGSiZaPniifBmN72iFsBwA8l/3N/h7gWoIPOUl5mpy9qmWyACbcRTAFskxoXX 1jNSWmQWL6QoMt1D3X+dbg== 0001040593-04-000113.txt : 20041103 0001040593-04-000113.hdr.sgml : 20041103 20041103170040 ACCESSION NUMBER: 0001040593-04-000113 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20041029 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041103 DATE AS OF CHANGE: 20041103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRIZO OIL & GAS INC CENTRAL INDEX KEY: 0001040593 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760415919 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29187-87 FILM NUMBER: 041116943 BUSINESS ADDRESS: STREET 1: 14701 ST MARYS LANE STREET 2: STE 800 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 2814961352 MAIL ADDRESS: STREET 1: 14701 ST MARYS LANE STREET 2: SUITE 800 CITY: HOUSTON STATE: TX ZIP: 77079 8-K 1 k8102904.txt 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 Date of Report (date of earliest event reported): October 29, 2004 CARRIZO OIL & GAS, INC. (Exact name of registrant as specified in its charter) Texas 000-22915 76-0415919 (State or other (Commission (I.R.S. Employer jurisdiction of File Number) Identification No.) incorporation) 14701 St. Mary's Lane Suite 800 Houston, Texas 77079 (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code: (281) 496-1352 Not applicable (Former name or former address, if changed since last report.) 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: [ ] 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 29, 2004, Carrizo Oil & Gas, Inc., a Texas corporation (the "Company" or "we"), entered into a Note Purchase Agreement (the "Purchase Agreement") with PCRL Investments L.P. (the "Purchaser"). Pursuant to the Purchase Agreement, the Company may issue up to $28 million aggregate principal amount of its 10% Senior Subordinated Secured Notes due 2008 (the "Notes") for a purchase price equal to 90% of the principal amount of the Notes then issued. On October 29, 2004, the Purchaser purchased $18 million aggregate principal amount of the Notes for a purchase price of $16.2 million. Subject to the satisfaction of certain conditions, the Company has an option to issue up to an additional $10 million aggregate principal amount of the Notes to the Purchaser before October 29, 2006. The Notes are secured by a second lien on substantially all of our current proved producing reserves and non-reserve assets, guaranteed by our subsidiary, and subordinated to our obligations under our Senior Credit Facility (as defined below). The Notes bear interest at 10% per annum, payable quarterly on the 5th day of March, June, September and December of each year beginning March 5, 2005. The principal on the Notes is due December 15, 2008, and we have the option to prepay the Notes at any time. The Notes include an option that allows us to pay-in-kind 50% of the interest due until June 5, 2007 by increasing the principal due by a like amount. Subject to certain conditions, we have the option to pay the interest on and principal of (at maturity or upon prepayment) the Notes with our common stock, as long as the Purchaser would not hold more than 9.99% of the number of shares of our common stock outstanding immediately after giving effect to such payment. The value of such shares issued as payment on the Notes is determined based on 90% of the volume weighted average trading price during a specified period of days beginning with the date of the payment notice and ending before the payment date. The Company's issuance costs related to the transaction were estimated to be $600,000. As contemplated by the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchaser (the "Registration Rights Agreement"). In the event we choose to issue to shares of our common stock as payment of interest on or the principal of the Notes, the Registration Rights Agreement provides registration rights with respect to such shares. We are generally required to file a resale shelf registration statement to register the resale of such shares under the Securities Act of 1933 (the "Securities Act") if such shares are not freely tradable under Rule 144(k) under the Securities Act. We are subject to certain covenants under the terms of the Registration Rights Agreement, including the requirement that the registration statement be kept effective for resale of shares subject to certain "blackout periods," when sales may not be made. In certain circumstances, including those relating to (1) delisting of our common stock, (2) blackout periods in excess of a maximum length of time, (3) certain failures to make timely periodic filings with the Securities and Exchange Commission, or (4) certain delays or failures to deliver stock certificates, we may be required to repurchase common stock issued as payment on the Notes and, in certain of these circumstances, to pay damages based on the market value of our common stock. In certain situations, we are required to indemnify the holders of registration rights under the Registration Rights Agreement, including, without limitation, for liabilities under the Securities Act. The Purchase Agreement includes certain representations, warranties and covenants by the parties thereto. We are subject to certain covenants under the terms of the Purchase Agreement, including, without limitation, the maintenance of the following financial covenants: (1) a maximum total recourse debt to EBITDA ratio of not more than 3.50 to 1.0, (2) a minimum EBITDA to interest expense ratio of 2.50 to 1.0, and (3) as of April 30, 2005, a minimum tangible net worth of $12.5 million in excess of the tangible net worth of the Company as of September 30, 2004. Upon a change of control, any holders of the Notes may require us to repurchase such holders' Notes at a price equal to then outstanding principal amount of such Notes, together with all interest accrued on such Notes through the date of repurchase. The Purchase Agreement also places restrictions on additional indebtedness, dividends to stockholders, liens, investments, mergers, acquisitions, asset dispositions, asset pledges and mortgages, repurchase or redemption for cash of our common stock, speculative commodity transactions and other matters. In connection with the Purchase Agreement, we amended our senior credit facility, which provides us with a revolving line of credit of up to $75.0 million and a term loan facility of up to $25.0 million (the "Senior Credit Facility"), pursuant to the First Amendment to the Amended and Restated Credit Agreement dated as of October 29, 2004 among the Company, Hibernia National Bank and Union Bank of California, N.A. (the "Credit Facility Amendment"). Such amendment includes without limitation: (1) an adjustment to the covenant regarding maintenance of a minimum shareholders' equity, including such that the minimum on and after April 30, 2005 is $112.5 million, (2) the addition of a new covenant requiring maintenance of a minimum EBITDA to interest expense ratio of 2.60 to 1.0, and (3) the addition of other provisions and a consent which allow for the indebtedness incurred under the Notes. Also in connection with the Purchase Agreement, we amended the Securities Purchase Agreement dated December 15, 1999, which governs the terms of our 9% Senior Subordinated Notes due 2007 (the "Subordinated Notes"), pursuant to the Second Amendment to the Securities Purchase Agreement dated October 29, 2004 among the Company and an affiliate of the Purchaser (the "Subordinated Notes Agreement Amendment"), who is the holder of our outstanding Subordinated Notes. Such amendment includes without limitation: (1) an adjustment to the prepayment premium, (2) the addition of a provision that permits repurchase of our common stock as required by the Registration Rights Agreement, and (3) the addition of provisions which allow for the indebtedness incurred under the Notes. The foregoing descriptions of the Purchase Agreement, the Notes, the Registration Rights Agreement, the Credit Facility Amendment, and the Subordinated Notes Agreement Amendment are not complete and are qualified by reference to the complete documents which are attached hereto as exhibits and incorporated herein by reference. Item 2.02 Results of Operations and Financial Condition. Our press release dated November 3, 2004 announcing production, prices and other operational results of the Company for the third quarter of 2004, furnished as Exhibit 99.1 to this report, is incorporated by reference herein. None of the information furnished in Item 2.02 and the accompanying exhibit will be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, nor will it be incorporated by reference into any registration statement filed by Carrizo Oil & Gas under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference. The furnishing of the information in this report is not intended to, and does not, constitute a determination or admission by the Company, that the information in this report is material or complete, or that investors should consider this information before making an investment decision with respect to any security of the Company. Item 2.03 Creation of a Direct Financial Obligation. On October 29, 2004, we entered into a Note Purchase Agreement and consummated related transactions, as described under Item 1.01 above. Item 9.01. Financial Statements and Exhibits. (c) Exhibits.
Exhibit Number Description 10.1 Note Purchase Agreement dated as of October 29, 2004 among Carrizo Oil & Gas, Inc., the Purchasers named therein and PCRL Investments L.P., as collateral agent. 10.2 Form of 10% Senior Subordinated Secured Note due 2008. 10.3 Stock Pledge and Security Agreement dated as of October 29, 2004 by Carrizo Oil & Gas, Inc. in favor of PCRL Investments L.P., as collateral agent. 10.4 Commercial Guaranty dated as of October 29, 2004 by CCBM, Inc. in favor of PCRL Investments L.P., guarantying the indebtedness of Carrizo Oil & Gas, Inc. 10.5 Registration Rights Agreement dated as of October 29, 2004 among Carrizo Oil & Gas, Inc. and the Investors named therein. 10.6 First Amendment to Second Amended and Restated Credit Agreement dated as of October 29, 2004 among Carrizo Oil & Gas, Inc., CCBM, Inc., Hibernia National Bank and Union Bank of California, N.A.. 10.7 Second Amendment to Securities Purchase Agreement dated as of October 29, 2004 among Carrizo Oil & Gas, Inc. and the Investors named therein. 99.1 Press Release, dated November 3, 2004, Announcing Term Loan Financing and Operational Results for Third Quarter 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. CARRIZO OIL & GAS, INC. By: /s/ Paul F. Boling ------------------ Name: Paul F. Boling Title: Vice President and Chief Financial Officer Date: November 3, 2004 INDEX TO EXHIBITS
Exhibit Number Description 10.1 Note Purchase Agreement dated as of October 29, 2004 among Carrizo Oil & Gas, Inc., the Purchasers named therein and PCRL Investments L.P., as collateral agent. 10.2 Form of 10% Senior Subordinated Secured Note due 2008. 10.3 Stock Pledge and Security Agreement dated as of October 29, 2004 by Carrizo Oil & Gas, Inc. in favor of PCRL Investments L.P., as collateral agent. 10.4 Commercial Guaranty dated as of October 29, 2004 by CCBM, Inc. in favor of PCRL Investments L.P., guarantying the indebtedness of Carrizo Oil & Gas, Inc. 10.5 Registration Rights Agreement dated as of October 29, 2004 among Carrizo Oil & Gas, Inc. and the Investors named therein. 10.6 First Amendment to Second Amended and Restated Credit Agreement dated as of October 29, 2004 among Carrizo Oil & Gas, Inc., CCBM, Inc., Hibernia National Bank and Union Bank of California, N.A.. 10.7 Second Amendment to Securities Purchase Agreement dated as of October 29, 2004 among Carrizo Oil & Gas, Inc. and the Investors named therein. 99.1 Press Release, dated November 3, 2004, Announcing Term Loan Financing and Operational Results for Third Quarter 2004.
EX-10 2 exh101.txt EXHIBIT 10.1 EXECUTION VERSION ----------------- NOTE PURCHASE AGREEMENT DATED AS OF OCTOBER 29, 2004 AMONG CARRIZO OIL & GAS, INC. AS COMPANY, THE PURCHASERS, AND PCRL INVESTMENTS L.P., AS THE COLLATERAL AGENT - -------------------------------------------------------------------------------- $28,000,000 Principal Amount of 10% Senior Subordinated Secured Notes Due December 15, 2008 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS.................................................................................1 ARTICLE II PURCHASE AND SALE OF THE NOTES..............................................................21 2.1. Authorization and Issuance of the Notes.....................................................21 2.2. Delivery of the Notes.......................................................................22 2.3. Closing.....................................................................................22 ARTICLE III PROVISIONS OF THE NOTES.....................................................................22 3.1. The Notes...................................................................................22 3.2. General Provisions as to Payments...........................................................22 3.3. Interest....................................................................................25 3.4. Interest on Overdue Amounts.................................................................28 3.5. Mandatory Redemption........................................................................28 3.6. Optional Redemption.........................................................................30 3.7. Securities Register.........................................................................31 3.8. Lost, Etc. Securities.......................................................................31 3.9. Several Obligations; Remedies Independent...................................................32 3.10. Notes Not Senior Indebtedness...............................................................32 ARTICLE IV CONDITIONS PRECEDENT........................................................................32 4.1. Purchase of Initial Notes...................................................................32 4.2. Certificate of Effectiveness................................................................34 4.3. Purchase of Additional Notes................................................................34 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................................36 5.1. Corporate Authority of the Company..........................................................36 5.2. Financial Reports...........................................................................37 5.3. Title to Mortgaged Properties...............................................................37 5.4. Litigation..................................................................................38 5.5. Approvals...................................................................................38 5.6. Required Insurance..........................................................................38 5.7. Licenses....................................................................................38 5.8. Adverse Agreements..........................................................................38 5.9. Default or Event of Default.................................................................38 5.10. Employee Benefit Plans......................................................................38 5.11. Investment Company Act......................................................................39 5.12. Public Utility Holding Company Act..........................................................39 5.13. Regulations X, T and U......................................................................39 5.14. Location of Offices and Records.............................................................39 5.15. Patriot Act.................................................................................39 5.16. Environmental Matters.......................................................................39 5.17. Solvency of the Company.....................................................................41 5.18. Governmental Requirements...................................................................41 5.19. Corporate Authority of the Guarantor........................................................41 5.20. Subordinated Note Agreement.................................................................42 5.21. Security Agreement..........................................................................42 5.22. Closing Date Borrowing Base and Quarterly Reduction.........................................42 5.23. Survival of Representations and Warranties..................................................42 ARTICLE VI AFFIRMATIVE COVENANTS.......................................................................42 6.1. Financial Statements; Other Reporting Requirements..........................................42 6.2. Notice of Default; Litigation; ERISA Matters................................................44 6.3. Maintenance of Existence, Properties and Liens..............................................44 6.4. Taxes.......................................................................................45 6.5. Compliance with Environmental Laws..........................................................45 6.6. Further Assurances..........................................................................46 6.7. Financial Covenants.........................................................................46 6.8. Operations..................................................................................47 6.9. Change of Location..........................................................................47 6.10. Employee Benefit Plans......................................................................47 6.11. Field Audits; Other Information.............................................................47 6.12. Insurance...................................................................................47 6.13. Subsidiaries................................................................................48 6.14. Disclosure Requirements.....................................................................48 6.15. Collateral..................................................................................48 6.16. Amendment of Disclosure Schedule............................................................50 6.17. Post Closing Requirements...................................................................50 6.18. Investment Base Determination and Borrowing Base............................................50 ARTICLE VII NEGATIVE COVENANTS..........................................................................51 7.1. Limitations on Fundamental Changes..........................................................51 7.2. Disposition of Assets.......................................................................51 7.3. Repurchase of Stock; Dividends..............................................................51 7.4. Liens; Negative Pledge......................................................................52 7.5. Debts.......................................................................................54 7.6. Investments, Loans and Advances.............................................................55 7.7. Other Agreements............................................................................57 7.8. Transactions with Affiliates................................................................58 7.9. Second Priority Liens.......................................................................58 7.10. Commodity Transactions......................................................................58 7.11. Restriction of Amendments to First Lien Credit Documents....................................58 ARTICLE VIII DEFAULTS....................................................................................58 8.1. Events of Default...........................................................................58 8.2. Waivers.....................................................................................60 8.3. Notice to Delta Farms Lessors...............................................................61 ARTICLE IX ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES..............................................61 9.1. Acceleration................................................................................61 9.2. Amendments..................................................................................61 9.3. Preservation of Rights......................................................................62 ARTICLE X COLLATERAL AGENCY...........................................................................62 10.1. Creation of Collateral Agency...............................................................62 10.2. Possession and Use of Collateral............................................................62 10.3. Additional Collateral.......................................................................62 10.4. Releases of Collateral......................................................................63 ARTICLE XI COLLATERAL AGENT............................................................................63 11.1. Appointment; Nature of Relationship.........................................................63 11.2. Powers......................................................................................64 11.3. General Immunity............................................................................64 11.4. No Responsibility for Loans, Recitals, etc..................................................64 11.5. Action on Instructions of Holders...........................................................64 11.6. Employment of the Collateral Agents and Counsel.............................................65 11.7. Reliance on Documents; Counsel..............................................................65 11.8. COLLATERAL AGENT'S REIMBURSEMENT AND INDEMNIFICATION........................................65 11.9. Notice of Default...........................................................................66 11.10. Rights as a Holder..........................................................................66 11.11. Holder Decision.............................................................................66 11.12. Successor Collateral Agent..................................................................66 11.13. Delegation to Affiliates....................................................................67 11.14. Execution of Security Documents.............................................................67 11.15. Collateral Releases.........................................................................67 ARTICLE XII SETOFF; RATABLE PAYMENTS....................................................................68 12.1. Setoff......................................................................................68 12.2. Ratable Payments............................................................................68 ARTICLE XIII REPRESENTATIONS AND WARRANTIES OF PURCHASERS................................................68 13.1. Representations and Warranties of Each Purchaser............................................68 ARTICLE XIV SUBORDINATION OF NOTES......................................................................69 14.1. Subordination of Notes......................................................................69 ARTICLE XV TRANSFER OF SECURITIES......................................................................69 15.1. Restriction on Transfer.....................................................................69 15.2. Restrictive Legends.........................................................................70 15.3. Notice of Transfer..........................................................................71 ARTICLE XVI MISCELLANEOUS...............................................................................72 16.1. Notices.....................................................................................72 16.2. Survival of Agreement.......................................................................73 16.3. Successors and Assigns......................................................................73 16.4. Expenses of the Holders.....................................................................73 16.5. Indemnification.............................................................................74 16.6. Third Party Claims..........................................................................76 16.7. Governing Law...............................................................................78 16.8. Waivers; Amendments.........................................................................79 16.9. Independence of Covenants...................................................................79 16.10. No Fiduciary Relationship...................................................................79 16.11. No Duty.....................................................................................80 16.12. Construction................................................................................80 16.13. Severability................................................................................80 16.14. Counterparts................................................................................80 16.15. Confidentiality.............................................................................80 16.16. Press Release...............................................................................83 16.17. Headings....................................................................................83 16.18. Entire Agreement............................................................................83
ANNEXES Annex A - Calculation of Investment Base EXHIBITS Exhibit A - Form of Note Exhibit B - Form of Certificate Accompanying Financial Statements Exhibit C - Form of Certificate of Effectiveness Exhibit D - Form of Company's Counsel Opinion Exhibit E - Form of Subordinated Note Agreement Amendment Exhibit F - Form of Senior Credit Agreement Amendment Exhibit G - Form of Registration Rights Agreement SCHEDULES Schedule 1 - Disclosure Schedule Schedule 2 - Purchaser Information Schedule 6.17 - Post Closing Requirements NOTE PURCHASE AGREEMENT This NOTE PURCHASE AGREEMENT is dated as of October 29, 2004, and entered into by and among Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), the purchasers listed on Schedule 2 hereto, (each a "Purchaser" and collectively, the "Purchasers") and PCRL Investments L.P., as Collateral Agent (in such capacity, "Collateral Agent"). RECITALS WHEREAS, the Company is engaged in the exploration, development, exploitation and production of natural gas and crude oil (the "Subject Business"); WHEREAS, the Company desires to issue to the Purchasers and the Purchasers, severally and not jointly, desire to purchase from the Company up to $28,000,000 in stated principal amount of its 10% Senior Subordinated Secured Notes due December 15, 2008 in the form of Exhibit A attached hereto (the "Notes"), on the terms and for the consideration provided herein, in each case on the terms and for the consideration provided herein; WHEREAS, the proceeds of the Notes shall be used (i) to fund the Company's working capital and (ii) for general corporate purposes; WHEREAS, the Company has agreed to secure all of its obligations evidenced by the Notes and this Agreement by granting to the Collateral Agent, for the benefit of the holders of the Notes, a second priority lien and security interest on substantially all of its assets, including a pledge of all of the ownership interests of each of its Subsidiaries (other than its Unrestricted Subsidiaries (as hereinafter defined)); and WHEREAS, the Notes and the liens and security interests securing the Notes shall be subordinated, to the extent and in the manner provided in the Subordination Agreement (as hereinafter defined), to the senior credit facility provided to the Company pursuant to the terms of the Senior Credit Agreement (as hereinafter defined). NOW THEREFORE, the parties to this Agreement hereby agree as follows: ARTICLE I DEFINITIONS ----------- As used in this Agreement: "Act" is defined in Section 5.15. "Additional Closing Date" means any one or more dates prior to the second anniversary of the Closing Date upon which all of the conditions precedent set forth in Section 4.3 have been satisfied. "Affiliate" means, as to any Person, each other Person that directly or indirectly (through 1 one or more intermediaries or otherwise) controls, is controlled by, or is under common control with, such Person and, for the avoidance of doubt shall include the investment manager of any such Person that is a Fund. A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power: (a) to vote 20% or more of the securities or other equity interests (on a fully diluted basis) having ordinary voting power for the election of directors, the managing general partner or partners or the managing member or members or (b) to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agreement" means this note purchase agreement, as it may be amended or modified and in effect from time to time. "Annex" refers to an annex attached to this Agreement, unless another document is specifically referenced. "Applicable Law" means all provisions of laws, statutes, ordinances, rules, regulations, permits, certificates or orders of any Governmental Authority applicable to the Person in question or any of its assets or property, and all judgments, injunctions, orders and decrees of all courts and arbitrators in proceedings or actions in which the Person in question is a party or by which any of its assets or properties are bound. "Applicable Period" as defined in Section 16.15. "Approved Counterparty" means (i) any Holder, any Affiliate of any Holder, any Bank or any Affiliate of any Bank and (ii) any other Person engaged in the business of writing hedges for commodity or interest rate risk that is acceptable to the Collateral Agent and has, at the time Company or any Guarantor enters into a Hedging Agreement with such Person, a credit rating of A or better from S&P or Baa1 or better from Moody's. "Approved Fund" means any Fund that is administered or managed by (a) a Holder, (b) an Affiliate of a Holder or (c) an entity that administers or manages a Holder. "Article" means an article of this Agreement unless another document is specifically referenced. "Authorized Officer" means, as to any Person, any of its Chairman of the Board, its Chief Executive Officer, its President, its Directors, its Managers (in the case of a limited liability company), or its Chief Financial Officer, acting singly. "Bank" means any Person from time to time a party to the Senior Credit Agreement as a lender and "Banks" means all Banks. "Bloomberg" means Bloomberg Financial Markets. "Board" means the board of directors of the Company. "Borrowing Base" means, individually and collectively, the "Facility A Borrowing Base 2 Amount" and the "Facility B Borrowing Base Amount" as such terms are defined from time to time in the Senior Credit Agreement (or as such similar terms or the term "Borrowing Base" is defined in any replacement Senior Credit Agreement) unless all of the Obligations under the Senior Credit Documents have been paid in full and all commitments under the Senior Credit Agreement have been terminated and no replacement Senior Credit Agreement is in effect in which event "Borrowing Base" shall be an amount determined by the Majority Holders as of May 1 and November 1 of each year based on the most recent Engineering Report delivered pursuant to Section 6.1(f) and Section 6.1(h), respectively unless such Engineering Reports have not been requested by the Collateral Agent or the Majority Holders, in which event the "Borrowing Base" shall be an amount determined by the Majority Holders based on the Company's most recently filed Commission Reports. "Business Day" means any day, other than a Saturday, Sunday or day which shall be in the State of Texas or the State of New York a legal holiday or day on which banking institutions are required or authorized to close. "Capital Lease" means a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "Capital Lease Obligations" means any Debt represented by obligations under a Capital Lease. "Capital Stock" means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), including, without limitation, partnership interests and membership interests, and any and all warrants, rights or options to purchase or other arrangements or rights to acquire any of the foregoing. "CCBM" means CCBM, Inc., a Texas corporation. "Certificate of Effectiveness" means a Certificate of Effectiveness in the form of Exhibit C attached hereto to be executed by the Company and the Collateral Agent upon the satisfaction of each of the conditions precedent contained in Section 4.1 hereof. "Change of Control" means the occurrence of any of the following events: (i) the Company shall have merged into or consolidated with any other Person, or permitted any other Person to merge into or consolidate with it or sold, leased or sub-leased (as lessor or sub-lessor) or voluntarily transferred or otherwise disposed of all or substantially all of its assets or liquidated, wound-up or dissolved itself (or suffered any liquidation or dissolution in any such case in a transaction that would violate Section 7.1 or 7.2, (ii) any "person" (as such term is used in Sections 13(d) and 14 (d) of the Exchange Act) other than Purchaser or any of its Affiliates or managed accounts is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the Exchange Act; provided that such person shall be deemed to have "beneficial ownership" of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of the outstanding voting securities of the Company; or (iii) during any period of two 3 consecutive years, individuals who at the beginning of such period constituted the Board (together with any new directors whose election by such members of the Board or whose nomination for election by the shareholders of the Company, as the case may be, was approved by a vote of at least a majority of the directors of the Company then still in office) cease for any reason to constitute a majority of the Board then in office. Notwithstanding the foregoing, no Change of Control shall be deemed to have occurred pursuant to this Agreement as a result of any other Person becoming the beneficial owner of more than 35% of the total voting power to the extent caused solely by the attribution to that Person of the beneficial ownership of voting power owned by another Person that is not an Affiliate of such Person who is then a party to a customary shareholder's agreement and is a member of a group with such other Person solely because of such shareholders' agreement, a voting agreement, tag along rights and not as a result of the acquisition of securities of the Company by such Person. "Change of Control Notice" is defined in Section 3.5(b). "Closing Date" means the date upon which all of the conditions precedent set forth in Section 4.1 have been satisfied, and the Company and the Collateral Agent have executed and delivered the Certificate of Effectiveness. "Closing Documents" means the Subordination Agreement, the Subordinated Note Agreement Amendment, and all other material documents, instruments and agreements executed or delivered by any Restricted Person in connection with, or otherwise pertaining to, the Closing Transactions. "Closing Transactions" means the transactions to occur on the Closing Date, including, without limitation (a) the amendment of the Senior Credit Agreement pursuant to the Senior Credit Agreement Amendment, and (b) the amendment of the Subordinated Note Agreement pursuant to the Subordinated Note Agreement Amendment. "Collateral" means all property of any kind which is subject to a Lien in favor of Holders (or in favor of the Collateral Agent for the benefit of Holders) or which, under the terms of any Security Document, is purported to be subject to such a Lien. "Collateral Agent" has the meaning assigned to such term in the preamble hereto and shall include any successor appointed pursuant to Section XI of this Agreement. "Commission" means the United States Securities and Exchange Commission. "Commission Reports" means the annual reports, information documents and other reports as are specified in Section 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections. "Common Stock" means the common stock, par value $0.01 per share, of the Company or Capital Stock of any other class into which such shares may hereafter have been reclassified or changed. "Company" has the meaning ascribed to such term in the preamble hereto and shall 4 include its successors and assigns. "Competitor" means (i) any Person who is actively engaged in the Subject Business and (ii) any Affiliate of a Person identified in clause (i) above (it being agreed that an investment firm shall not be deemed to control a Person described in clause (i) above merely as a result of owning a minority interest in such Person if it does not otherwise control such Person). "Consolidated" refers to the consolidation of any Person, in accordance with GAAP, with its properly consolidated Subsidiaries. References herein to a Person's Consolidated financial statements, financial position, financial condition, liabilities, etc. refer to the consolidated financial statements, financial position, financial condition, liabilities, etc. of such Person and its properly consolidated Subsidiaries. "Debt" shall mean without duplication: (i) indebtedness for borrowed money; (ii) the face amounts of all outstanding standby and commercial letters of credit and bankers acceptances, matured or unmatured, issued on behalf of the Company; (iii) guaranties of the Debt of any other Person, whether direct or indirect, whether by agreement to purchase the indebtedness of any other Person or by agreement for the furnishing of funds to any other Person through the purchase or lease of goods, supplies or services (or by way of stock purchase, capital contribution, advance or loan) in each case for the purpose of paying or discharging the Debt of any other Person; and (iv) the present value of all obligations for the payment of rent or hire of property of any kind (real or personal) under leases or lease agreements required to be capitalized under GAAP; provided that (x) in no event shall the Company's obligations under and in connection with any Series B Preferred Stock issued by the Company prior to the Closing Date constitute Debt and (y) any Series B Preferred Stock issued by the Company after the Closing Date shall constitute Debt. "Default" means any Event of Default and any default, event or condition which would, with the giving of any requisite notices and the passage of any requisite periods of time, constitute an Event of Default. "Defensible Title" shall mean, with respect to the assets of the Company (i) the title of the Company to such assets is free and clear of all Liens of any kind whatsoever (except to the extent permitted by the Documents), and (ii) as to those wells for which a "working interest" and a "net revenue interest" are set forth on the Disclosure Schedule (except to the extent disposed of or abandoned in accordance with the Documents), the Company is entitled to receive the percentage of all hydrocarbons produced, saved and marketed from such wells in an amount not less than the net revenue interest set forth therein, without reduction, suspension or termination throughout the duration of the productive life of such wells, and the Company is obligated to bear the percentage of costs and expenses related to the maintenance, development and operation of such wells in an amount not greater than the working interest set forth on the Disclosure Schedule, without increase throughout the productive life of such wells, except increases that also result in a proportionate increase in net revenue interest and as set forth on the Disclosure Schedule. "Designated Title Exceptions" is defined in Section 5.3. 5 "Disclosure Notice" as defined in Section 16.15. "Disclosure Schedule" means Schedule 1 hereto. "Disqualified Stock" means any Capital 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 redeemable at the sole option of the holder thereof, in whole or in part, on or prior to the Maturity Date; provided, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the rights to require the issuer of such Capital Stock to repurchase or redeem such Capital Stock upon the occurrence of (x) an "asset sale" or a "change of control" that also results in a Change of Control shall not constitute Disqualified Stock or (y) a "default" or an "event of default" shall not constitute Disqualified Stock; provided further, that in each case with respect to the foregoing clauses (x) and (y), the obligations of the Company to repurchase or redeem such Capital Stock is required only if permitted under the terms of this Agreement or with the consent of the Majority Holders or such obligations are subordinated to the Indebtedness on terms and conditions reasonably satisfactory to the Majority Holders. "Documents" means, collectively, this Agreement, the Subordination Agreement, the Notes, the Registration Rights Agreement, the Security Documents and all other agreements, certificates, documents, instruments and writings at any time delivered in connection herewith or therewith (exclusive of term sheets and commitment letters). "Dollar", "Dollars" and the sign "$" mean lawful money of the United States of America. "EBITDA" means the Company's consolidated earnings before interest expense, income taxes, depreciation, amortization, depletion, oil and gas asset impairment write downs, lease impairment expense, gains and losses from the sale of capital assets, and other non-cash charges; provided that none of the following shall be included in the determination of the EBITDA of the Company: (i) the earnings (or losses) of any Person which is not a Subsidiary of the Company or is accounted for by the Company by the equity method of accounting, (ii) any non-cash gains or losses, if any, resulting from the repricing of any stock options issued by the Company, or (iii) any non-cash gains or losses resulting from the application of FASB Statement 133 or the application of ceiling test write-downs made pursuant to Rule 4.10 of Regulation S-X promulgated by the Commission. "Eligible Market" means the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market and the NASDAQ SmallCap Market (or any of their respective successors). "Engineering Report" means each engineering report, if any, delivered pursuant to Section 6.1(f) or 6.1(h). "Environmental Laws" shall mean any federal, state, local or tribal statute, law, rule, regulation, ordinance, code, permit, consent, approval, license, written policy or rule of common 6 law now or hereafter in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, injunction, consent decree or judgment, or other authorization or requirement whenever promulgated, issued or modified, including the requirement to register underground storage tanks, well plugging and abandonment requirements, and oil and gas waste disposal requirements relating to: (i) emissions, discharges, spills, migration, movement, releases or threatened releases of pollutants, contaminants, Hazardous Materials, or hazardous or toxic materials or wastes into or onto soil, land, ambient air, surface water, ground water, watercourses, publicly owned treatment works, drains, sewer systems, wetlands or septic systems; (ii) the use, treatment, storage, disposal, handling, manufacturing, transportation, or shipment of Hazardous Materials or hazardous and/or toxic wastes, material, products or by-products containing Hazardous Materials (or of equipment or apparatus containing Hazardous Materials); or (iii) otherwise relating to pollution or the protection of human health or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. ss.ss. 9601 et seq., as amended, the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901 et seq., as amended, the Hazardous Materials Transportation Act, 49 U.S.C. ss.ss. 1801 et seq., as amended, the Clean Water Act, 33 U.S.C. ss.ss. 1251 et seq., as amended, the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et seq., as amended, the Clean Air Act, 42 U.S.C. ss.ss. 7401 et seq., as amended, the federal Water Pollution Control Act, 33 U.S.C. ss. 1251 et seq., as amended, the Safe Drinking Water Act, 42 U.S.C. ss.ss. 300f et seq., as amended, the Atomic Energy Act, 42 U.S.C. ss.ss. 2011 et seq., as amended, the Natural Gas Pipeline Safety Act of 1968, 49 U.S.C. ss. 1671 et seq., as amended, the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. ss.ss. 136 et seq., as amended, and the Occupational Safety and Health Act, 29 U.S.C. ss.ss. 651 et seq., as amended, and all comparable statutes of the States of Louisiana and Texas, and all comparable local Governmental Requirements in such states, and other environmental, conservation or protection laws in effect in any jurisdiction where any of the Mortgaged Properties of the Company are located. "Environmental Liabilities" means with respect to any Person, any and all liabilities, responsibilities, losses, sums paid in settlement of claims, obligations, charges, actions (formal or informal), claims (including, without limitation, claims for personal injury or for property damage), liens, administrative proceedings, damages (including, without limitation, loss or damage resulting from the occurrence of an Event of Default), punitive damages, consequential damages, treble damages, penalties, fines, monetary sanctions, interest, court costs, response and remediation costs, stabilization costs, encapsulation costs, treatment, storage, or disposal costs, groundwater monitoring or environmental sampling costs, other causes of action and any other costs and expenses (including, without limitation, reasonable attorneys', experts', and consultants' fees, costs of investigation and feasibility studies and disbursements in connection with any investigative, administrative or judicial proceeding), whether direct or indirect, known or unknown, absolute or contingent, past, present or future arising under, pursuant to or in 7 connection with any Environmental Law, or any other binding obligation of such Person requiring abatement of pollution or protection of human health and the environment. "Environmental Lien" means a Lien in favor of any Governmental Authority for (i) any liability under Environmental Laws or (ii) damages arising from, or costs incurred by such Governmental Authority in response to, a Release or threatened Release of a Hazardous Materials into the environment. "Equity Conditions" means, with respect to a specified issuance of Common Stock, that each of the following conditions is satisfied: (i) the number of authorized but unissued and otherwise unreserved shares of Common Stock is sufficient for such issuance and such shares will be issued in compliance with Section 3.2(i); (ii) on and including the date of any Stock Payment Notice to and including the Issue Date to which such Stock Payment Notice relates, the Common Stock shall be listed on an Eligible Market and delisting or suspension by such market or exchange shall not have been threatened either (A) in writing by such market or exchange or (B) by falling below for at least the requisite period the applicable minimum quantative listing maintenance requirements of such market or exchange; (iii) the shares of Common Stock to be issued in payment of any Indebtedness on such date of determination are, to the extent required, approved for listing on an Eligible Market upon issuance; (iv) on any day during an Interest Measuring Period, a Maturity Date Measuring Period and a Voluntary Prepayment Measuring Period, as applicable, the Common Stock shall not have fallen below, for three (3) consecutive Trading Days during any such period, the minimum bid or trading price for any Eligible Market on which the Common Stock is then quoted or listed; (v) on and including the date of any Stock Payment Notice to and including the Issue Date to which such Stock Payment Notice relates, there shall not have occurred a Significant Default or an Event of Default other than a Significant Default or an Event of Default that has been waived or has been cured within the cure period specified in Section 8.1(b); (vi) on the applicable date of determination either (A) the Registration Statement or Registration Statements contemplated pursuant to the Registration Rights Agreement shall be effective and available for the resale of all of the Registrable Securities in accordance with the terms of the Registration Rights Agreement or (B) all shares of Common Stock issuable in payment of the Indebtedness on the terms permitted under this Agreement shall be eligible for legend removal in accordance with the provisions of Rule 144(k) upon request by the holder thereof and applicable state securities laws; (vii) on any date of determination, if the aggregate number of shares of Common Stock issued to the Holders during the period of six (6) consecutive calendar months immediately preceding such date and then held by the Holders on such date together with the shares of Common Stock to be issued on such date (or with respect to the date of the Stock Payment Notice, proposed to be issued and calculated based on issuance of such shares at the Floor Price or if no Floor Price is specified, at the Volume Weighted Average Price for the applicable Measurement Period as if the date of the Stock Payment Notice was the Issue Date) exceeds one and one-half percent (1.50%) of the Common Stock issued and outstanding on such date, the Company shall have no knowledge of any material fact not previously disclosed to the public that is reasonably likely to cause the Registration Statements required pursuant to the Registration Rights Agreement not to be effective and available for the resale of not less than all of the Registrable Securities in accordance with the terms of the Registration Rights Agreement; (viii) the Company is current in its periodic filing obligations under the Exchange Act and the rules of any Eligible Market on 8 which the Common Stock is then either listed or quoted (determined by including any safe harbors provided by Form 8-K and grace periods pursuant to Rule 12b-25); and (ix) any applicable shares of Common Stock to be issued in connection with the event requiring determination may be issued in full without violating Section 3.2(f) or the rules or regulations of the applicable Eligible Market. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statutes or statute, together with all rules and regulations promulgated with respect thereto. "Event of Default" has the meaning given to such term in Section 8.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute or law thereto. "Exhibit" refers to an exhibit attached to this Agreement, unless another document is specifically referenced. "Fiscal Quarter" means a three-month period ending on March 31, June 30, September 30 or December 31 of any year. "Floor Price" means, as applicable for any payment of Indebtedness in Common Stock permitted under this Agreement, the minimum Maturity Date Price, Interest Payment Price or Voluntary Redemption Price, if any, specified by the Company in any notice delivered to Collateral Agent and Holders pursuant to Sections 3.3(b), 3.5 or 3.6, respectfully. "Floor Price Portion" is defined in Section 3.6. "Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans, debt instruments and similar extensions of credit in the ordinary course of its business. "GAAP" shall mean, at any time, accounting principles generally accepted in the United States as then in effect. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Governmental Requirement" shall mean any applicable state, federal or local law, statute, ordinance, code, rule, regulation, order or decree. "Guarantors" means CCBM and any other Person who has guaranteed some or all of the Indebtedness and who has been accepted by Collateral Agent as a Guarantor and any Subsidiary of the Company which now or hereafter executes and delivers a Guaranty to Collateral Agent pursuant to Section 6.15. 9 "Guaranty" means individually and collectively that certain Commercial Guaranty of even date with this Agreement by CCBM in favor of the Collateral Agent for the ratable benefit of the Holders, as amended and/or restated from time to time and in effect, and any Commercial Guaranty executed after the date of this Agreement by a Subsidiary in favor of the Collateral Agent for the ratable benefit of the Holders, as amended and/or restated from time to time and in effect. "Hazardous Materials" means (1) hazardous materials, hazardous wastes, and hazardous substances including, but not limited to, those substances, materials and wastes listed in the United States Department of Transportation Hazardous Materials Table, 49 C.F.R. ss. 172.101, as amended, or listed by the federal Environmental Protection Agency as hazardous substances under or pursuant to 40 C.F.R. Part 302, as amended, or substances, materials, contaminants or wastes which are or become regulated under any Environmental Law, including without limitation, those substances, materials, contaminants or wastes as defined in the following statutes and their implementing regulations: the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801 et seq., as amended, the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901 et seq., as amended, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 et seq., as amended, the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq., as amended, the Clean Air Act, 42 U.S.C. ss. 7401 et seq., as amended, the federal Water Pollution Control Act, 33 U.S.C. ss. 1251 et seq., as amended, the Occupational Safety and Health Act, 2 U.S.C. ss. 651 et seq., as amended, the Safe Drinking Water Act, 42 U.S.C. ss.300f et seq., as amended and the Natural Gas Pipeline Safety Act of 1968, 49 U.S.C. ss. 1671 et seq., as amended; (2) all substances, materials, contaminants or wastes listed in all comparable statutes of the States of Louisiana and Texas and in comparable local Governmental Requirements in such states; (3) acid gas, sour water streams or sour water vapor streams containing hydrogen sulfide or other forms of sulphur, sodium hydrosulfide and ammonia; (4) Hydrocarbons; (5) natural gas, synthetic gas, and any mixtures thereof; (6) asbestos and/or any material which contains 1% or more, by weight, of any hydrated mineral silicate, including but not limited to chrysotile, amosite, crocidolite, tremolite, anthophylite and/or actinolite, whether friable or non-friable; (7) PCB's, or PCB containing materials or fluids; (8) radon; (9) naturally occurring radioactive material, radioactive substances or waste; (10) salt water and other oil and gas wastes and (11) any other hazardous or noxious substance, material, pollutant, emission, or solid, liquid or gaseous waste. "Hedging Agreement" means (a) any interest rate or currency swap, rate cap, rate floor, rate collar, forward agreement, or other exchange or rate protection agreement or any option with respect to any such transaction and (b) any swap agreement, cap, floor, collar, exchange transaction, forward agreement, or other exchange or protection agreement relating to any commodity, including Hydrocarbons, or any option with respect to any such transaction. "Highest Lawful Rate" shall mean, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal or Texas law permits the higher interest rate, stated as a rate per annum. On each day, if any, that Chapter 303 of the Texas Finance Code, as amended (formerly Tex. Rev. Civ. Stat. Ann. Art. 5069-1D.003) establishes the Highest Lawful Rate, such rate shall be the "indicated (weekly) rate ceiling" (as defined in Chapter 303 of the Texas Finance Code, as amended) for that day. 10 "Holder" or "Holders" means each Purchaser (so long as it holds any Notes) and any other holder of any of the Notes. "Hydrocarbons" means oil, gas, casing head gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products separated, settled and dehydrated therefrom and all products refined therefrom, including, without limitation, kerosene, liquefied petroleum gas, refined lubricating oils, diesel fuel, drip gasoline, natural gasoline, helium, sulphur and all other materials. "Indebtedness" means, at any time, all obligations, indebtedness, and liabilities, whether now existing or arising in the future, of the Company and/or any Guarantor to the Collateral Agent or the Holders or any of them (or in the case of a Hedging Agreement any Affiliate thereof) pursuant to a Hedging Agreement or other commodity or price management transaction (including all renewals, extensions, modifications, and substitution thereof and therefor) and all cancellations, buy backs, reversals, terminations, or assignments of Hedging Agreements, and the indebtedness, liabilities and obligations of the Company evidenced by any Document, including principal, interest, repurchase obligations, costs, expenses and reasonable attorneys' fees and all other fees and charges, together with all commitment fees and other indebtedness and costs and expenses for which the Company and/or any Guarantor is responsible under this Agreement or under any of the Documents (including the repurchase obligations of the Company under the Registration Rights Agreement). In addition, the word "Indebtedness" also includes, any and all other loans, extensions of credit, obligations, debts and liabilities of the Company, plus interest thereon, that may now and in the future be owed to or incurred in favor of the Collateral Agent and/or the Holders, as well as all claims by the Collateral Agent and/or the Holders against the Company and/or any Guarantor, whether existing now or later; whether they are voluntary or involuntary, due or to become due, direct or indirect or by way of assignment, determined or undetermined, absolute or contingent, liquidated or unliquidated; whether the Company may be liable individually or jointly with others, of every nature and kind whatsoever, in principal, interest, costs, expenses and reasonable attorneys' fees and all other fees and charges; whether the Company and/or any Guarantor may be obligated as principal obligor, guarantor, surety, accommodation party or otherwise. "Indemnified Person" has the meaning ascribed to such term in Section 16.5. "Indemnifying Person" has the meaning ascribed to such term in Section 16.6. "Initial Notes" has the meaning ascribed to such term in Section 2.1. "Interest Expense" means, for any period, total interest expense (including that portion attributable to Capital Lease Obligations in accordance with GAAP and capitalized interest) of the Company and its Subsidiaries (other than Unrestricted Subsidiaries) on a consolidated basis with respect to all outstanding Obligations of the Company and its Subsidiaries (other than Unrestricted Subsidiaries) to the extent the promissory notes, leases or other instruments or agreements evidencing such Obligations require the payment of such interest in cash during such period. 11 "Interest Payment Notice" is defined in Section 3.3(b). "Interest Payment Price" means, with respect to any Payment Date, that price which shall be computed as 90% of the arithmetic average of the Volume Weighted Average Price of the Common Stock on each of the ten (10) consecutive Trading Days immediately preceding (but not including) the Trading Day that is two (2) Trading Days prior to such Payment Date (each, an "Interest Measuring Period"). All such determinations to be appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction during such Interest Measuring Period. "Internal Revenue Code" means the United States Internal Revenue Code of 1986, as amended from time to time and any successor statute or statutes, together with all rules and regulations promulgated with respect thereto. "Investment" means any investment, made directly or indirectly, in any Person, whether by purchase, acquisition of equity interests, indebtedness or other obligations or securities or by extension of credit, loan, advance, capital contribution or otherwise and whether made in cash, by the transfer of property, or by any other means. "Investment Base" means (i) as of the Closing Date, $28,000,000, and (ii) after the Closing Date, the amount determined in accordance with Section 6.18 less, in each case with respect to the foregoing clauses (i) and (ii), any Quarterly Reduction as and when applied in accordance with the terms of the Senior Credit Agreement. "Issue Date" means with respect to any payment of the Indebtedness by the issuance of Common Stock pursuant to Section 3.3(b), 3.5 or 3.6, as the case may be, the date the Company is obligated to issue such Common Stock. "Law" means any statute, law, regulation, ordinance, rule, treaty, judgment, order, decree, permit, concession, franchise, license, agreement or other governmental restriction of the United States or any state or political subdivision thereof or of any foreign country or any department, province or other political subdivision thereof. Any reference to a Law includes any amendment or modification to such Law, and all regulations, rulings, and other Laws promulgated under such Law. "Leases" shall mean all present and future oil, gas and mineral leases or interests therein now owned or hereafter acquired by the Company that form part of the Mortgaged Properties. "Liabilities" means, as to any Person, all indebtedness, liabilities and obligations of such Person, whether matured or unmatured, liquidated or unliquidated, primary or secondary, direct or indirect, absolute, fixed or contingent, and whether or not required to be considered pursuant to GAAP. "Liens" means any interest in property securing an obligation owed to, or a claim by, Guarantor, a Person other than the owner of such property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other 12 title exceptions and encumbrances affecting property. For the purpose of the Agreement, the Company and each Guarantor shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement or other arrangements pursuant to which title to the property has been retained by or vested in some other Person for security purposes; provided, however, that the term "Lien" shall not include a trust or similar arrangement established for the purpose of defeasing any Debt pursuant to the terms evidencing or providing for the issuance of such Debt but only to the extent that such defeasance is permitted under this Agreement. "Losses" has the meaning ascribed to such term in Section 16.5. "Majority Holders" means, at any time, the Holder or Holders of at least a majority in aggregate outstanding principal amount of the Notes. "Material Adverse Effect" shall mean, with respect to the Company and/or the Guarantor, as the case may be, an event which causes a material adverse effect on the business, assets, operations or condition (financial or otherwise) of such Person. "Maturity Date" means December 15, 2008. "Maturity Date Floor Price Portion" is defined in Section 3.5(a). "Maturity Date Payment Notice" is defined in Section 3.5(a). "Maturity Date Price" means, with respect to the payment due on the Maturity Date, that price which shall be computed as 90% of the arithmetic average of the Volume Weighted Average Price of the Common Stock on each of the thirty (30) consecutive Trading Days immediately preceding (but not including) the Trading Day that is two (2) Trading Days prior to the Maturity Date (the "Maturity Date Measuring Period"). All such determinations to be appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction during the Maturity Date Measuring Period. "Maximum Shares" is defined in Section 3.2(f). "Maximum Percentage" is defined in Section 3.2(f). "Measurement Period" means any Interest Measuring Period, a Maturity Date Measuring Period or a Voluntary Prepayment Measuring Period, in each case, as extended pursuant to Section 16.15. "Mortgaged Properties" shall mean the property and interests of the Company and/or any Guarantor that are encumbered by the Mortgages. "Mortgages" means, collectively, all deeds of trust and mortgages included in the Security Documents. 13 "Non-Recourse Indebtedness" shall mean Obligations owed by the Guarantor to Rocky Mountain Gas, Inc., and Obligations of the Company and/or any Guarantor for which the Company and/or any Guarantor, as the case may be, are not personally liable for payment of the Obligations. "Notes" has the meaning ascribed to such term in the recitals hereto. "Note Register" has the meaning ascribed to such term in Section 3.7(a). "Obligations" of any Person means Liabilities in any of the following categories: (a) Liabilities for borrowed money; (b) Liabilities constituting an obligation to pay the deferred purchase price of property or services; (c) Liabilities evidenced by a bond, debenture, note or similar instrument; (d) Liabilities which (i) would under GAAP be shown on such Person's balance sheet as a liability, and (ii) are payable more than one year from the date of creation or incurrence thereof (other than reserves for taxes and reserves for contingent obligations); (e) Liabilities arising under Hedging Agreements (on a net basis to the extent netting is provided for in the applicable Hedging Agreements); (f) Liabilities constituting principal under Capital Leases; (g) Liabilities arising under conditional sales or other title retention agreements; (h) Liabilities owing under direct or indirect guaranties of Liabilities of any other Person or otherwise constituting obligations to purchase or acquire or to otherwise protect or insure a creditor against loss in respect of Liabilities of any other Person (such as obligations under working capital maintenance agreements, agreements to keep-well, or agreements to purchase Liabilities, assets, goods, securities or services), but excluding endorsements in the ordinary course of business of negotiable instruments in the course of collection; (i) Liabilities (for example, repurchase agreements, Disqualified Stock (but not accrued dividends on preferred stock), and sale/leaseback agreements) consisting of an obligation to purchase or redeem securities or other property, if such Liabilities arise out of or in connection with the sale or issuance of the same or similar securities or property; (j) Liabilities with respect to letters of credit or applications or reimbursement agreements therefore; (k) Liabilities with respect to banker's acceptances; (l) Liabilities with respect to payments received in consideration of oil, gas, or other minerals yet to be acquired or produced at the time of payment (including obligations under "take-or-pay" contracts to deliver gas in return for payments already received and the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment); or (m) Liabilities with respect to other obligations to deliver goods or services in consideration of advance payments therefor; provided, however, that the "Obligations" of any Person shall not include Liabilities that were incurred by such Person on ordinary trade terms to vendors, suppliers, or other Persons providing goods and services for use by such Person in the ordinary course of its business, unless and until such Liabilities are outstanding more than 90 days past the original invoice or billing date therefor. "Oil and Gas Properties" means all oil, gas and/or mineral leases, oil, gas or mineral properties, mineral servitudes and/or mineral rights of any kind (including, without limitation, mineral fee interests, lease interests, farmout interests, overriding royalty and royalty interests, net profits interests, oil payment interests, production payment interests and other types of mineral interests), and all oil and gas transportation, gathering, treating, storage, processing and 14 handling assets. "Organizational Documents" means (a) with respect to any corporation, its certificate or articles of incorporation or organization, as amended, and its by-laws, as amended, (b) with respect to any limited partnership, its certificate of limited partnership, as amended, and its partnership agreement, as amended, (c) with respect to any general partnership, its partnership agreement, as amended, and (d) with respect to any limited liability company, its articles of organization, as amended, and its operating agreement, as amended. "Payment Date" means the 5th day of March, June, September and December of each year. "PCRL" has the meaning assigned to such term in the preamble hereto and shall include is successors. "Permitted Liens" shall have the meaning ascribed to such term in Section 7.4. hereof. "Person" means an individual, corporation, general partnership, limited partnership, limited liability company, association, joint stock company, trust or trustee thereof, estate or executor thereof, Tribunal, or any other legally recognizable entity. "Pinnacle" means Pinnacle Gas Resources, Inc., a Delaware corporation. "Principal Market" means the Nasdaq National Market. "Purchase Money Indebtedness" means Debt incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Debt assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and any extension, renewal or replacement of any such Debt. "Purchasers" has the meaning ascribed to such term in the preamble hereto and shall include its successors and assigns. "Qualified Common Stock" means with respect to any Holder, any shares of Common Stock issued to such Holder in payment of the Indebtedness pursuant to the terms of this Agreement for which the effectiveness of a Registration Statement or Registration Statements with respect to such shares of Common Stock is not required to be maintained under the Registration Rights Agreement. "Quarterly Reduction" has the meaning assigned to such term from time to time in the Senior Credit Agreement unless all of the Obligations under the Senior Credit Documents have been paid in full and all commitments under the Senior Credit Agreement have been terminated and no replacement Senior Credit Agreement is in effect in which event "Quarterly Reductions" shall be an 15 amount determined by the Majority Holders as of May 1 and November 1 of each year based on the most recent Engineering Report delivered pursuant to Section 6.1(f) and Section 6.1(h), respectively unless such Engineering Reports have not been requested by the Collateral Agent or the Majority Holders, in which event the "Quarterly Reductions" shall be an amount determined by the Majority Holders based on the information described in the Company's most recently filed Commission Reports. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Registrable Securities" as defined in the Registration Rights Agreement. "Registration Rights Agreement" means that certain Registration Rights Agreement between the Company and the Purchasers, dated as of the date hereof, substantially in the form attached hereto as Exhibit G, as amended, modified, supplemented or restated from time to time. "Release" means any release, spill, emission, leak, injection, deposit, disposal, discharge, dispersal, leaching or migration of any Hazardous Materials into the environment or into or out of any real property of the Company, including the movement of Hazardous Materials through or in the air, soil, surface water, groundwater and/or land which could reasonably be expected to form the basis of an Environmental Liability against the Company. "Remedial Action" means any action to (i) clean up, remove, treat or in any other way address Hazardous Materials in the environment, (ii) prevent the Release or threat of Release or minimize the further Release of Hazardous Materials so they do not mitigate or endanger or threaten to endanger public health or welfare or the environment or (iii) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Repurchase Closing Date" is defined in Section 3.5(b). "Repurchase Notice" is defined in Section 3.5(b). "Repurchase Notice Date" is defined in Section 3.5(b). "Restricted Person" means the Guarantor, the Company, and each other Subsidiary of the Company, excluding Unrestricted Subsidiaries. "Restricted Securities" means the Notes and the Underlying Shares, to the extent the Notes or Underlying Shares have not then been sold to the public pursuant to (a) a registration under the Securities Act or (b) Rule 144(k). "Rule 144" and "Rule 144(k)" means Rule 144 and Rule 144(k), respectively, promulgated by the Commission pursuant to the Securities Act, as such Rules may be amended 16 from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Schedule" refers to a specific schedule to this Agreement, unless another document is specifically referenced. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute or law thereto. "Security Agreement" shall mean that certain Stock Pledge and Security Agreement executed by the Company in favor of the Collateral Agent for the ratable benefit of the Holders, of even date with the Agreement, pledging 100% of the outstanding Capital Stock of the Guarantor, as the same may be amended, supplemented, and/or restated from time to time and in effect. "Security Documents" means the Guaranty, the Mortgages, the Security Agreement and all other security agreements, deeds of trust, mortgages, chattel mortgages, pledges, guaranties, financing statements, continuation statements, extension agreements and other agreements or instruments now, heretofore, or hereafter delivered by any Restricted Person to Collateral Agent in connection with this Agreement or any transaction contemplated hereby to secure or guarantee the payment of any part of the Indebtedness or the performance of any Restricted Person's other duties and obligations under the Documents. "Senior Agent" means Hibernia National Bank, in its capacity as the agent for the Banks under the Senior Credit Agreement or any permitted successor thereto in such capacity. "Senior Credit Agreement" means (i) that certain Second Amended and Restated Credit Agreement dated as of September 30, 2004 among the Company, the Guarantors, the Senior Agent and Union Bank of California, N.A., as co-agent, pursuant to which the Banks therein agree to make revolving loans available to the Company in an aggregate outstanding amount not to exceed $100,000,000 at any time, as amended, modified, supplemented or restated as permitted hereunder and (ii) subject to the limitations set forth in Section 7.5(l), any other credit agreement, loan agreement, note agreement, promissory note, indenture or other agreement or instrument evidencing or governing the terms of any indebtedness or other financial accommodation that has been incurred to extend, replace, refinance or refund in whole or in part the indebtedness and other obligations outstanding under clause (i) or any other agreement or instrument referred to in this clause (ii) provided such agreement or instrument referred to in this clause (ii) expressly provides that it is intended to be and is a "Senior Credit Agreement" hereunder. Any reference to the "Senior Credit Agreement" hereunder shall be deemed a reference to any "Senior Credit Agreement" then extant. "Senior Credit Agreement Amendment" means an amendment to the Senior Credit Agreement in the form attached hereto as Exhibit F. 17 "Senior Credit Documents" means, collectively, the Senior Credit Agreement, and any other agreements, documents, instruments or certificates executed and delivered from time to time in connection therewith. "Significant Default" means a Default arising under Section 6.7 (as of the last day of the Fiscal Quarter immediately preceding the date of the Stock Payment Notice for which Commission Reports have been filed for the Company), 6.16, 7.1, 7.2, 7.3, 7.4 or 7.6. "Significant Stock Payment Notice" means any of the Maturity Date Payment Notice, a Voluntary Redemption Notice or a Change of Control Notice that contemplates payment of any of the Indebtedness with Common Stock. "Solvent" shall mean, when used with respect to any Person on a particular day, that on such date (i) the fair value of the property of such Person is greater than the total amount of Liabilities, including without limitation, contingent Liabilities, of such person, (ii) the present fair salable value of the assets of such person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (iii) such Person is able to realize upon its assets and pay its debts and other Liabilities, contingent obligations and other commitments as they mature in the ordinary course of business, (iv) such Person does not intend to, and does not believe that it will, incur debts and Liabilities beyond such Person's ability to pay as such debts and Liabilities mature, and (v) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such person is engaged. In computing the amount of contingent Liabilities at any time, it is intended that such Liabilities will be computed at the amount which, in light of all of the facts and circumstances existing at such time, represents the amount that can be reasonably expected to become an actual or matured liability. "Stated Rate" is defined in Section 3.3(c). "Stock Payment Notice" means any of the Maturity Date Payment Notice, a Voluntary Redemption Notice or an Interest Payment Notice. "Subject Business" has the meaning ascribed to such term in the recitals hereto. "Subordinated Note Agreement" means that certain Securities Purchase Agreement dated as of December 15, 1999, as amended by that certain First Amendment thereto dated as of June 7, 2004 among the Company and the Subordinated Noteholder, as amended, modified, supplemented or restated from time to time. "Subordinated Note Agreement Amendment" means an amendment of the Subordinated Note Agreement in the form attached hereto as Exhibit E. "Subordinated Note Documents" means, collectively, the Subordinated Note Agreement, and any other agreements, documents, instruments or certificates executed and delivered from time to time in connection therewith. 18 "Subordinated Noteholder" means Steelhead Investments Ltd., a Cayman Islands corporation, together with any successor or assignee thereof. "Subordinated Notes" means that certain Amended and Restated Note dated as of June 7, 2004, in the principal amount of $27,702,426.55, executed by the Company and payable to the order of the Subordinated Noteholder pursuant to the Subordinated Note Agreement, as amended, modified, supplemented, replaced or restated from time to time. "Subordination Agreement" means that certain Subordination Agreement dated as of the date hereof, by and among the Collateral Agent, the Senior Agent and the Company, as amended, modified, supplemented, replaced or restated from time to time. "Subsidiary" means, with respect to any Person, any corporation, association, partnership, limited liability company, joint venture, or other business or corporate entity, enterprise or organization which is directly or indirectly (through one or more intermediaries) controlled by or owned more than fifty percent by such Person. "Tangible Net Worth" means, with respect to any Person, the total assets of such Person (other than with respect to the Company, its Unrestricted Subsidiaries), on a consolidated basis, exclusive of (a) those assets classified as intangible, including, without limitation, goodwill, patents, trademarks, trade names, copyrights, franchises and deferred charges, (b) treasury stock and minority interests in any Person, (c) cash set apart and held in sinking or other analogous funds established for the purpose of redemption or other retirement of Capital Stock, (d) to the extent not already deducted from total assets, allowances for depreciation, depletion, obsolescence and/or amortization of properties, uncollectible accounts, and contingent but probable Liabilities as to which an amount can be established, (e) deferred taxes and (f) all assets arising from advances to officers, former officers or sales representatives of such Person or any of its Subsidiaries (other than with respect to the Company, its Unrestricted Subsidiaries) made outside the ordinary course of business; less total Liabilities of such Person and its Subsidiaries (other than with respect to the Company, its Unrestricted Subsidiaries), on a consolidated basis, all of the above being determined in accordance with GAAP and, with respect to the Company, excluding the effect of any cumulative after-tax amounts of ceiling test write-downs (not to exceed an aggregate of $30 million) incurred subsequent to December 31, 2001 pursuant to Rule 4.10 of Regulation S-X promulgated by the Commission. "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all Liabilities with respect to the foregoing. "Third Party Claim" has the meaning ascribed to such term in Section 16.6. "Total Recourse Debt" is defined in Section 6.7(a). "Trading Day" means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal Eligible Market on which the Common Stock is then traded; provided that "Trading Day" shall not include any day on which the Common Stock is scheduled to trade on 19 any Eligible Market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such Eligible Market (or if such Eligible Market does not designate in advance the closing time of trading on such Eligible Market, then during the hour ending at 4:00 p.m., New York City Time). "Transfer" means any sale, transfer, assignment, or other disposition of any interest in, with or without consideration, any security, including any disposition of any security or of any interest therein which would constitute a sale thereof within the meaning of the Securities Act. "Tribunal" means any government, any arbitration panel, any court or any governmental department, commission, board, bureau, agency or instrumentality of the United States of America or any state, province, commonwealth, nation, territory, possession, county, parish, town, township, village or municipality, whether now or hereafter constituted or existing. "Underlying Securities" means the Common Stock issuable in payment of the Indebtedness evidenced by the Notes pursuant to Section 3.3(b), 3.5 or 3.6. "Unrestricted Subsidiary" means (a) any Subsidiary of Company designated as an Unrestricted Subsidiary of Company by Company's Board of Directors in compliance with the following sentence, and (b) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of Company may at any time and from time to time designate any Subsidiary of Company (other than any Guarantor) as an Unrestricted Subsidiary provided that (i) no Default or Event of Default has occurred or is continuing at the time of such designation and after giving effect to such designation, (ii) immediately after such designation, no Restricted Person has any Liability to pay any Obligations of such Subsidiary, has in any way guaranteed any Obligations of such Subsidiary, or has any assets or properties (excluding a pledge of the equity interest in such Subsidiary) which are subject to any Lien securing any Obligations of such Subsidiary, and (iii) notice of any such designation is promptly given to the Collateral Agent in writing. "Volume Weighted Average Price" with respect to a share of Common Stock on any day, means on such day, the average of the daily volume weighted average trading price per share (the total dollar amount traded on each day divided by the trading volume for such day) of such security on the Principal Market for the regular trading day session as reported at 4:15 p.m. (New York City time) by Bloomberg, LP function key HP by using W to calculate the daily weighted average or, if there is a change in trading hours, a change relating to Bloomberg or the effect or name of such function key, such other method as is reasonably determined by the Board and the Majority Holders. "Voluntary Redemption Date" means the date on which the Company prepays all or any portion of the outstanding Indebtedness evidenced by the Notes under this Agreement. "Voluntary Redemption Notice" is defined in Section 3.6. "Voluntary Redemption Price" means, with respect to the payment due on any Voluntary Redemption Date, that price which shall be computed as 90% of the arithmetic average of the Volume Weighted Average Price of the Common Stock on each of the thirty (30) consecutive 20 Trading Days immediately preceding (but not including) such Voluntary Redemption Date (each, a "Voluntary Redemption Date Measuring Period"). All such determinations to be appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction during such Voluntary Prepayment Measuring Period. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. The use herein of the word "include" or "including", when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. As used herein, the terms "proved reserves," "proved developed reserves," and "proved developed producing reserves," have the meaning given such terms from time to time and at the time in question by the Society of Petroleum Engineers of the American Institute of Mining Engineers. ARTICLE II PURCHASE AND SALE OF THE NOTES ------------------------------ 2.1. Authorization and Issuance of the Notes. (a) The Company has authorized the issuance of Notes in the aggregate principal amount of $18,000,000 on the Closing Date (the "Initial Notes"). (b) On the Closing Date, the Company shall sell to each Purchaser, and each Purchaser shall severally purchase from the Company, upon satisfaction of the conditions set forth in Section 4.1 hereof (or waiver in writing of such conditions by such Purchaser), an Initial Note in the principal amount equal to the amount set forth opposite such Purchaser's name on Schedule 2 for the purchase price set forth opposite its name. (c) On or before the issuance thereof, the Company will have authorized the issue and sale to the Purchasers of up to $10,000,000 aggregate principal amount of additional Notes (the "Additional Notes"). (d) On each Additional Closing Date, the Company shall sell to each Purchaser, and each Purchaser shall severally purchase from the Company, upon satisfaction of the conditions set forth in Section 4.3 hereof (or waiver in writing of such conditions by such Purchaser), in one or more increments of $4,000,000 or integral multiples of $1,000,000 in excess thereof, up to $10,000,000 aggregate stated principal amount of Additional Notes in the respective percentages set forth opposite such 21 Purchaser's name on Schedule 2 for the purchase price set forth opposite its name. Notwithstanding anything to the contrary herein, the obligation of each Purchaser to purchase Additional Notes shall terminate on the second anniversary of the Closing Date and the aggregate stated principal amount of all Additional Notes issued by the Company shall not exceed $10,000,000. 2.2. Delivery of the Notes. On the Closing Date, the Company shall deliver to each Purchaser a duly executed Initial Note (payable to the order of such Purchaser) purchased by such Purchaser on the Closing Date. Delivery shall be made against receipt by the Company of the aggregate purchase price for the Notes being purchased by such Purchaser by wire transfer of immediately available funds to an account designated by the Company. On each Additional Closing Date, the Company shall deliver to each Purchaser a duly executed Additional Note (payable to the order of such Purchaser) purchased by such Purchaser on such Additional Closing Date. Delivery shall be made against receipt by the Company of the aggregate purchase price for the Additional Notes being purchased by such Purchaser by wire transfer of immediately available funds to an account designated by the Company. 2.3. Closing. Subject to the satisfaction of the conditions precedent set forth in Section 4.1 hereof (or the waiver in writing of such conditions by the Purchasers), the delivery of the Initial Notes shall take place at the offices of Gardere Wynne Sewell LLP, 3000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201-4761 on the Closing Date. Subject to the satisfaction of the conditions precedent set forth in Section 4.3 hereof (or the waiver in writing of such conditions by the Purchasers), the delivery of the Additional Notes shall take place at the offices of Gardere Wynne Sewell LLP, 3000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201-4761 on each Additional Closing Date or at such other location as may be agreed upon by the Company and the Purchasers. ARTICLE III PROVISIONS OF THE NOTES ----------------------- 3.1. The Notes. The Initial Notes shall be in the aggregate stated principal amount of Eighteen Million Dollars ($18,000,000). The Initial Notes shall be dated the Closing Date. The Additional Notes shall be in the aggregate stated principal amount of not more than Ten Million Dollars ($10,000,000). The Additional Notes shall be dated the applicable Additional Closing Date on which such Additional Notes are issued. The aggregate amount of the Notes shall, subject to the provisions for mandatory and optional prepayment and acceleration contained herein, mature and be payable in full on the Maturity Date. 3.2. General Provisions as to Payments. 22 (a) The Company shall make each payment in respect of the principal of, premium, if any, or accrued interest on the Notes, or any other amount due to the Holders under this Agreement or any other Document, not later than noon, New York City time, on the day when due, to the Holders as provided in the Notes and Schedule 2 attached hereto, or in such other manner as instructed from time to time in writing by the Holder. Except as otherwise permitted in Section 3.3(b), 3.5 and 3.6, all payments hereunder shall be made in United States Dollars by wire transfer of immediately available funds. (b) Whenever any payment (including principal of, premium, if any, or interest on the Notes or other amount) hereunder or under any other Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of such interest, or other amount, if applicable. (c) The Company hereby authorizes the Holders to make appropriate notations on the grid attached to the Notes, including the date, outstanding principal amount and any prepayment thereof and the deferred interest amounts to be added to the principal amount of the Notes in accordance with Section 3.3(b), which notations shall be conclusive absent manifest error; provided, however, that the failure of the Holders to make such notation or any error on the Notes shall not affect the obligation of the Company to repay, in accordance with the terms of the Notes and this Agreement, the principal amount of the Notes together with all interest, prepayment premiums, if any, and other amounts due hereunder. (d) Neither the Company nor any of its Subsidiaries shall purchase, redeem or otherwise acquire any Notes from any holder thereof except upon payment or redemption thereof in accordance with the specific terms thereof and of this Agreement unless the Company or such Subsidiary shall have offered to purchase, redeem or otherwise acquire, as the case may be, Notes from each holder of the Notes at the time outstanding upon the same terms and conditions and on a pro rata basis (based upon the principal amount of the Notes then held by each such holder). Any Notes so purchased, redeemed or otherwise acquired by the Company or any Subsidiary of the Company shall be cancelled and not be deemed outstanding for any purpose under this Agreement. (e) Except to the extent otherwise provided herein, each payment of principal of the Notes by the Company shall be made for the account of the holders thereof pro rata in accordance with the respective unpaid principal amounts of the Notes held by them and each payment of interest on Notes shall be made for the account of the holders thereof pro rata in accordance with the amounts of interest on such Notes then due and payable to the respective Holders. (f) The Company shall not effect any payment of the Indebtedness by the issuance of Common Stock otherwise permitted under this Agreement, and no Holder 23 shall have the obligation to accept any such payment in Common Stock, pursuant to Sections 3.3(b), 3.5 or 3.6 or otherwise, to the extent that after giving effect to such issuance, such Holder (together with such Holder's Affiliates) would beneficially own in excess of 9.99% (the "Maximum Percentage") of the number of shares of Common Stock outstanding immediately after giving effect to such payment. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by any Holder and its Affiliates shall include the number of shares of Common Stock issuable upon payment of the Indebtedness with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable in payment of any other Indebtedness permitted under the terms of this Agreement for which no notice of payment by issuance of Common Stock has been received. For purposes of this Section 3.2(f), in determining the number of outstanding shares of Common Stock, each Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the payment of any Indebtedness by the issuance of Common Stock since the date as of which such number of outstanding shares of Common Stock was reported (but excluding any shares of Common Stock issuable pursuant to such Stock Payment Notice to the extent provided in this Section 3.2(f)). In connection with the delivery of any Stock Payment Notice, the Company may request in such notice, and, if so requested, each Holder shall confirm on or before two (2) Trading Days after the receipt of such Stock Payment Notice, the number of shares of Common Stock such Holder may receive without causing such Holder, together with its Affiliates, to have beneficial ownership of a number of shares of Common Stock which exceeds the Maximum Percentage (the "Maximum Shares") and the number of outstanding shares of Common Stock used by such Holder to calculate the Maximum Shares. Each Holder covenants that its calculation of the Maximum Shares shall be made in good faith and consistent with the calculation of "beneficial ownership" under Rules 13(d) of the Exchange Act as if the Common Stock to be issued pursuant to the applicable Stock Payment Notice had been issued to such Holder at the Floor Price specified in such Stock Payment Notice unless no Floor Price is specified in such Stock Payment Notice in which event such Common Stock shall be excluded in all respects from the calculation and determination of the Maximum Shares. Without limiting the generality of the foregoing, unless a Holder notifies the Company of the Maximum Shares that such Holder may receive within two (2) Trading Days of receipt of any Payment Notice, the Company may assume that the number of shares of Common Stock to be issued to such Holder on the payment date to which such Payment Notice relates will not cause such Holder, together with its Affiliates, to have beneficial ownership of a number of shares of Common Stock which exceeds the Maximum Percentage and the Company will have no liability to any Holder in respect of issuances of Common Stock in excess of the Maximum Percentage. Without limiting the generality of the foregoing, the Company 24 shall have no obligation to determine the beneficial ownership of any Holder and its Affiliates or to determine whether any Person is an Affiliate of another Person. (g) From and after the delivery of any Stock Payment Notice until the issuance of the shares of Common Stock to which such Stock Payment Notice relates, the Company shall reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, the number of shares of Common Stock necessary to enable it to satisfy any obligation to issue Common Stock on the Issue Date to which such Stock Payment Notice relates. All shares of Common Stock issued to each Holder in payment of any of the Indebtedness as permitted under this Agreement shall, upon the issuance thereof, be validly authorized and issued, fully paid, nonassessable, free of preemptive rights and free, from all taxes, Liens and charges with respect to the issuance thereof. (h) With respect to any shares of Common Stock issued pursuant to this Agreement, the Company shall (x) provided that the transfer agent is participating in the Depository Trust Company Fast Automated Securities Transfer Program and such action is not prohibited by applicable law or regulation or any applicable policy of the Depository Trust Company, credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder's or its designee's balance account with the Depository Trust Company through its Deposit Withdrawal Agent Commission System on the date such shares are required to be issued pursuant to this Agreement and the shares of Common Stock so issued shall bear no restrictive legend, or (y) if the foregoing shall not apply, issue and deliver to each Holder, a certificate, registered in the name of such Holder or its designee, for the number of shares of Common Stock to which such Holder shall be entitled on the date such shares of Common Stock are required to be issued pursuant to this Agreement. (i) With respect to any shares of Common Stock issued pursuant to this Agreement, such shares will be duly authorized and validly issued, will be fully paid and nonassessable and will not have been issued in violation of, and will not be subject to, any preemptive or similar rights. 3.3. Interest. (a) Interest Rate. The Indebtedness evidenced by the Notes shall bear interest at ten percent (10%) per annum on the outstanding principal balance thereof, for each day from and including the date that the Note is issued (which outstanding principal balance shall be determined based on the stated amount of the Note issued on the Closing Date and not on the purchase price of the Note on the Closing Date plus any interest added to such principal balance thereof in accordance with Section 3.3(b)). Interest on all Indebtedness evidenced by the Notes shall be calculated for actual days elapsed on the basis of a 360 day year consisting of twelve 30-day months . If any payment of principal of or interest on Indebtedness evidenced by a Note shall become due on a day which is not a Business Day, such payment shall be made on the next 25 succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. (b) Interest Payment Dates and Payment. Interest accrued on the Indebtedness evidenced by the Notes shall be payable on each Payment Date, commencing on March 5, 2005 with respect to the Initial Notes and on the later of March 5, 2005 or the first such Payment Date to occur after the issuance thereof with respect to any Additional Notes, on any date on which any Indebtedness evidenced by the Notes is prepaid whether due to acceleration or otherwise, and on the Maturity Date. Interest payable on any date on which any Indebtedness evidenced by the Notes is prepaid, whether due to acceleration or otherwise shall be payable, at the Company's option, in cash, or by the issuance of additional fully paid and nonassessable shares of Common Stock or any combination of cash and Common Stock to the extent permitted by Section 3.6. Interest payable on the Maturity Date shall be payable, at the Company's option, in cash, or by the issuance of additional fully paid and nonassessable shares of Common Stock or any combination of cash and Common Stock to the extent permitted by Section 3.5(a). Interest payable on any Payment Date shall be payable, at Company's option, (i) in cash, or (ii) by the issuance of additional fully paid and nonassessable shares of Common Stock (but not fractions thereof) or (iii) any combination of the foregoing clauses (i) and (ii). In the event the Company elects to pay the interest due on any Payment Date by issuing Common Stock or by a combination of cash and Common Stock, (A) subject to the following proviso, the Interest Payment Price for such payment is equal to or greater than the Floor Price, if any, specified by the Company in the notice required by the following clause (D) with respect to such Payment Date, as adjusted for stock splits, reverse stock splits and similar recapitalizations, if any occurring on or after the date of such notice, (B) the Equity Conditions are met as of the date of the notice required by the following clause (D) and as of such Payment Date, (C) the number of shares of Common Stock to be issued to each Holder in payment of the interest due on such Payment Date to such Holder shall be determined by dividing the portion of such interest to be paid in Common Stock by the Interest Payment Price for such Payment Date, and (D) the Company shall give written notice to the Holders at least fifteen (15) Trading Days prior to such Payment Date stating the percentage of the aggregate amount of interest due on such Payment Date the Company proposes to pay in Common Stock on such Payment Date and, at the Company's option, the Floor Price for such Common Stock (each, an "Interest Payment Notice"); provided that in the event the foregoing clause (A) is not satisfied on any Payment Date, any Holder may elect, by written notice of such election to the Company delivered on or before one (1) Trading Day prior to such Payment Date, to accept payment of all or any portion of the interest due such Holder on such Payment Date that the Company proposed to pay by the issuance of Common Stock in which event the portion of each payment specified by the Holder shall be made to such Holder in Common Stock as if the Interest Payment Price was equal to the Floor Price specified by the Company and the remainder of such interest due such Holders shall be paid in cash. Notwithstanding the foregoing, on each Payment Date occurring on or before June 5, 2007, the Company may defer fifty percent (50%) of the interest 26 due on such Payment Date and such deferred interest shall become a part of the principal due hereunder as of the Payment Date such interest became due, shall earn interest as provided hereunder and shall be due and payable on the Maturity Date unless the maturity of the amounts due hereunder are accelerated pursuant to the terms of this Agreement. (c) Limitation of Interest. The Company, the Collateral Agent and the Holders intend to strictly comply with all applicable laws, including applicable usury laws. Accordingly, the provisions of this Section 3.3(c) shall govern and control over every other provision of this Agreement or any other Document which conflicts or is inconsistent with this Section 3.3(c), even if such provision declares that it controls. As used in this Section 3.3(c), the term "interest" includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law, provided that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money and not as interest, and (b) all interest at any time contracted for, reserved, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of the Indebtedness. In no event shall the Company or any other Person be obligated to pay, or any Holder have any right or privilege to reserve, receive or retain, (a) any interest in excess of the maximum amount of nonusurious interest permitted under the laws of the State of Texas or the applicable laws (if any) of the United States or of any other applicable state, or (b) total interest in excess of the amount which such Holder could lawfully have contracted for, reserved, received, retained or charged had the interest been calculated for the full term of the Indebtedness at the Highest Lawful Rate. On each day, if any, that the interest rate (the "Stated Rate") called for under this Agreement or any other Document exceeds the Highest Lawful Rate, the rate at which interest shall accrue shall automatically be fixed by operation of this sentence at the Highest Lawful Rate for that day, and shall remain fixed at the Highest Lawful Rate for each day thereafter until the total amount of interest accrued equals the total amount of interest which would have accrued if there were no such ceiling rate as is imposed by this sentence. Thereafter, interest shall accrue at the Stated Rate unless and until the Stated Rate again exceeds the Highest Lawful Rate when the provisions of the immediately preceding sentence shall again automatically operate to limit the interest accrual rate. The daily interest rates to be used in calculating interest at the Highest Lawful Rate shall be determined by dividing the applicable Highest Lawful Rate per annum by the number of days in the calendar year for which such calculation is being made. None of the terms and provisions contained in this Agreement or in any other Document which directly or indirectly relate to interest shall ever be construed without reference to this Section 3.3(c), or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the Highest Lawful Rate. If the term of any Indebtedness is shortened by reason of acceleration of maturity as a result of any Default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason any Holder at any time, including but not limited to, the stated maturity, is owed or received (and/or has 27 received) interest in excess of interest calculated at the Highest Lawful Rate, then and in any such event all of any such excess interest shall be canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to such Holder, it shall be credited pro tanto against then-outstanding principal balance of the Company's obligations to such Holder, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor. Chapter 346 of the Texas Finance Code (which regulates certain revolving credit accounts (formerly Tex. Rev. Civ. Stat. Ann. Art. 5069, Ch. 15)) shall not apply to this Agreement or to any Note, nor shall this Agreement or any Note be governed by or be subject to the provisions of such Chapter 346 in any manner whatsoever. 3.4. Interest on Overdue Amounts. During the continuance of an Event of Default, the Majority Holders may, at their option, by notice to the Company (which notice may be revoked at the option of the Majority Holders notwithstanding any provision of Section 16.8 requiring unanimous consent of the Holders to changes in interest rates), declare that the Indebtedness evidenced by each Note shall bear interest at a rate per annum equal to twelve percent (12%) per annum, provided that, during the continuance of an Event of Default under Sections 8.1(f), the interest rates set forth in this Section 3.4 above shall be applicable to Indebtedness evidenced by the Notes without any election or action on the part of the Collateral Agent or any Holder. 3.5. Mandatory Redemption. (a) Maturity Date. Any outstanding Indebtedness evidenced by the Notes and all other unpaid Indebtedness shall be paid in full, at the Company's option, (i) in cash, (ii) by the issuance of additional fully paid and nonassessable shares of Common Stock (but not fractions thereof) or (iii) any combination of the foregoing clauses (i) and (ii) on the Maturity Date. In the event the Company elects to pay the Indebtedness due on the Maturity Date by issuing Common Stock or by a combination of cash and Common Stock, (A) subject to the following proviso, the Maturity Date Price is equal to or greater than the Floor Price, if any, specified by the Company in the notice required by the following clause (D), as adjusted for stock splits, reverse stock splits and similar recapitalizations, if any occurring on or after the date of such notice, (B) the Equity Conditions are met as of the date of the notice required by the following clause (D) and as of the Maturity Date, (C) the number of shares of Common Stock to be issued to each Holder in payment of the outstanding principal balance of and accrued but unpaid interest on the Indebtedness held by such Holder shall be determined by dividing the portion of such Indebtedness to be paid in Common Stock by the Maturity Date Price, (D) the Company shall give written notice to the Collateral Agent and the Holders at least thirty-five (35) Trading Days prior to the Maturity Date stating the percentage of the outstanding principal balance of and accrued but unpaid interest on the Notes the Company will pay in Common Stock on the Maturity Date, and, at the Company's option, the Floor Price for such Common Stock (the "Maturity Date Payment Notice") and (E) Common Stock can only be issued in satisfaction of the outstanding principal 28 balance of and accrued but unpaid interest on the Notes; provided that in the event the foregoing clause (A) is not satisfied, any Holder may elect, by written notice of such election to the Company delivered on or before one (1) Trading Day prior to the Maturity Date, to accept payment of all or any portion of such Holder's Indebtedness that Company proposed to pay by the issuance of Common Stock (the "Maturity Date Floor Price Portion") in which event the portion of such payment specified by such Holder shall be made to such Holder in Common Stock as if the Maturity Date Price was equal to the Floor Price specified by the Company and the remainder of such Indebtedness due such Holder shall be paid in cash on the Maturity Date. If the Company delivers a Maturity Date Payment Notice with respect to the payment of the amounts due on the Maturity Date and the Company is prohibited from paying the amounts specified in the Maturity Date Payment Notice in Common Stock on the Maturity Date as a result of the failure to satisfy any of the conditions to such payment in Common Stock set forth in this Agreement or any other Document (including any Maturity Date Floor Price Portion), the Company shall pay the amounts it proposed to pay in Common Stock in the Maturity Date Payment Notice in full in cash on or before thirty (30) days after the Maturity Date. The Company shall also comply with any applicable obligation under Section 6.14. (b) Change of Control. In the event of a Change of Control, each Holder shall have the option to require the Company to repurchase all the Notes held by such Holder at a purchase price equal to the then outstanding principal amount of the Notes, together with all interest accrued on such Notes through the date of repurchase. The Company shall give the Holders notice (a "Change of Control Notice") of any transaction that would result in a Change of Control not less than sixty (60) days prior to the anticipated date of the consummation of such transaction (but in no event prior to the public announcement of such Change of Control). Any Holder may exercise its right to require the Company to repurchase the Notes held by it by delivering written notice of such exercise (a "Repurchase Notice") to the Company within twenty (20) days after receipt of the Change of Control Notice. The repurchase of the Notes shall be consummated on a date selected by the Company upon at least thirty-five (35) Trading Days' prior written notice to the Holders which have given the relevant Repurchase Notice(s) if any portion of such repurchase will be made by the issuance of Common Stock to the extent permitted hereunder, otherwise at least ten (10) days prior written notice to such holders, but in no event later than the date of consummation of such Change of Control or three (3) Business Days after the Company becomes aware of such Change of Control unless the Company is not a party to the transaction resulting in a Change of Control, in which case such date shall be as soon as practicable, following such Change of Control but in any event not later than ten (10) days following the Change of Control (the "Repurchase Closing Date"). On the Repurchase Closing Date, the Company shall purchase from the Holders which have given such Repurchase Notice(s), and such Holder shall sell to the Company, the Notes held by such Holder for the purchase price specified in this paragraph 3.5(b) which purchase price may, at the Company's option, be paid in cash or by the issuance of shares of Common Stock as if such purchase was a voluntary redemption of the Notes pursuant to Section 3.6. Any 29 payment of the purchase price with shares of Common Stock as a result of a Change of Control may be made only if the issuance of such shares of Common Stock complies, in all respects, with the conditions and provisions of the Documents applicable to a voluntary redemption pursuant to Section 3.6 including Section 6.14. The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this Section 3.5(b). To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 3.5(b), the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 3.5(b) by virtue thereof. 3.6. Optional Redemption. The Company may from time to time redeem, at the Company's option, (i) in cash, (ii) by the issuance of additional fully paid and nonassessable shares of Common Stock (but not fractions thereof) or (iii) any combination of the foregoing clauses (i) and (ii) all or any portion of the Indebtedness outstanding under the Notes. In the event the Company elects to voluntarily redeem any of the Indebtedness outstanding under the Notes by issuing Common Stock or by a combination of cash and Common Stock, (A) subject to the following proviso, the Voluntary Redemption Price for such Voluntary Redemption Date is equal to or greater than the Floor Price, if any, specified by the Company in the notice required by the following clause (D) with respect to such Voluntary Redemption Date, as adjusted for stock splits, reverse stock splits and similar recapitalizations, if any occurring on or after the date of such notice, (B) the Equity Conditions are met as of the date of the notice required by the following clause (D) and as of the Voluntary Redemption Date, (C) the number of shares of Common Stock to be issued to each Holder in payment of the outstanding principal balance of and accrued but unpaid interest on the Indebtedness held by such Holder shall be determined by dividing the portion of such Indebtedness due on such Voluntary Redemption Date to be paid in Common Stock by the Voluntary Redemption Price for such Voluntary Redemption Date, (D) the Company shall give written notice to the Holders at least thirty-five (35) Trading Days prior to the proposed Voluntary Redemption Date stating the aggregate amount of principal the Company proposes to prepay on such date (which shall be in a minimum aggregate principal amount of $500,000 or any integral multiple of $100,000 in excess thereof), the percentage of the outstanding principal balance of and accrued but unpaid interest on the Notes the Company will pay in Common Stock on such Voluntary Redemption Date and, at the Company's option, the Floor Price for such Common Stock (each a "Voluntary Redemption Notice") and (E) Common Stock can only be issued in satisfaction of the outstanding principal balance of and accrued but unpaid interest on the Notes; provided that in the event the foregoing clause (A) is not satisfied on any Voluntary Redemption Date, any Holder may elect, by written notice of such election to the Company delivered on or before one (1) Trading Day prior to such Voluntary Redemption Date, to accept payment of all or any portion of such Holder's Indebtedness that the Company proposed to pay by the issuance of Common Stock in which event the portion of such payment specified by such Holder shall be made to such Holder in Common Stock as if the Voluntary Redemption Price was equal to the Floor Price specified by the Company (the "Floor Price Portion") and the remainder of such Indebtedness due on such Voluntary Redemption Date shall 30 be paid in cash on the Voluntary Redemption Date. Upon the delivery of the notice required by the foregoing clause (D) the principal amount of the Indebtedness evidenced by the Notes specified in such notice shall become due and payable and shall constitute an Event of Default under Section 8.1(a) if the Company fails to pay such principal amount on the Voluntary Redemption Date specified in such notice unless such failure to pay is a result of the failure to satisfy clause (A) on such Voluntary Redemption Date with respect to any portion of such payment that is not the Floor Price Portion. If the Company delivers a Voluntary Redemption Notice with respect to the payment of the amounts due on any Voluntary Redemption Date and the Company cannot make the payment of the amounts specified in such Voluntary Redemption Notice to be paid in Common Stock on the Voluntary Redemption Date as a result of the failure to satisfy any of the conditions to such payment in Common Stock set forth in this Agreement or any other Document (including any Floor Price Portion), the Company shall pay the amounts it proposed to pay in Common Stock on such Voluntary Redemption Notice in cash on or before ten (10) days after such Voluntary Redemption Date. The Company shall also comply with any applicable obligation under Section 6.14. 3.7. Securities Register. (a) The Company shall cause to be kept at its principal office a register for the registration and transfer of the Notes (the "Note Register"). The names and addresses of the holders of the Notes, the transfer of the Notes, and the names and addresses of the transferees of the Notes shall be registered in the Note Register. (b) The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement and the Company shall not be affected by any notice to the contrary, until due presentment of such Note for registration of transfer so provided in this Section 3.7(b). Payment of or on account of the principal, premium, interest and any other amount paid on any registered Note shall be made to (or based upon the written order of) such registered holder. 3.8. Lost, Etc. Securities. (a) Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of a financial institution or other institutional investor being satisfactory) of the ownership and the loss, theft, destruction or mutilation of any Note, and in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company (if such Holder is a financial institution or other institutional investor, its own agreement being satisfactory) or, in the case of any such mutilation, upon surrender for cancellation of such Note, the Company shall, without charge, issue, register and deliver in lieu of such Note a new Note of like kind representing the same rights represented by and dated the date of such lost, stolen, destroyed or mutilated Note. Any such new Note shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Note shall be at any time enforceable by any Person. 31 3.9. Several Obligations; Remedies Independent. No Purchaser shall have any obligation to any other Purchaser in respect of the failure by such Purchaser to purchase any Note required to be purchased by such Purchaser. The amounts payable by the Company at any time hereunder and under the Notes to each Purchaser shall be separate and independent debt and, subject to the provisions of Articles VIII and XIV, each holder shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes held by it and it shall not be necessary for any other holder to consent to or be joined as an additional party in, any proceedings for such purposes. 3.10. Notes Not Senior Indebtedness. The Indebtedness does not constitute "Senior Indebtedness" as such term is defined in the Subordinated Note Agreement. ARTICLE IV CONDITIONS PRECEDENT -------------------- 4.1. Purchase of Initial Notes. The Purchasers shall not be required to purchase the Initial Notes hereunder unless the Company has satisfied each of the following conditions: (a) Closing Deliveries. The Company shall have furnished to the Purchasers: (i) Copies of the Organizational Documents of each Restricted Person, together with all amendments, and a certificate of good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation as well as any other information required by Section 326 of the USA PATRIOT ACT or necessary for the Purchasers to verify the identity of each Restricted Person as required by Section 326 of the USA PATRIOT ACT. (ii) Copies, certified by the Secretary or other Authorized Officer of each Restricted Person, of its Organizational Documents and, if applicable, its Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Documents to which such Restricted Person is a party. (iii) An incumbency certificate, executed by the Secretary or other Authorized Officer of each Restricted Person, which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers of each Restricted Person authorized to sign the Documents to which such Restricted Person is a party, upon which certificate the Purchasers shall be entitled to rely until informed of any change in writing by such Restricted Person. (iv) A certificate, signed by the Chief Financial Officer of the Company, stating that on the date of the Purchase of the Initial Notes no Default or Event of Default has occurred and is continuing, and after giving effect to the Closing Transactions, the Company shall be in compliance, on a pro forma basis, 32 with the financial covenants set forth in Section 6.7 accompanied by reasonably detailed calculations demonstrating compliance with the such financial covenants. (v) A written opinion of the Company's counsel, addressed to the Purchasers in substantially the form of Exhibit D. (vi) The Subordination Agreement duly executed and delivered by the Company, the Collateral Agent and the Senior Agent. (vii) The Initial Notes. (viii) The following Security Documents to be executed on the Closing Date, duly executed and delivered by each Restricted Party or party thereto: (a) the Mortgages; (b) the Security Agreement (and physical delivery to the Collateral Agent (or the Senior Agent) of the stock certificates therein described); (c) the Guaranty; and (d) any additional Security Documents granted by any Person in favor of the Collateral Agent for the ratable benefit of the Purchasers as security for the Indebtedness. (ix) A copy of each Document and all other material documents, instruments and agreements executed and/or delivered by any Restricted Person in connection with the Closing Transactions, together with a certificate from an Authorized Officer of the Company certifying that such copies are accurate and complete and represent the complete understanding and agreement of the parties with respect to the subject matter thereof. (x) The Subordinated Note Agreement Amendment duly executed and delivered by the Company and the holders of the Senior Subordinated Notes. (xi) The Senior Credit Agreement Amendment duly executed and delivered by Company, Guarantor, Senior Agent and Banks. (xii) The Registration Rights Agreement and each other Document duly executed and delivered by each Restricted Person a party thereto, Collateral Agent and the Purchasers, to the extent a party thereto. (xiii) Such other documents as any Purchaser or its counsel may have reasonably requested. 33 (b) Closing Transactions. Subject only to the disbursement and application of the proceeds of the Notes, the Closing Transactions shall have occurred and been consummated on the terms set forth in the Documents (or the Collateral Agent shall be satisfied that such transactions will occur and be consummated simultaneously with the Closing Date). (c) No Event of Default or Default; Legal Matters. No Event of Default or Default shall have occurred and be continuing or would result from the consummation of the Closing Transactions and all legal matters incident to the purchase of the Initial Notes shall be satisfactory to the Purchasers and their counsel. (d) No Litigation. No litigation, arbitration or similar proceeding shall be pending or, to the knowledge of the Company, threatened that purports to affect the validity or enforceability of this Agreement, the other Documents, the Closing Transactions or the transactions contemplated hereby or thereby or that could cause a Material Adverse Effect in the Company or in the ability of any Restricted Person to perform its obligations under any of the Documents to which it is a party. (e) Closing Fees and Expenses. Subject to any agreed limitations between the Company and the Purchaser, the Company shall have paid all fees, expenses and disbursements of counsel for the Collateral Agent and the Purchasers with respect to the initial closing of the transactions contemplated by this Agreement. (f) Representations and Warranties. The representations and warranties of the Company and each Guarantor under this Agreement and the other Documents shall be true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date). (g) Other Matters. All matters related to this Agreement, the other Documents, the Restricted Persons, the Closing Documents and the Closing Transactions shall be reasonably acceptable to each Purchaser, and each Restricted Person shall have delivered to each Purchaser and each Purchaser such evidence as they shall request to substantiate any matters related to this Agreement, the other Documents, the Restricted Persons, the Documents and the Closing Transactions as any Purchaser shall reasonably request. 4.2. Certificate of Effectiveness. Upon satisfaction or waiver in writing by the Collateral Agent and each Purchaser of each of the conditions set forth in Section 4.1, the Company and the Collateral Agent shall execute the Certificate of Effectiveness. Each Purchaser hereby authorizes the Collateral Agent to execute the Certificate of Effectiveness on its behalf and acknowledges and agrees that the execution of the Certificate of Effectiveness by the Collateral Agent shall be binding on each such Purchaser. 4.3. Purchase of Additional Notes. The Purchasers shall not be required to purchase any Additional Notes hereunder unless the Company has satisfied each of the following conditions: 34 (a) Closing Deliveries. The Company shall have furnished to the Purchasers: (i) Copies of the Organizational Documents of each Restricted Person, together with all amendments, and a certificate of good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation as well as any other information required by Section 326 of the USA PATRIOT ACT or necessary for the Purchasers to verify the identity of each Restricted Person as required by Section 326 of the USA PATRIOT ACT. (ii) Copies, certified by the Secretary or other Authorized Officer of each Restricted Person, of its Organizational Documents and, if applicable, its Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Documents to which such Restricted Person is a party. (iii) An incumbency certificate, executed by the Secretary or other Authorized Officer of each Restricted Person, which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers of each Restricted Person authorized to sign the Documents to which such Restricted Person is a party, upon which certificate the Purchasers shall be entitled to rely until informed of any change in writing by such Restricted Person. (iv) A certificate, signed by the Chief Financial Officer of the Company, stating that on the date of the Purchase of the Additional Notes no Default or Event of Default has occurred and is continuing, and after giving effect to the Closing Transactions, the Company shall be in compliance, on a pro forma basis, with the financial covenants set forth in Section 6.7 accompanied by reasonably detailed calculations demonstrating compliance with the such financial covenants. (v) A written opinion of the Company's counsel, addressed to the Purchasers in substantially the form of Exhibit D. (vi) The Additional Notes to be issued at such Additional Closing Date. (vii) Such other documents as any Purchaser or its counsel may have reasonably requested. (b) Prior Notice. Each Purchaser shall have received not less than twenty (20) days prior written notice from the Company of the Company's desire to issue and sell to the Purchasers, subject to the terms and conditions set forth herein, Additional Notes. Such prior written notice shall include the proposed Additional Closing Date and the aggregate stated amount of Additional Notes to be issued on such proposed Additional Closing Date. (c) No Event of Default or Default; Legal Matters. No Event of Default or Default shall have occurred and be continuing or would result from the consummation 35 of the purchase of the Additional Notes to be issued on such Additional Closing Date and all legal matters incident to the purchase of such Additional Notes shall be reasonably satisfactory to the Purchasers and their counsel. (d) No Litigation. No litigation, arbitration or similar proceeding shall be pending or, to the knowledge of the Company, threatened that purports to affect the validity or enforceability of this Agreement, the other Documents, or the transactions contemplated hereby or thereby or that could cause a Material Adverse Effect in the Company or in the ability of any Restricted Person to perform its obligations under any of the Documents to which it is a party. (e) Closing Fees and Expenses. The Company shall have paid all documented and reasonable fees, out-of-pocket expenses and disbursements of counsel for the Purchasers with respect to the closing of the purchase of the Additional Notes. (f) Representations and Warranties. The representations and warranties of the Company and each Guarantor under this Agreement and the other Documents shall be true and correct in all material respects as of such date, as if then made. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY --------------------------------------------- To confirm each Purchaser's understanding concerning Restricted Persons and Restricted Persons' businesses, properties and obligations and to induce each Purchaser to enter into this Agreement and to purchase its Notes hereunder, the Company represents and warrants to Collateral Agent and each Purchaser that: 5.1. Corporate Authority of the Company. The Company is a corporation duly created, validly existing, and in good standing under the laws of the state its incorporation, and is duly qualified and in good standing as foreign corporation in Louisiana and all other jurisdictions where the failure to qualify would have an adverse effect upon its ability to perform its obligations under this Agreement and all Documents to which it is a party. The Company has the corporate power to enter into this Agreement, execute the Documents, and grant the liens and security interests in the Collateral in the manner and for the purpose contemplated by the Security Documents. The Company has the corporate power to perform its obligations hereunder and under the Documents. The execution, delivery, and performance by the Company of the Documents have all been duly authorized by all necessary corporate or company action, and do not and will not result in any violation by the Company of any provision of any law, rule, regulation, order, writ, judgment, decree, determination or award presently in effect having applicability to the Company, or the articles of incorporation and bylaws of the Company. Except as set forth in the Disclosure Schedule attached hereto, the making and performance by the Company of the Documents do not and will not result in a breach of or constitute a default under any material indenture or loan or credit agreement or any other material agreement or instrument to which the Company is a party or by which it may be bound or affected, or result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest 36 or other charge or encumbrance of any nature (other than as contemplated by the Security Documents) upon or with respect to any of the properties now owned or hereafter acquired by the Company. Each of the Documents to which the Company is a party constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms. 5.2. Financial Reports. As of the date hereof, the most recent filings made with the Commission pursuant to the Exchange Act do not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by such reports. Except as set forth in the Disclosure Schedule, no Material Adverse Effect has occurred since the dates of such filings with respect to the Company and its Subsidiaries, taken as a whole. 5.3. Title to Mortgaged Properties. As of the date hereof, except as set forth on the Disclosure Schedule attached hereto, the Company has Defensible Title to each of the Mortgaged Properties that has a book cost in excess of $200,000 and, in each case free and clear of all Liens (other than Permitted Liens) (i) Liens for taxes not yet due and payable or, if payable, that are being contested in good faith in the ordinary course of business, (ii) statutory Liens (including materialmen's, mechanic's, repairmen's, landlord's and other similar encumbrances) arising in the ordinary course of business to secure payments not yet due and payable or, if payable, that are being contested in good faith in the ordinary course of business, (iii) easements, restrictions, reservations or other encumbrances, as well as such imperfections or irregularities of title, if any, as are not material, (iv) obligations or duties to any municipality or public authority with respect to any franchise, grant, license or permit and all applicable laws, rules, regulations and orders of any Governmental Authority, (v) all lessors' royalties, overriding royalties, net profits interests, production payments, carried interests, reversionary interests and other burdens on or deductions from the proceeds of production, (vi) the terms and conditions of joint operating agreements and other oil and gas contracts, (vii) all rights to consent by, required notices to, and filings with or other actions by governmental or tribal entities, if any, in connection with the change of ownership or control of an interest in federal, state, tribal or other domestic governmental oil and gas leases, if the same are customarily obtained subsequent to such change of ownership or control, but only insofar as such consents, notices, filings and other actions relate to the transactions contemplated by this Agreement, (viii) any preferential purchase rights, (ix) required third party consents to assignment, (x) conventional rights of reassignment prior to abandonment and (xi) the terms and provisions of oil and gas leases, unit agreements, pooling agreements, and other documents creating interests comprising the Mortgaged Properties; provided, however, the exceptions described in clauses (iv) through (xi) inclusive above are qualified to include only those exceptions in each case which do not operate to (A) reduce the net revenue interest of the Company below that set forth on the Disclosure Schedule, (B) increase the proportionate share of costs and expenses of leasehold operations attributable to or to be borne by the working interest of the Company above that set forth on the Disclosure Schedule without a proportionate increase in the net revenue interest of the Company or (C) increase the working interest of the Company above that set forth on the Disclosure Schedule without a proportionate increase in the net revenue interest of the Company, and, provided, further, that the foregoing defects, limitations, liens and encumbrances, whether individually material or not, do not in the aggregate create a Material Adverse Effect upon the Company (the categories of exceptions in clauses (iv) through 37 (xi), as so qualified and as any such exceptions may exist from time to time, being referred to as the "Designated Title Exceptions"). The Mortgages constitute a legal, valid and perfected Lien on the property interests covered thereby, subject only to Designated Title Exceptions, Permitted Liens, and matters disclosed on the Disclosure Schedule. Further, as of the date hereof, the Mortgaged Properties constitute not less than ninety percent (90%) of the net present value of the proved reserves of the Oil and Gas Properties owned by the Company and the Guarantors, taken as a whole, as of the Closing Date which are included in the Borrowing Base as of the Closing Date. 5.4. Litigation. Other than as set forth in the Disclosure Schedule as of the date hereof, there are no legal actions, suits or proceedings pending or, to the best knowledge of the Company, threatened against or affecting the Company, or any of its properties before any court or administrative agency (federal, state or local), which could reasonably be expected to constitute a Material Adverse Effect, and there are no judgments or decrees affecting the Company, or its property (including, without limitation, the Collateral) which are or could reasonably be expected to become a Lien against such property (other than a Designated Title Exception or a Permitted Lien). 5.5. Approvals. No authorization, consent, approval or formal exemption of, nor any filing or registration with, any governmental body or regulatory authority (federal, state or local), and no vote, consent or approval of the shareholders of the Company is or will be required in connection with the execution and delivery by the Company of the Documents or the performance by the Company of its obligations hereunder and under the other Documents, except to the extent obtained. 5.6. Required Insurance. The Company maintains insurance with insurance companies in such amounts and against such risks as is usually carried by owners of similar businesses and properties in the same general areas in which Company operates. 5.7. Licenses. The Company possesses adequate franchises, licenses and permits to own its properties and to carry on its business as presently conducted, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.8. Adverse Agreements. Except as described in the Disclosure Schedule, the Company is not a party to any agreement or instrument, nor subject to any charter or other restriction, materially and adversely affecting the business, properties, assets, or operations of the Company or its condition (financial or otherwise), and the Company is not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party, which default would constitute a Material Adverse Effect. 5.9. Default or Event of Default. No Default or Event of Default hereunder has occurred and is continuing or will occur as a result of the giving effect hereto. 5.10. Employee Benefit Plans. Each employee benefit plan as to which the Company may have any liability complies in all material respects with all applicable requirements of law 38 and regulations, and (i) no Reportable Event (as defined in ERISA) has occurred and is continuing with respect to any such plan, (ii) the Company has not withdrawn from any such plan or initiated steps to do so, and (iii) no steps have been taken to terminate any such plan. 5.11. Investment Company Act. The Company is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 5.12. Public Utility Holding Company Act. The Company is not a "holding company," or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.13. Regulations X, T and U. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations X, T and U of the Board of Governors of the Federal Reserve System), and none of the proceeds of the issuance of the Notes will be used for the purpose of purchasing or carrying such margin stock. 5.14. Location of Offices and Records. As of the date hereof, the chief place of business of the Company, and the office where the Company keeps all of its records concerning the Collateral, is 14701 St. Mary's Lane, Suite 800, Houston, Texas 77079. 5.15. Patriot Act. To the extent applicable, each Restricted Person is in compliance, in all material respects, with the (i) Trading with the Enemy Act, as amended, and each of the foreign assets control regulations of the Untied States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) and any other enabling legislation or executive order relating thereto, and (ii) Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act of 2001) (the "Act"). No part of the proceeds of the issuance of the Notes will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended. 5.16. Environmental Matters. Except as previously disclosed to the Agent in writing or as could not reasonably be expected to result in a Material Adverse Effect: (a) To the best of Company's knowledge and belief after due inquiry, Company is in compliance with all applicable Environmental Laws; (b) To the best of Company's knowledge and belief after due inquiry, Company has obtained all consents and permits required under all applicable Environmental Laws to operate its business as presently conducted or as proposed to be conducted and all such consents and permits are in full force and effect and Company is in compliance with all terms and conditions of such approvals; 39 (c) To the best of Company's knowledge and belief after due inquiry, neither Company nor any of the present property or operations of Company is subject to any order from or agreement with any Governmental Authority or private party respecting (i) failure to comply with any Environmental Law or any Remedial Action or (ii) any Environmental Liabilities arising from the Release or threatened Release except those orders and agreements with which Company has complied; (d) To the best of Company's knowledge and belief after due inquiry, none of the operations of Company is subject to any judicial or administrative proceeding alleging a violation of, or liability under, any Environmental Law; (e) None of the operations of Company, to its best knowledge after due inquiry, is the subject of any investigation by any Governmental Authority evaluating whether any Remedial Action is needed to respond to a Release or threatened Release; (f) Company has not been required to file any notice under any Environmental Law indicating past or present treatment, storage or disposal of a hazardous waste as defined by 40 CFR Part 261 or any state or local equivalent which could reasonably be expected to have a Material Adverse Effect; (g) Company has not been required to file any notice under any applicable Environmental Law reporting a Release which could reasonably be expected to have a Material Adverse Effect; (h) There is not now, nor, to the best knowledge of Company, has there ever been, on or in any property of Company: (i) any unauthorized generation, treatment, recycling, storage or disposal of any hazardous waste as defined by 40 CFR Part 261 or any state or local equivalent, (ii) any underground storage tanks or surface impoundments without proper permits, (iii) any asbestos - containing material, or (iv) any polychlorinated biphenyls (PCBs) used in hydraulic oils, electrical transformers or other equipment; (i) There have been no written commitments or agreements involving Company from or with any Governmental Authority or any private entity (including, without limitation, the owner of the Mortgaged Properties or any portion thereof) relating to the generation, storage, treatment, presence, Release, or threatened Release which could reasonably be expected to have a Material Adverse Effect on or into any of the properties of Company or the environment (including off-site disposal of Hazardous Materials) or any Remedial Action with respect thereto in non-compliance or violation of any Environmental Law; 40 (j) Company has not received any written notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release which could reasonably be expected to have a Material Adverse Effect; (k) To the best of Company's knowledge and belief after due inquiry, Company has no known liability in connection with any material Release or material threatened Release which could reasonably be expected to have a Material Adverse Effect; (l) After due inquiry, no Environmental Lien has attached (and continues to attach) to any properties of Company, provided that no breach of this Section 5.16(l) shall occur if the same is discharged within thirty days after the attachment thereof or an appeal or other appropriate proceeding for review thereof is taken within said thirty day period and/or a stay of execution pending such appeal is obtained; and (m) To the Company's best knowledge after due inquiry, there have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by or which are in the possession of Company in relation to any violation of Environmental Laws which violation could reasonably be expected to have a Material Adverse Effect in relation to any properties or facility now or previously owned or leased by Company which have not been made available to the Holders. 5.17. Solvency of the Company. The Company is and after consummation of the transactions contemplated by this Agreement (including the purchase and sale of the Notes), and after giving effect to all obligations incurred by the Company in connection herewith, will be, Solvent. 5.18. Governmental Requirements. The Collateral is in compliance with all current Governmental Requirements affecting the said property, except where failure could not reasonably be expected to have a Material Adverse Effect. 5.19. Corporate Authority of the Guarantor. The Guarantor is a corporation duly created, validly existing, and in good standing under the laws of the state of its incorporation, and is duly qualified and in good standing as foreign corporation in all other jurisdictions where the failure to qualify would have an adverse effect upon its ability to perform its obligations under this Agreement and all Documents to which it is a party. The Guarantor has the corporate power to enter into this Agreement and the Guaranty. The Guarantor has the power to perform its obligations hereunder and under the Documents to which it is a party. The making and performance by the Guarantor of the Documents to which it is a party have all been duly authorized by all necessary corporate or company action, and do not and will not violate any provision of any law, rule, regulation, order, writ, judgment, decree, determination or award presently in effect having applicability to the Guarantor, or the Organizational Documents of the Guarantor. The making and performance by the Guarantor of the Documents to which it is a party do not and will not result in a breach of or constitute a default under any material indenture or loan or credit agreement or any other material agreement or instrument to which the Guarantor is a party or by which it may be bound or affected, or result in, or require, the creation or 41 imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than as contemplated by the Security Documents) upon or with respect to any of the properties now owned or hereafter acquired by the Guarantor, and the Guarantor is not in default under or in violation of any such order, writ, judgment, decree, determination, award, indenture, agreement or instrument to the extent any such default or violation could reasonably be expected to have a Material Adverse Effect. Each of the Documents to which the Guarantor is a party constitutes a legal, valid and binding obligation of the Guarantor, enforceable in accordance with its terms. 5.20. Subordinated Note Agreement. The Company represents and warrants that it is not in default under the Subordinated Note Agreement, and that, after giving effect to the Subordinated Note Agreement Amendment, no such default will occur as a result of Company's execution of this Agreement, and its incurrence of obligations hereunder. 5.21. Security Agreement. As of the date hereof, the Security Agreement constitutes a second priority security interest in one hundred percent (100%) of the issued and outstanding Capital Stock of the Guarantor, and there are no other Liens affecting the said Capital Stock except for a Lien granted by Company as security for the Obligations evidenced by the Senior Credit Documents. 5.22. Closing Date Borrowing Base and Quarterly Reduction. As of the Closing Date, the Borrowing Base is $28,000,000 and the Quarterly Reduction is $3,000,000. 5.23. Survival of Representations and Warranties. The Company understands and agrees that the Collateral Agent and the Holders are relying upon the above representations and warranties in purchasing the Notes from the Company. The Company further agrees that the foregoing representations and warranties shall be true and correct in all material respects as of the date(s) made or deemed made and shall remain in full force and effect until such time as the Indebtedness shall be paid in full, or until this Agreement shall be terminated, whichever is the last to occur. ARTICLE VI AFFIRMATIVE COVENANTS --------------------- To conform with the terms and conditions under which the Purchasers are willing to purchase the Notes from the Company, and to induce each Purchaser to enter into this Agreement and to purchase its Notes hereunder, the Company warrants, covenants and agrees that until the full and final payment of the Indebtedness and the termination of this Agreement, unless Majority Holders have previously agreed otherwise: 6.1. Financial Statements; Other Reporting Requirements. If requested by the Majority Holders (and only if and only for so long as such statements and reports are requested by the Majority Holders) the Company will furnish or cause to be furnished to the Collateral Agent (and or its attorneys or any Holder as specified by the Majority Holders (but in any event not more than three (3) Holders)): 42 (a) within one hundred twenty (120) days following the close of fiscal year of the Company, audited consolidated financial statements of the Company consisting of a balance sheet as at the end of such fiscal year and statements of income, and statements of cash flow for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, certified by independent certified public accountants of recognized standing acceptable to the Majority Holders (such acceptance not to be unreasonably withheld), (b) within forty-five (45) days following the close of each calendar quarter, interim consolidated financial statements of the Company, consisting of a balance sheet as of the end of such quarter and statements of income and cash flow, certified as true and correct by the Company's chief financial officer as having been prepared in accordance with GAAP consistently applied, (c) upon each submission of the financial statements required by (a) and (b) above, a compliance certificate signed by the chief financial officer of the Company in the form attached hereto as Exhibit B, certifying that he has reviewed this Agreement and to the best of his knowledge no Default or Event of Default has occurred, or if such Default or Event of Default has occurred, specifying the nature and extent thereof, that all financial covenants in this Agreement have been met, and providing a computation of all financial covenants contained herein, and details of any waivers, amendments, or modifications of any covenant contained in this Agreement, and said certificate shall include a schedule of all Hedging Agreements, (d) within thirty-five (35) days after the end of each month, the unaudited consolidated balance sheets of the Company and its Subsidiaries as at the end of such month and the related consolidated statements of income and stockholders' equity and cash flows for such month and in each case for the period from the beginning of the then current fiscal year to the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous fiscal year, all in reasonable detail and certified by the chief financial officer of the Company that they fairly present in all material respects the financial condition of the Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, (e) as soon as available and in any event within thirty (30) days after filing, a copy of the Company's federal tax returns, (f) by March 31st of each year, a third party engineering report (at Company's expense) dated as of the preceding December 31 covering Oil and Gas Properties included or to be included in the Borrowing Base, in form and substance reasonably satisfactory to the Collateral Agent, prepared by independent petroleum engineers chosen by Company and reasonably acceptable to the Collateral Agent, 43 (g) as soon as available and in any event within forty-five (45) days after the end of each quarter, the following reports and data: reports of production (attributable to Oil and Gas Properties included or to be included in the Borrowing Base under the Senior Credit Agreement), commodity prices, sales revenues, operating expenses for the Leases evaluated for determination of the Borrowing Base, and production taxes, in form and content reasonably acceptable to the Majority Holders, (h) as soon as available and in any event by September 30th of each year, an internally prepared engineering report covering Oil and Gas Properties included or to be included in the Borrowing Base and dated as of no earlier than the preceding June 30, in form and content reasonably satisfactory to the Majority Holders, (i) as soon as delivered, copies of any engineering report covering the Oil and Gas Properties of any Restricted Person delivered to the Senior Agent or the Banks pursuant to the Senior Credit Agreement, and upon any Holder's request and within 10 days of such request, copies of any financial or other report or notice delivered to the Senior Agent or the Banks pursuant to the Senior Credit Agreement not otherwise delivered to the Holders pursuant to this Section 6.1, and (j) subject to Section 6.13, such other financial information or other information concerning the Company as the Collateral Agent and/or the Holders may reasonably request from time to time. 6.2. Notice of Default; Litigation; ERISA Matters. At any time during which the Collateral Agent requested that the Company deliver such notices, the Company will give written notice to the Collateral Agent as soon as reasonably possible and in no event more than five (5) Business Days of (i) the occurrence of any Default or Event of Default hereunder of which it has knowledge, (ii) the filing of any actions, suits or proceedings against the Company in any court or before any governmental authority or tribunal of which it has knowledge, which could reasonably be expected to cause a Material Adverse Effect with respect to the Company, (iii) the occurrence of a reportable event under, or the institution of steps by the Company to withdraw from, or the institution of any steps to terminate, any employee benefit plan as to which the Company may have liability, or (iv) the occurrence of any other action, event or condition of any nature of which it has knowledge which could reasonably be expected to cause, or lead to, or result in, any Material Adverse Effect to the Company. 6.3. Maintenance of Existence, Properties and Liens. The Company will (i) continue to engage in the Subject Business and other business activities reasonably related to thereto; (ii) maintain its existence and good standing in each jurisdiction in which it is required to be qualified; (iii) keep and maintain all franchises, licenses and properties necessary in the conduct of its business in good order and condition, except to the extent the failure to do so could not reasonably be expected to cause a Material Adverse Effect; (iv) duly observe and conform to all material requirements of any Governmental Authorities relative to the conduct of its business or the operation of its properties or assets, except to the extent the failure to do so could not reasonably be expected to cause a Material Adverse Effect; and (v) the Company will maintain in 44 favor of the Collateral Agent for the ratable benefit of the Holders a perfected Lien and security interest in the Collateral, subject only to Permitted Liens and Designated Title Exceptions. 6.4. Taxes. The Company shall pay or cause to be paid when due, all taxes, local and special assessments, and governmental charges of every type and description, that may from time to time be imposed, assessed and levied against its properties. The Company further agrees to furnish the Holders with evidence that such taxes, assessments, and governmental and other charges due by the Company have been paid in full and in a timely manner, if such data is requested by the Holders. Notwithstanding the foregoing, the Company may withhold any such payment or elect to contest any Lien (other than the Lien securing the Indebtedness) if the Company is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as the Collateral Agent's interest in the Collateral is not jeopardized. 6.5. Compliance with Environmental Laws. The Company shall comply with and shall use reasonable commercial efforts to cause all of its employees, agents, invitees or sublessees (while such Persons are acting within the scope of their relationship with the Company) to (i) comply with all Environmental Laws with respect to the disposal of Hazardous Materials, (ii) pay immediately when due the cost of removal of any such Hazardous Materials, and (iii) keep the Company's properties free of any lien imposed pursuant to any Environmental Laws, provided that no breach of this Section 6.5 shall occur if (a) the same is discharged within thirty (30) days after the Company is notified of non-compliance or an appeal or appropriate proceedings for review thereof is taken within such period and Company is not obligated to comply pending such appeal or other appropriate proceedings or (b) failure to do so could not reasonably be expected to have a Material Adverse Effect. The Company shall give notice to the Collateral Agent as soon as reasonably possible and in no event more than five (5) days after it receives any compliance orders, environmental citations, or other notices from any Governmental Authority relating to any Environmental Liabilities relating to its properties or elsewhere which may reasonably be expected to result in a Default of Event of Default; the Company agrees to take any and all reasonable steps, and to perform any and all reasonable actions necessary or appropriate to promptly comply with any such citations, compliance orders or Environmental Laws requiring the Company to remove, treat or dispose of such Hazardous Materials, and, upon the Collateral Agent's request, to provide the Collateral Agent with satisfactory evidence of such compliance in excess of $500,000; provided, however, that nothing contained herein shall preclude the Company from contesting any such compliance orders or citations if such contest is made in good faith, appropriate reserves are established for the payment for the cost of compliance therewith, and the Collateral Agent's security interest in any such property affected thereby (or the priority thereof) is not jeopardized. Regardless of whether any Event of Default hereunder shall have occurred and be continuing, the Company (i) releases and waives any present or future claims against the Collateral Agent and each Holder for indemnity or contribution in the event the Company becomes liable for any Environmental Lien and/or Remedial Action, and (ii) agrees to defend, indemnify and hold harmless Collateral Agent and each Holder from any and all liabilities (including strict liability), actions, demands, penalties, losses, costs or expenses (including, without limitation, reasonable attorneys fees and remedial costs), suits, administrative orders, agency demand letters, costs of 45 any settlement or judgment and claims of any and every kind whatsoever which may now or in the future (whether before or after the termination of this Agreement) be paid, incurred, or suffered by, or asserted against Collateral Agent or any Holder by any Person or Governmental Authority for, with respect to, or as a direct or indirect result of, the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, or release from or onto the property of the Company or any of its Subsidiaries of any Hazardous Materials, regulated by any Environmental Laws, contamination resulting therefrom, or arising out of, or resulting from, the environmental condition of such property or the applicability of any Environmental Laws relating to hazardous materials (including, without limitation, CERCLA or any so called federal, state or local "super fund" or "super lien" laws, statute, ordinance, code, rule, regulation, order or decree) regardless of whether or not caused by or within the control of Collateral Agent or any Holder (the costs and/or liabilities described in (i) and (ii) above being hereinafter referred to as the "Environmental Liabilities"). THE COVENANTS AND INDEMNITIES CONTAINED IN THIS SECTION 6.5 SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF ANY INDEMNIFIED PARTY; AND, PROVIDED, HOWEVER, NO RELEASE, WAIVER, DEFENSE OR INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 6.5 IN RESPECT OF ANY PROPERTY FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF THE COLLATERAL AGENT AND/OR THE HOLDERS OR THEIR AGENTS OR REPRESENTATIVES DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS, OR ITS AGENTS OR REPRESENTATIVES, SHALL HAVE OBTAINED OWNERSHIP, OPERATION OR POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE OR DEED IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE). 6.6. Further Assurances. The Company will, at any time and from time to time, execute and deliver such further instruments and take such further action as may reasonably be requested by the Collateral Agent, in order to cure any defects in the execution and delivery of, or to comply with or accomplish the covenants and agreements contained in this Agreement or the Security Documents. 6.7. Financial Covenants. The Company shall comply with the following covenants and ratios: (a) Maximum Debt to EBITDA Ratio. The Company shall maintain as of the last day of each Fiscal Quarter a ratio of Total Recourse Debt as of such day to EBITDA for the four Fiscal Quarter Period ending on such day of not more than 3.50 to 1.0. For the purposes of this covenant, EBITDA shall not include the net revenue attributable to assets pledged to secure Non-Recourse Indebtedness. The term "Total Recourse Debt" shall mean Company's consolidated Debt excluding Non-Recourse Indebtedness and Debt of any Unrestricted Subsidiary. (b) EBITDA to Interest Expense Ratio. The Company shall maintain as of the last day of each Fiscal Quarter a ratio of EBITDA for the four Fiscal Quarter Period ending on such day to Interest Expense for such period of at least 2.50 to 1.0. 46 (c) Tangible Net Worth. As of April 30, 2005, the Tangible Net Worth of the Company shall be greater than or equal to the sum of (i) the Tangible Net Worth of the Company as of September 30, 2004 plus (ii) $12,500,000. 6.8. Operations. The Company shall conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable Laws, respecting its properties, charters, businesses and operations, including compliance with all minimum funding standards and other requirements of ERISA, and other laws applicable to any employee benefit plans which they may have, except to the extent the failure to do so could not reasonably be expected to cause a Material Adverse Effect. 6.9. Change of Location. The Company shall, within ten (10) Business Days prior to any such change, notify the Collateral Agent in writing of any proposed change in the location of its chief executive office. 6.10. Employee Benefit Plans. The Company will maintain each employee benefit plan as to which it may have any liability, in material compliance with all applicable requirements of law and regulations. 6.11. Field Audits; Other Information. Upon reasonable prior notice (unless an Event of Default has occurred and is continuing in which event no such notice shall be required) , the Company shall allow the Collateral Agent's employees and agents access to its books and records and properties during normal business hours to perform field audits from time to time. The Company shall pay all reasonable costs and expenses associated with such field audits. The Company will provide the Collateral Agent with such other information as the Collateral Agent may reasonably request from time to time, subject in all cases to any confidentiality restrictions that may be applicable to the Company and its Subsidiaries and to any confidentiality restrictions that the Company reasonably imposes on the Persons receiving such information; provided, however, that neither the Company nor any of its Subsidiaries shall be required to disclose to the Collateral Agent or any agents or representatives thereof any information which is the subject of attorney-client privilege or attorney's work product privilege properly asserted by the applicable Person to prevent the loss of such privilege in connection with such information; and provided, further, that the Company will use commercially reasonable efforts to furnish such information (excluding information covered by confidentiality restrictions in agreements relating to seismic, geologic or geophysical data or similar technical and business matters relating to the exploration for oil and gas), which requirement shall be satisfied if the Collateral Agent is offered the opportunity to review such confidential information by executing or otherwise becoming a party to the confidentiality restrictions on substantially the same terms (including any standstill provisions) as are applicable to the Company. 6.12. Insurance. The Company shall maintain in effect all insurance required by this Agreement and the Security Documents, and the Company agrees to comply with the requirements of Section 5.6 above. The Company agrees to provide the Collateral Agent with certificates or binders evidencing such insurance coverage on an annual basis, and, if requested by the Collateral Agent, the Company further agrees to promptly furnish the Collateral Agent with copies of all renewal notices and copies of receipts for paid premiums. The Company shall 47 provide the Collateral Agent with certificates or binders evidencing insurance coverage pursuant to all renewal or replacement policies of insurance no later than fifteen (15) days before any such existing policy or policies should expire. 6.13. Subsidiaries. The Company agrees that any Subsidiary (excluding Unrestricted Subsidiaries, if any) of the Company formed by or on behalf of the Company after the date of this Agreement shall execute a guaranty of the Indebtedness (in a form substantially similar to the Guaranty) and all of the Capital Stock of such Subsidiary shall be owned by Company or a Guarantor and Company shall comply, and shall cause such Subsidiary to comply with Section 6.15 promptly after the formation of such Subsidiary. 6.14. Disclosure Requirements. Prior to November 4, the Company shall file a Current Report on Form 8-K with the Commission describing the terms of the transactions contemplated herein and including as exhibits to such Current Report on Form 8-K this Agreement and the exhibits to this Agreement in the form and to the extent required by the Exchange Act. In the event Company elects to satisfy all or any part of the Indebtedness due on the Maturity Date or any Voluntary Redemption Date by the issuance of shares of Common Stock pursuant to Sections 3.5 or 3.6, respectively, Company shall, concurrently with the delivery of the Stock Payment Notice required under Sections 3.5 or 3.6, as the case may be, disclose to the public that such payment may be made by the issuance of such Common Stock by the filing of a Form 8-K with the Commission containing such information including the maximum number of shares that may be issued on the Maturity Date or such Voluntary Redemption Date, as the case may be to the extent substantially the same information (or the Company's intent or plans with respect thereto) has not been "previously reported" as contemplated by General Instruction B3 to Form 8-K. 6.15. Collateral. (a) At all times the Indebtedness shall be secured by Liens in favor of the Collateral Agent for the benefit of the Holders (subject only to the first and prior Lien securing the obligations and other liabilities permitted under Section 7.5(l) and the other Permitted Liens) covering and encumbering any and all Oil and Gas Properties (and other assets and properties) of the Restricted Persons securing the obligations and other liabilities permitted under Section 7.5(l), including the issued and outstanding Capital Stock of each Subsidiary of the Company securing such obligations. Notwithstanding the forgoing, in the event the Tangible Net Worth of any Guarantor (calculated with respect to CCBM without including the Capital Stock of Pinnacle so long as Pinnacle is not a Subsidiary of the Company) exceeds 3% or more of the Tangible Net Worth of the Company and its Subsidiaries, on a consolidated basis, the Company shall cause such Guarantor to execute and deliver to Collateral Agent, for the benefit of each Holder, Mortgages in form and substance reasonably acceptable to the Collateral Agent and substantially similar to the corresponding Senior Credit Document and duly executed by such Guarantor together with such other assignments, conveyances, amendments, agreements and other writings (each duly authorized and executed) as Collateral Agent shall reasonably deem necessary or appropriate to grant, evidence and perfect the Liens in the assets and properties of such Guarantor (provided that in no 48 event shall the Capital Stock of Pinnacle be pledged as Collateral so long as Pinnacle is not a Subsidiary of the Company). (b) To the extent necessary to comply with the first sentence of Section 6.15(a), Company or any other Restricted Person, as the case may be, shall execute and deliver to Collateral Agent, for the ratable benefit of each Holder, Mortgages in form and substance reasonably acceptable to Collateral Agent and substantially similar to the corresponding Senior Credit Document and duly executed by any such Restricted Persons together with such other assignments, conveyances, amendments, agreements and other writings (each duly authorized and executed) as Collateral Agent shall deem necessary or appropriate to grant, evidence and perfect the Liens required by this Section 6.15. (c) To the extent necessary to comply with the first sentence of Section 6.15(a), and, if earlier, within 10 days after the execution and delivery of any security instrument, agreement, mortgage or deed of trust covering or encumbering any Oil and Gas Properties to secure any Indebtedness permitted under Section 7.5(l) not otherwise subject to a Lien in favor of Collateral Agent to secure the Indebtedness, Company or each other Restricted Person, as the case may be, shall execute and deliver to Collateral Agent, for the ratable benefit of each Holder, Mortgages, in form and substance reasonably acceptable to Collateral Agent and substantially similar to the corresponding Senior Credit Document, duly executed by any such Restricted Person together with such other assignments, conveyances, amendments, agreements and other writings (each duly authorized and executed) as Collateral Agent shall reasonably deem necessary or appropriate to grant, evidence and perfect the Liens required by this Section. (d) Subject to Section 6.17, on or before 30 days after the Closing Date and at any time thereafter that Company or any of its Subsidiaries is required to execute and deliver Mortgages to Collateral Agent pursuant to Section 6.15(a), the Company shall also deliver to Collateral Agent, within 20 days after delivery of such Mortgages to Collateral Agent, evidence of title reasonably satisfactory to Collateral Agent to verify such Restricted Person's title to not less than ninety percent (90%) of the net present value of the proved reserves of the Oil and Gas Properties subject to such Mortgages. With respect to such Restricted Person's title to such Property, such evidence may include check stubs, revenue receipts or other evidence that the Company or such Restricted Person has been receiving proceeds of production for a reasonable length of time without interruption or challenge, as well as joint interest billings or other evidence of the costs and expenses of operations paid by the Company or such Restricted Person. (e) On the date hereof and at the time hereafter that any Subsidiary of any Company is created or acquired (other than an Unrestricted Subsidiary) and to the extent such Restricted Person is required to do so pursuant to the Senior Credit Documents, the Company and any Subsidiaries of the Company (as applicable) shall execute and deliver to Collateral Agent for the ratable benefit of each Holder (or to the 49 Senior Agent (or the Collateral Agent if the Obligations under the Senior Credit Documents have been paid in full and the obligations of the lenders under the Senior Credit Agreement has been terminated) in the case of the certificates described below), a stock pledge agreement in form and substance reasonably acceptable to Collateral Agent and substantially similarly to the corresponding Senior Credit Document from such Company and/or its Subsidiaries (as applicable) covering the Capital Stock in all such Subsidiaries, together with all certificates (or other evidence acceptable to Collateral Agent) evidencing the issued and outstanding Capital Stock of each such Subsidiary of every class owned by the Company or such Subsidiary (as applicable) which, if certificated, shall be duly endorsed or accompanied by stock powers executed in blank (as applicable), as Collateral Agent shall deem necessary or appropriate to grant, evidence and perfect the Liens required by Section 6.15(a) in the issued and outstanding Capital Stock of each such Subsidiary. 6.16. Amendment of Disclosure Schedule. In connection with each issuance of Additional Notes, the Company shall, subject to the approval of the Majority Holders (which approval shall not be unreasonably withheld), amend and restate the Disclosure Schedule to the extent necessary to make the representations and warranties set forth in Section 5 true and correct after giving effect to the issuance of such Additional Notes and any other transactions to be consummated in connection therewith. 6.17. Post Closing Requirements. The Company agrees that within ninety (90) days from the execution of this Agreement, the Company shall (i) satisfy the requirements set forth in Section 12.17 of the Senior Credit Agreement as in effect on the date hereof and (ii) to the extent not included pursuant to the immediately preceding clause (i) satisfy the requirements set forth on Schedule 6.17. 6.18. Investment Base Determination and Borrowing Base. By April 15th and October 15th of each year commencing April 15, 2005, and at any other time (including prior to April 15, 2005) the Borrowing Base is subject to redetermination under the Senior Credit Agreement the Company shall deliver to the Collateral Agent (or its counsel if requested by written notice from the Collateral Agent to the Company delivered not less than ten days prior to such date), a proposed Investment Base calculated based on the Engineering Report described in Sections 6.1(f) and 6.1(h), respectively, and in accordance with the methodology and risk percentages set forth on the attached Annex A. The Collateral Agent (or its counsel, as the case may be) shall notify the Company in writing within seven (7) days of the receipt of such proposed Investment Base whether such proposed Investment Base has been approved or rejected, (which approval or rejection shall be made by the Majority Holders) and if such proposed Investment Base is approved by the Majority Holders or no written notice of approval or rejection is received by the Company from the Collateral Agent (or its counsel, as the case may be) within such seven (7) day period such proposed Investment Base shall be the Investment Base until the next redetermination of the Investment Base in accordance with this Section 6.18. In the event the proposed Investment Base is rejected by the Majority Holders and the Company and the Majority Holders cannot agree on the amount of the Investment Base within seven (7) days after the delivery to the Company of written notice of such rejection by the Collateral Agent (or its counsel, as the case may be), the redetermined Investment Base shall be the Borrowing Base until 50 the next redetermination of the Investment Base in accordance with this Section 6.18. As soon as practicable and in any event within ten (10) days after the receipt by the Company of notice of any redetermination of the Borrowing Base or Quarterly Reduction, the Company shall notify the Collateral Agent of such redetermined amount of the Borrowing Base and/or Quarterly Reduction. ARTICLE VII NEGATIVE COVENANTS ------------------ To conform with the terms and conditions under which each Purchaser is willing to purchase the Notes from the Company, and to induce each Purchaser to enter into this Agreement to purchase the Notes, the Company warrants, covenants and agrees that until the full and final payment of the Indebtedness and the termination of this Agreement, unless Majority Holders have previously agreed otherwise: 7.1. Limitations on Fundamental Changes. Without the prior written consent of the Majority Holders, the Company shall not form, or permit any other Restricted Person to form, any Subsidiary (excluding Unrestricted Subsidiaries) that does not comply with Section 6.13, nor shall the Company consummate, or permit any Guarantor to liquidate or dissolve itself (or suffer any liquidation or dissolution). 7.2. Disposition of Assets. Neither Company nor any Guarantor shall convey, sell, lease, assign, transfer or otherwise dispose of, any of its property or assets to which the Banks have included a value in the Borrowing Base in excess of $5,000,000 in any fiscal year of the Company; provided that to the extent the proceeds of such sales are cash, such proceeds are applied to the payment of the Obligations evidenced by the Senior Credit Documents in accordance with, and to the extent required by, Section 13.2 of the Senior Credit Agreement as in effect on the date hereof, without amendment or waiver of any of the terms thereof. Notwithstanding the foregoing, this Section 7.2 shall not prohibit the consummation of sales of assets and properties constituting a Change of Control provided the Company complies with Section 3.5(b) with respect to such Change of Control. 7.3. Repurchase of Stock; Dividends. The Company shall not, nor shall it permit any other Restricted Person to, (i) repurchase or redeem for cash any of its Common Stock (except for repurchases and redemption of Registrable Securities pursuant to the Registration Rights Agreement) or (ii) pay any dividends or distributions, without the prior written consent of the Majority Holders; provided, however, that (a) so long as no Measurement Period is then in effect, the Company may declare and pay dividends consisting entirely of Capital Stock of the Company (other than Disqualified Stock), (b) the Company may make cash payments in lieu of fractional shares in an aggregate amount not exceeding $100,000, (c) the Company may declare and pay distributions effecting "poison pill" rights plans provided that any securities or rights so distributed have a nominal fair market value at the time of declaration and (d) any Subsidiary may pay dividends to the Company or any other wholly-owned Subsidiary of the Company. 51 7.4. Liens; Negative Pledge. The Company shall not, nor shall it permit any other Restricted Person to, create, incur, assume or permit to exist any Liens on any of its property now owned or hereafter acquired, except for the following (hereinafter referred to as the "Permitted Liens"): (a) Liens for taxes, assessments, or other governmental charges not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserves as shall be required by GAAP shall have been made therefor; (b) Liens of landlords, vendors, carriers, warehousemen, mechanics, laborers, materialmen and other Liens arising by law in the ordinary course of business for sums either not yet due or being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as shall be required by GAAP shall have been made therefor; (c) Inchoate liens arising under ERISA to secure the contingent liabilities, if any, permitted by this Agreement; (d) Liens created by the Security Documents and any other Liens in favor of the Collateral Agent and/or the Holders to secure the Indebtedness; (e) Liens granted prior to the date of this Agreement to secure Non-Recourse Indebtedness, and/or Liens granted after the date of this Agreement to secure Non-Recourse Indebtedness; (f) Liens existing on the date hereof and set forth in the Disclosure Schedule, provided that such Liens shall secure only those obligations which they secure on the date hereof; (g) Pledges and deposits made in the ordinary course of business in compliance with workmen's compensation, unemployment insurance and other social security laws or regulations; (h) Deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than capital lease obligations), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (i) Zoning restrictions, easements, licenses, covenants, conditions, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business and minor irregularities of title that, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; 52 (j) Deposits, encumbrances or pledges to secure payments of workmen's compensation and other payments, public liability, unemployment and other insurance, old-age pensions or other social security obligations, or the performance of bids, tenders, leases, contracts (other than contracts for the payment of money), public or statutory obligations, surety, stay or appeal bonds, or other similar obligations arising in the ordinary course of business; (k) Any Designated Title Exceptions which are incurred in the ordinary course of business and would not materially adversely affect the operations of the Company or otherwise in the aggregate have a Material Adverse Effect; (l) Any Lien securing Purchase Money Debt, provided that, (i) such Lien is incurred, and the Debt secured thereby is created, within 180 days after the acquisition (or completion of construction) of the property or assets subject thereto, (ii) the Debt secured thereby does not include any other Debt that is not from the same financing source, (iii) such Lien encumbers only such acquired (or constructed) property or assets of the Company or any Subsidiary and (iv) such Lien does not affect any of the Mortgaged Properties included in the determination of the Borrowing Base; (m) Any Lien existing on any property or asset (together with any receivables, intangibles and proceeds related thereto) prior to the acquisition thereof by the Company or any Subsidiary, provided that (i) such Lien is not created in contemplation of or in connection with such acquisition and (ii) such Lien does not apply to any other property or assets of the Company or any Subsidiary; and provided, further, that (x) such Liens do not secure any Debt or other obligation not permitted under this Agreement, and (y) such Liens do not affect any of the Mortgaged Properties included in the determination of the Borrowing Base; (n) Liens securing Purchase Money Debt and Capital Lease Obligations in real property, improvements thereto or equipment hereafter acquired (or, in the case of improvements, constructed) by the Company or any Subsidiary (together with any receivables, intangibles and proceeds related thereto), provided that (i) such security interests secure Debt permitted by Section 7.5(k)(i), (ii) such security interests are incurred, and the Debt secured thereby is created, within 180 days after such acquisition (or completion of construction), (iii) such security interests do not apply to any other property or assets of the Company or any Subsidiary, and (iv) such security interests do not affect any of the Mortgaged Properties included in the determination of the Borrowing Base; (o) Liens arising out of judgments or awards in respect of which the Company shall in good faith be prosecuting an appeal or proceedings for review and in respect of which it shall have secured a subsisting stay of execution pending such appeal or proceedings for review, provided the Company shall have set aside on its books adequate reserves, in accordance with GAAP, with respect to such judgment or award; 53 (p) Liens on the property or assets of any Person existing at the time such Person becomes a Subsidiary of the Company and not incurred as a result of (or in connection with or in anticipation of) such Person's becoming a Subsidiary of the Company, provided that such Liens do not extend to or cover any property or assets of the Company or any of its Subsidiaries other than the property or assets encumbered at the time such Person becomes a Subsidiary of the Company, and provided, further, that (i) such Liens do not secure any Debt or other obligation not permitted under this Agreement, and (ii) such Liens do not affect any of the Mortgaged Properties included in the determination of the Borrowing Base; (q) Liens securing Debt and other Obligations permitted to be incurred under Sections 7.5(i) and 7.5(l); and (r) Liens affecting the Company's equity interest in an Unrestricted Subsidiary. 7.5. Debts. The Company, without the prior written consent of the Majority Holders, will not, nor will it permit any other Restricted Person to, incur, create, assume or in any manner become or be liable in respect of any Debt or issue any Disqualified Stock, except for: (a) The Indebtedness; (b) Trade payables or operating leases from time to time incurred in the ordinary course of business; (c) Non-Recourse Indebtedness not to exceed $25,000,000.00 at any time outstanding, provided that for any Non-Recourse Indebtedness incurred by Company subsequent to the execution of this Agreement, the Company must obtain the Majority Holder's prior written consent to the relevant documentation establishing/evidencing the non-recourse nature and amount of such Non-Recourse Indebtedness, which consent will not be unreasonably withheld; (d) Taxes, assessments or other government charges which are not yet due or are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as shall be required by generally accepted accounting principles shall have been made therefore; (e) The indebtedness evidenced by the Subordinated Promissory Notes and guaranties executed by any Subsidiary of the Company guaranteeing payment thereof; (f) Debt (excluding Non-Recourse Indebtedness) existing as of the date of this Agreement as set forth in the Disclosure Schedule, together with extensions or refinancings (but not increases) of such Debt; (g) Indebtedness arising under any performance bond, or letter of credit obtained for similar purposes, or any reimbursement obligations in respect thereof, entered into in the ordinary course of business; 54 (h) Debt of the Company to any Guarantor of the Company and Debt of any Guarantor to the Company or any other Guarantor of the Company; (i) Debt represented by Hedging Agreements permitted under Section 7.6(l); (j) Guaranties by the Company of Debt of any Guarantor permitted under this Section 7.5 and by any Guarantor of Debt of the Company or any other permitted under this Section 7.5; (k) Subject to a maximum aggregate principal amount at any time outstanding not in excess of $1,000,000.00, the following: (i) Purchase Money Debt and Capital Lease Obligations; (ii) additional unsecured Debt; and (iii) Debt of any Person that becomes a Subsidiary after the date hereof; provided, that such Debt exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary; and (l) All "Indebtedness" under and as defined in the Senior Credit Agreement, now existing or hereinafter created, under the Senior Credit Documents; provided, that, (i) the aggregate principal amount of such "Indebtedness" does not, at any time, exceed the lesser of (1) 110% of the Investment Base and (2) the Borrowing Base; and (ii) such "Indebtedness" with respect to Hedging Agreements between the Company and any Guarantor and any Bank or Affiliate of any Bank is permitted under Section 7.6(l); provided further that no Default or Event of Default shall occur as a result of the principal amount of the "Indebtedness" exceeding the amounts permitted under clause (i) of this Section 7.5(l) so long as the Company complies with Section 8.3 of the Senior Credit Agreement (as in effect on the date hereof or as subsequently amended with the consent of the Majority Holders) with respect to such excess principal amount. 7.6. Investments, Loans and Advances. Except as set forth on the Disclosure Schedule, the Company will not, nor will it permit any other Restricted Person to, make or permit to remain outstanding any loans or advances to or make investments or acquire an equity interest in any Person, except for: (a) Direct obligations of, or obligations the principal of and interest on which are unconditionally guarantied by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) Investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from Standard & Poor's Ratings Service or from Moody's Investors Service, Inc.; (c) Investments in certificates of deposit, banker's acceptances, repurchase agreements and time deposits maturing within one year from the date of acquisition 55 thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $250,000.000; (d) Shares of funds registered under the Investment Company Act of 1940, as amended, that have assets of at least $100,000,000 and invest only in obligations described in clauses (a) through (c) above to the extent that such shares are rated by Moody's Investors Service, Inc. or Standard & Poor's Ratings Service in one of the two highest rating categories assigned by such agency for shares of such nature; (e) Loans among Restricted Persons and/or capital contributions and/or investments among Restricted Persons; (f) Loans or advances to employees in the ordinary course of business in an aggregate amount to any single employee not in excess of $75,000 (or, if and to the extent such loans or advances shall be used by such employee for relocation expenses, $100,000) and in an aggregate amount for all employees of the Company and its Subsidiaries not in excess of $500,000 at any one time outstanding; (g) Trade credits and accounts arising in the ordinary course of business; (h) Investments made as a result of the receipt of non-cash consideration from an asset sale that was made pursuant to and in compliance with this Agreement; (i) Investments made in any debtor of the Company as a result of the receipt of Capital Stock, obligations or securities in settlement of debts created in the ordinary course of business and owing to the Company or any of its Subsidiaries; (j) Investments made pursuant to the requirements of farm-out, farm-in, joint operating, joint venture or area of mutual interest agreements, gathering systems, pipelines or other similar or customary arrangements entered into in the ordinary course of business (including, without limitation, advances to operators under operating agreements entered into by Company in the ordinary course of business) (provided that any such single investment in excess of $1,000,000 shall be approved by the Board of Directors of the Company); (k) Investments made in connection with the purchase, lease, or other acquisition of tangible assets of any Person and investments made in connection with the purchase, lease or other acquisition of all or substantially all of the business, of any Person, or Capital Stock of any Person, or any division, line of business or business unit of any Person (including, without limitation, (i) by the merger or consolidation of such Person into the Company or any of its Subsidiaries or by the merger of a Subsidiary of the Company into such Person and (ii) the purchase of proved reserves); (l) Investments by Company consisting of Hedging Agreements entered into with Approved Counterparties in the ordinary course of business and not for speculative 56 purposes; provided that such Hedging Agreements (a) would not cause the aggregate notional amount of Hydrocarbons under all Hedging Agreements then in effect to exceed eighty-five percent (85%) of the "forecasted production from proved reserves" (as defined below) of the Company's and Guarantors for the forthcoming three (3) year period, or (b) together with any other Hedging Agreements then in effect for the purpose of hedging the Company's interest rate exposure would not cause the notional amount of all such Hedging Agreements then in effect for such purpose to exceed one hundred percent (100%) of the Total Recourse Debt of the Company projected to be outstanding for any period covered by such Hedging Agreement. As used in this clause (l) of Section 7.6, "forecasted production from proved reserves" means the forecasted production of Hydrocarbons as reflected in the most recent Engineering Report delivered to the Collateral Agent pursuant to clauses (f) and (h) of Section 6.1, after giving effect to any pro forma adjustments for the consummation of any acquisitions or dispositions since the effective date of such Engineering Report; (m) So long as no Default or Event of Default has occurred and is continuing or would be caused thereby, Investments by the Company consisting of equity contributions in CCBM to the extent necessary to permit CCBM to purchase Capital Stock of Pinnacle pursuant to that certain Contribution and Subscription Agreement by and among CCBM, Pinnacle, Rocky Mountain Gas, Inc., a Wyoming corporation, and the CSFB Parties (as defined therein) as in effect on the date hereof, in an aggregate amount after the Closing Date not to exceed the sum of $5,000,000 plus the annual increase in the purchase price per share of such Capital Stock specified in such agreement and the purchase of such Capital Stock by CCBM with the proceeds of such equity contribution by the Company; provided the proceeds of the Notes are not used to make any such Investment; (n) Investments consisting of the repurchase or redemption of Registrable Securities pursuant to the Registration Rights Agreement; and (o) Any other investments in any Person having an aggregate fair market value (measured on the date each such investment was made and without giving effect to subsequent changes in value), when taken together with all other investments made pursuant to this clause (o) since the Closing Date not to exceed at any time outstanding $1,000,000 (after giving effect to any reductions in the aggregate amount of such investments as a result of the disposition thereof, including through liquidation, repayment or other reduction, including by way of dividend or distribution, for cash, the aggregate amount of such reductions not to exceed the aggregate amount of such investments outstanding and previously made pursuant to this clause (o)). 7.7. Other Agreements. The Company will not, nor will it permit any other Restricted Person to, enter into any agreement containing any provision which would be violated or breached by the performance of its obligations hereunder or under any instrument or document delivered or to be delivered by it hereunder or in connection herewith; provided that subject to compliance with Section 3.5(b), the Company may agree to the redemption or repurchase of its securities upon a change of control or dissolution, winding-up or liquidation of, or the merger or 57 sale of substantially all the assets of, the Company (provided that nothing in this Section 7.7 shall permit any action otherwise prohibited by Sections 7.1 and 7.2 hereof.). 7.8. Transactions with Affiliates. Except as set forth on the Disclosure Schedule attached hereto, the Company shall not, nor shall it permit any other Restricted Person to, sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates unless such transaction is on terms that are no less favorable to the Company or such Restricted Person, as the case may be, than those that could be obtained at the time of such transaction on an arm's-length basis from a Person who is not an Affiliate and if such transaction involves an amount in excess of $500,000, such transaction has been approved by a majority of the disinterested members of the Board of Directors of the Company; provided, however, that this Section 7.8 (i) shall not apply to transactions between a Guarantor and the Company or any other Guarantor permitted under this Agreement, or between Pinnacle and the Company or any other Restricted Person; (ii) shall not prohibit any individual serving as an officer, director, employee or consultant of the Company or any other Restricted Person from (A) receiving reasonable compensation, benefits or indemnification in connection with his or her services in such capacity (except as otherwise included hereby), provided that any such compensation, benefits or indemnification are approved by a majority of the disinterested members of the Board of Directors of the Company or by the Compensation Committee of the Company, (B) receiving advances for travel or other business expenses made in the ordinary course of business to the extent permitted under this Agreement or (C) participating in any benefit or compensation plan; and (iii) shall not restrict the Company from repaying to any director or its Affiliates when due on its scheduled maturity dates any Debt for borrowed money permitted to be incurred in accordance with this Agreement. 7.9. Second Priority Liens. No Restricted Person shall, nor shall any Restricted Person permit any other Restricted Person to, enter into any agreement containing any provision which would grant a Lien on any of its assets or properties to any holder of the Senior Indebtedness unless a similar Lien, subject only to Permitted Liens, is granted to the Collateral Agent for the benefit of the Holders on terms and conditions reasonably acceptable to the Collateral Agent. 7.10. Commodity Transactions. Neither Company nor any other Restricted Person shall enter into any Hedging Agreements other than Hedging Agreements permitted under Section 7.6(l). 7.11. Restriction of Amendments to First Lien Credit Documents. No Restricted Person shall amend or otherwise modify, or waive any rights under the Senior Credit Documents, if, in any case, such amendment, modification or waiver would be in contravention of the provisions of the Subordination Agreement. ARTICLE VIII DEFAULTS -------- 8.1. Events of Default. Each of the following events constitutes an Event of Default under this Agreement: 58 (a) Default under the Indebtedness. Should the Company default in the payment of principal under the Indebtedness of the Company to the Holders, or should the Company default in the payment of interest under the Indebtedness of the Company to the Holders within three (3) days after any such interest payment is due. (b) Default under this Agreement. Should the Company violate or fail to comply fully with any of the terms and conditions of, or default under, this Agreement (other than Section 8.1(a)), and such default not be cured within thirty (30) days of the occurrence thereof (provided, however, that no cure period shall be available for a default in the obligation to maintain insurance coverages required hereby or a default under Sections 6.14, 6.16 or 7.5). (c) Default Under Other Documents. (i) Should any event of default occur or exist under any of the Documents (other than this Agreement or the Registration Rights Agreement) or should the Company and/or any Guarantor violate, or fail to comply fully with, any terms and conditions of any of the Documents (other than this Agreement or the Registration Rights Agreement), and such default not be cured within ten (10) days of the occurrence thereof or (ii) should the Company fail to comply with any of its obligations under the Registration Rights Agreement to repurchase Registrable Securities. (d) Other Defaults in Favor of the Holders. Should the Company and/or the Guarantor default under any other loan, extension of credit, security agreement, or other obligation in favor of any of the Holders (other than the Registration Rights Agreement) and fail to cure same in accordance with any applicable cure periods. (e) Default in Favor of Third Parties. Should the Company or any Guarantor (i) fail to pay Debt having a principal amount in excess of $250,000 in the aggregate (other than the amounts referred to in Section 8.1(a)), or any interest or premium thereon, when due (or, if permitted by the terms of the relevant document, within any applicable grace period), whether such Debt shall become due by scheduled maturity, by required prepayment, by acceleration, by demand or otherwise; or (ii) fail to perform any term, covenant or condition on its part to be performed under any agreement or instrument evidencing, securing or relating to Debt having a principal amount in excess of $250,000 in the aggregate, when required to be performed, and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such failure is to accelerate, or to permit the holder or holders of such Debt to accelerate, the maturity of such Debt. (f) Insolvency. The following occurrences, in addition to the failure or suspension of the Company or any Guarantor, shall constitute an Event of Default hereunder: (i) Filing by the Company or any Guarantor of a voluntary petition or any answer seeking reorganization, arrangement, readjustment of its debts or for any other relief under any applicable bankruptcy act or law, or under any other 59 insolvency act or law, now or hereafter existing, or any action by the Company or any Guarantor consenting to, approving of, or acquiescing in, any such petition or proceeding; the application by the Company or any Guarantor for, or the appointment by consent or acquiescence of, a receiver or trustee of the Company or any Guarantor for all or a substantial part of the property of the Company or any Guarantor; the making by the Company or any Guarantor, of an assignment for the benefit of creditors; the inability of the Company or any Guarantor or the admission by the Company or any Guarantor in writing, of its inability to pay its debts as they mature (the term "acquiescence" means the failure to file a petition or motion in opposition to such petition or proceeding or to vacate or discharge any order, judgment or decree providing for such appointment within sixty (60) days after the appointment of a receiver or trustee); or (ii) Filing of an involuntary petition against the Company or any Guarantor in bankruptcy or seeking reorganization, arrangement, readjustment of its debts or for any other relief under any applicable bankruptcy act or law, or under any other insolvency act or law, now or hereafter existing and such petition remains undismissed or unanswered for a period of sixty (60) days from such filing; or the insolvency appointment of a receiver or trustee of the Company or any Guarantor for all or a substantial part of the property of the Company or any Guarantor and such appointment remains unvacated or unopposed for a period of sixty (60) days from such appointment, execution or similar process against any substantial part of the property of the Company or any Guarantor and such warrant remains unbonded or undismissed for a period of sixty (60) days from notice to the Company or such Guarantor of its issuance. (g) Dissolution Proceedings. Should proceedings for the dissolution or appointment of a liquidator of the Company or any Guarantor be commenced. (h) False Statements. Should any representation or warranty of the Company made by the Company to the Collateral Agent and/or the Holders in this Agreement or any other Document or in any certificate or statement furnished thereunder prove to be incorrect or misleading in any material respect when made or reaffirmed the result of which could reasonably be expected to have a Material Adverse Effect. 8.2. Waivers. Except as otherwise provided for in this Agreement and by applicable law, the Company and the Guarantor waive to the extent permitted by applicable law (i) presentment, demand and protest and notice of presentment, dishonor, notice of intent to accelerate, notice of acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by the Agent for the benefit of the Holders on which the Company and the Guarantor may in any way be liable and hereby ratify and confirm whatever the Collateral Agent and/or the Holders may do in this regard, (ii) all rights to notice and a hearing prior to the Collateral Agent's taking possession or control of, or to the Collateral Agent's replevy, attachment or levy upon, the Collateral or any bond or security which might be required by any court prior to allowing the Collateral Agent to 60 exercise any of its remedies, and (iii) the benefit of all valuation, appraisal and exemption laws. The Company and the Guarantor acknowledge that they have been advised by counsel of their choice with respect to this Agreement, the other Documents, and the transactions evidenced by this Agreement and other Documents. 8.3. Notice to Delta Farms Lessors. Company and Guarantor hereby authorize and direct the Collateral Agent to provide the lessors of the oil, gas and mineral leases granted by Delta Farms to the Company (the "Delta Farms Lessors") with a copy of any notice of the occurrence of any Event of Default which Collateral Agent may choose or be required to send to Company and/or Guarantor under the Agreement. Company and Guarantor hereby release the Collateral Agent and the Holders and hold the Collateral Agent and the Holders harmless from any liability occasioned by the giving of or the failure to give any such notice, it being understood that the Collateral Agent shall use its best efforts to provide such notice to the Delta Farms Lessors, but shall have no obligation or liability to Delta Farms Lessors for its failure to do so. Under no circumstances shall Delta Farms Lessors be considered as a third party beneficiary of this Agreement. ARTICLE IX ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES ---------------------------------------------- 9.1. Acceleration. If any Event of Default described in Sections 8.1(f) occurs with respect to any Restricted Person, the Indebtedness shall immediately become due and payable without any election or action on the part of the Collateral Agent or any Holder. If any other Event of Default occurs, the Majority Holders (or the Collateral Agent with the consent of the Majority Holders) may declare the Indebtedness to be due and payable, or both, whereupon the Indebtedness shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Company hereby expressly waives. If, within thirty (30) days after acceleration of the maturity of the Indebtedness as a result of any Event of Default (other than any Event of Default as described in Sections 8.1(f) with respect to any Restricted Person) and before any judgment or decree for the payment of the Indebtedness due shall have been obtained or entered, the Majority Holders (in their sole discretion) shall so direct, then the Collateral Agent shall, by notice to the Company, rescind and annul such acceleration and/or termination. 9.2. Amendments. Subject to the provisions of this Section 9.2, the Majority Holders (or the Collateral Agent with the consent in writing of the Majority Holders) and each Restricted Person may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Documents or changing in any manner the rights of the Holders or such Restricted Person hereunder or waiving any Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of all of the Holders affected thereby: (a) Extend the Maturity Date or forgive all or any portion of the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon. 61 (b) Reduce the percentage specified in the definition of Majority Holders. (c) Amend this Section 9.2. (d) Release any Guarantor or, except as otherwise provided in Section 11.15, release any of the Collateral. No amendment of any provision of this Agreement relating to the Collateral Agent shall be effective without the written consent of the Collateral Agent. 9.3. Preservation of Rights. No delay or omission of the Holders or the Collateral Agent to exercise any right under the Documents shall impair such right or be construed to be a waiver of any Default or Event of Default or an acquiescence therein. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Documents whatsoever shall be valid unless in writing signed by the Holders required pursuant to Section 9.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Documents or afforded by law shall be cumulative and all shall be available to the Collateral Agent and the Holders until the Indebtedness has been paid in full. ARTICLE X COLLATERAL AGENCY ----------------- 10.1. Creation of Collateral Agency. In order to provide for the creation, perfection and maintenance of all Liens granted under Security Documents and for the enforcement of the various rights and remedies set forth in the Security Documents, the Purchasers hereby appoint PCRL Investments L.P. as the Collateral Agent under this Agreement and the other Security Documents, and the Collateral Agent hereby accepts its appointment subject to the terms and conditions of this Agreement and the Security Documents. Company hereby reaffirms and confirms the grant of the Liens in favor of the Collateral Agent in accordance with the terms of the Security Documents and for the benefit of the Holders as set forth therein and herein. 10.2. Possession and Use of Collateral. So long as no Event of Default exists, Company shall have the right to remain in possession and retain control of the Collateral (other than any Collateral for which applicable law requires that Liens on such Collateral be perfected by control or possession) in accordance with, and to the extent permitted by, the terms of the Subordination Agreement and the terms of the Security Documents. 10.3. Additional Collateral. At any time, Company and the Collateral Agent may, without necessity of consent from the Holders, enter into one or more Security Documents, in form reasonably satisfactory to the Collateral Agent: (a) to supplement or add to the covenants of Company for the benefit of all Holders or to surrender any right or power conferred upon the Company; (b) to mortgage or pledge to the Collateral Agent, or grant a security interest in favor of the Collateral Agent in, any property or assets as additional security for the Indebtedness; or (c) to cure any ambiguity, to correct or supplement any provision herein or in any Security 62 Document which may be defective or inconsistent with any other provision herein or therein, or to make any other provision with respect to matters or questions arising hereunder which shall not be inconsistent with any provision hereof. The Collateral Agent and the Holders agree that the forms of Security Documents being executed and delivered concurrently with (and dated of even date with) this Agreement are satisfactory to such parties. The Company and the Guarantors will deliver or cause to be delivered to the Collateral Agent, promptly upon the execution and delivery thereof, executed counterparts of all Security Documents and all amendments and supplements thereto. The Collateral Agent shall keep all Security Documents held by it at the principal office maintained by it in Dallas, Texas, or, if none is there maintained, at its primary address for notice under this Agreement, shall provide copies of such Security Documents to the Holders within a reasonable time after its receipt of a written request therefor, and permit any Holder or the representative thereof to inspect the same at such office during normal business hours upon reasonable prior notice. 10.4. Releases of Collateral. The Collateral Agent shall execute and deliver to the Restricted Persons on behalf of the Holders and other Persons, if any, secured by the Collateral, any agreements, documents or instruments as shall be necessary or appropriate to effect any releases of Collateral which shall be required by the terms hereof or of any other Document, including releases required pursuant to sales of Collateral that are not prohibited under Section 7.2, which shall otherwise have been approved by the Majority Holders in writing, or as otherwise required by the Subordination Agreement. Notwithstanding anything to the contrary herein, in the event any portion of the Indebtedness is satisfied by the issuance of Registrable Securities, except for sales of Collateral that are not prohibited under Section 7.2 or as otherwise required by the Subordination Agreement, none of the Collateral shall be released until the repurchase obligations of the Company under the Registration Rights Agreement have terminated in accordance with its terms. ARTICLE XI COLLATERAL AGENT ---------------- 11.1. Appointment; Nature of Relationship. PCRL is hereby appointed by each of the Holders as its contractual representative (herein referred to as the "Collateral Agent") hereunder and under each other Document, and each of the Holders irrevocably authorizes the Collateral Agent to act as the contractual representative of such Holder with the rights and duties expressly set forth herein and in the other Documents. The Collateral Agent agrees to act as such contractual representative upon the express conditions contained in this Article XI. Notwithstanding the use of the defined term "Collateral Agent," it is expressly understood and agreed that the Collateral Agent shall not have any fiduciary responsibilities to any Holder by reason of this Agreement or any other Document and that the Collateral Agent is merely acting as the contractual representative of the Holders with only those duties as are expressly set forth in this Agreement and the other Documents. In its capacity as the Holders' contractual representative, the Collateral Agent (i) does not hereby assume any fiduciary duties to any of the Holders, (ii) is a "representative" of the Holders within the meaning of the term "Secured Party" as defined in the New York Uniform Commercial Code, and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this 63 Agreement and the other Documents. Each of the Holders hereby agrees to assert no claim against the Collateral Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Holder hereby waives. 11.2. Powers. The Collateral Agent shall have and may exercise such powers under the Documents as are specifically delegated to the Collateral Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Collateral Agent shall have no implied duties to the Holders, or any obligation to the Holders to take any action thereunder except any action specifically provided by the Documents to be taken by the Collateral Agent. 11.3. General Immunity. Neither the Collateral Agent nor any of its directors, officers, agents or employees shall be liable to any Restricted Person, the Holders or any Holder for any action taken or omitted to be taken by it or them hereunder or under any other Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person. 11.4. No Responsibility for Loans, Recitals, etc. Neither the Collateral Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Document, including, without limitation, any agreement by an obligor to furnish information directly to each Holder; (c) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered solely to the Collateral Agent; (d) the existence or possible existence of any Default or Event of Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of the Company or any Guarantor of any of the Indebtedness or of any of the Company's or any such Guarantor's respective Subsidiaries. The Collateral Agent shall have no duty to disclose to the Holders information that is not required to be furnished by the Company to the Collateral Agent at such time, but is voluntarily furnished by the Company to the Collateral Agent (either in its capacity as the Collateral Agent or in its individual capacity). 11.5. Action on Instructions of Holders. The Collateral Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Document in accordance with written instructions signed by the Majority Holders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Holders. The Holders hereby acknowledge that the Collateral Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Document unless it shall be requested in writing to do so by the Majority Holders. The Collateral Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Document unless it shall first be indemnified to its satisfaction by the Holders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 64 11.6. Employment of the Collateral Agents and Counsel. The Collateral Agent may execute any of its duties as the Collateral Agent hereunder and under any other Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Holders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Collateral Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Collateral Agent and the Holders and all matters pertaining to the Collateral Agent's duties hereunder and under any other Document. 11.7. Reliance on Documents; Counsel. The Collateral Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Collateral Agent, which counsel may be employees of the Collateral Agent. 11.8. COLLATERAL AGENT'S REIMBURSEMENT AND INDEMNIFICATION. EACH HOLDER AGREES TO REIMBURSE AND INDEMNIFY THE COLLATERAL AGENT RATABLY IN PROPORTION TO THE RATIO THAT ITS RESPECTIVE NOTE BEARS TO THE AGGREGATE NOTES (I) FOR ANY AMOUNTS NOT REIMBURSED BY THE COMPANY FOR WHICH THE COLLATERAL AGENT IS ENTITLED TO REIMBURSEMENT BY THE COMPANY UNDER THE DOCUMENTS, (II) FOR ANY OTHER EXPENSES INCURRED BY THE COLLATERAL AGENT ON BEHALF OF THE HOLDERS, IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION AND ENFORCEMENT OF THE DOCUMENTS (INCLUDING, WITHOUT LIMITATION, FOR ANY EXPENSES INCURRED BY THE COLLATERAL AGENT IN CONNECTION WITH ANY DISPUTE BETWEEN THE COLLATERAL AGENT AND ANY HOLDER OR BETWEEN TWO OR MORE OF THE HOLDERS) AND (III) FOR ANY LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE COLLATERAL AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THE DOCUMENTS OR ANY OTHER DOCUMENT DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS CONTEMPLATED THEREBY (INCLUDING, WITHOUT LIMITATION, FOR ANY SUCH AMOUNTS INCURRED BY OR ASSERTED AGAINST THE COLLATERAL AGENT IN CONNECTION WITH ANY DISPUTE BETWEEN THE COLLATERAL AGENT AND ANY HOLDER OR BETWEEN TWO OR MORE OF THE HOLDERS), OR THE ENFORCEMENT OF ANY OF THE TERMS OF THE DOCUMENTS OR OF ANY SUCH OTHER DOCUMENTS, PROVIDED THAT NO HOLDER SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT ANY OF THE FOREGOING IS FOUND IN A FINAL NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE COLLATERAL AGENT. THE OBLIGATIONS OF THE HOLDERS UNDER THIS SECTION 11.8 SHALL SURVIVE PAYMENT OF THE OBLIGATIONS AND TERMINATION OF THIS AGREEMENT. 65 11.9. Notice of Default. The Collateral Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Collateral Agent has received written notice from a Holder or the Company referring to this Agreement describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Collateral Agent receives such a notice, the Collateral Agent shall give prompt notice thereof to the Holders. 11.10. Rights as a Holder. In the event the Collateral Agent is a Holder, the Collateral Agent shall have the same rights and powers hereunder and under any other Document with respect to its Indebtedness evidenced by the Notes as any Holder and may exercise the same as though it were not the Collateral Agent, and the term "Holder" or "Holders" shall, at any time when the Collateral Agent is a Holder, unless the context otherwise indicates, include the Collateral Agent in its individual capacity. The Collateral Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Document, with the Company, the Guarantors or any of their respective Subsidiaries in which the Company, such Guarantor or such Subsidiary is not restricted hereby from engaging with any other Person. The Collateral Agent, in its individual capacity, is not obligated to remain a Holder. 11.11. Holder Decision. Each Holder acknowledges that it has, independently and without reliance upon the Collateral Agent or any other Holder and based on the financial statements prepared by the Company and the Guarantors and such other documents and information as it has deemed appropriate, made its own analysis and decision to enter into this Agreement and the other Documents. Each Holder also acknowledges that it will, independently and without reliance upon the Collateral Agent or any other Holder and based on such documents and information as it shall deem appropriate at the time, continue to make its own decisions in taking or not taking action under this Agreement and the other Documents. 11.12. Successor Collateral Agent. The Collateral Agent may resign at any time by giving written notice thereof to the Holders and the Company, such resignation to be effective upon the appointment of a successor Collateral Agent or, if no successor Collateral Agent has been appointed, forty-five days after the retiring Collateral Agent gives notice of its intention to resign. The Collateral Agent may be removed at any time with or without cause by written notice received by the Collateral Agent from the Majority Holders, such removal to be effective on the date specified by the Majority Holders. Upon any such resignation or removal, the Majority Holders shall have the right to appoint, on behalf of the Company and the Holders, a successor Collateral Agent subject to the approval of the Company, such approval not to be unreasonably withheld; provided that Company shall not have the right to approve any successor Collateral Agent appointed during the continuance of any Event of Default. If no successor Collateral Agent shall have been so appointed by the Majority Holders within thirty days after the resigning Collateral Agent's giving notice of its intention to resign, then the resigning Collateral Agent may appoint, on behalf of the Company and the Holders, a successor Collateral Agent. Notwithstanding the previous sentence, the Collateral Agent may at any time without the consent of the Company or any Holder, appoint any of its Affiliates which is a commercial bank as a successor Collateral Agent hereunder. If the Collateral Agent has resigned or been removed and no successor Collateral Agent has been appointed, the Holders may perform all the duties of 66 Collateral Agent hereunder and the Company shall make all payments in respect of the Indebtedness to the applicable Holder and for all other purposes shall deal directly with the Holders. No successor Collateral Agent shall be deemed to be appointed hereunder until such successor Collateral Agent has accepted the appointment. Any such successor Collateral Agent shall be a financial institution or Fund having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as the Collateral Agent hereunder by a successor Collateral Agent, such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Collateral Agent. Upon the effectiveness of the resignation or removal of the Collateral Agent, the resigning or removed Collateral Agent shall be discharged from its duties and obligations hereunder and under the Documents. After the effectiveness of the resignation or removal of a Collateral Agent, the provisions of this Article XI shall continue in effect for the benefit of such Collateral Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Collateral Agent hereunder and under the other Documents. 11.13. Delegation to Affiliates. The Company and the Holders agree that the Collateral Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Collateral Agent is entitled under Articles X and XI. 11.14. Execution of Security Documents. The Holders hereby empower and authorize the Collateral Agent to execute and deliver to the Company on its behalf the Security Documents (including the Subordination Agreement) and all related financing statements and any financing statements, agreements, documents or instruments as shall be necessary or appropriate to effect the purposes of the Security Documents. 11.15. Collateral Releases. The Holders hereby empower and authorize the Collateral Agent to execute and deliver to the Restricted Persons on their behalf any agreements, documents or instruments as shall be necessary or appropriate to effect any releases of Collateral which shall be permitted by the terms hereof or of any other Document, including releases required pursuant to sales of Collateral that are not prohibited under Section 7.2, which shall otherwise have been approved by the Majority Holders in writing or as otherwise required by the Subordination Agreement. Notwithstanding anything to the contrary herein, in the event any portion of the Indebtedness is satisfied by the issuance of Registrable Securities, except for sales of Collateral that are not prohibited under Section 7.2, releases approved by the Majority Holders in writing or as otherwise required by the Subordination Agreement, none of the Collateral shall be released until the repurchase obligations of the Company under the Registration Rights Agreement have terminated in accordance with its terms. 67 ARTICLE XII SETOFF; RATABLE PAYMENTS ------------------------ 12.1. Setoff. In addition to, and without limitation of, any rights of the Holders under applicable law, if any Restricted Person becomes insolvent, however evidenced, or any Event of Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Obligation at any time held or owing by any Holder or any Affiliate of any Holder (with the exception of funds deposited in the Company's accounts in trust for third parties or funds deposited in pension accounts, IRA's, Keogh accounts and All Savor Certificates) to or for the credit or account of any Restricted Person may be offset and applied toward the payment of the Indebtedness then due and owing to such Holder. 12.2. Ratable Payments. If any Holder, whether by setoff or otherwise, has payment made to it upon its Indebtedness evidenced by the Notes in a greater proportion than that received by any other Holder, such Holder agrees, promptly upon demand, to purchase a portion of the Notes held by the other Holders so that after such purchase each Holder will hold its ratable proportion of Notes. If any Holder, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Indebtedness or such amounts which may be subject to setoff, such Holder agrees, promptly upon demand, to take such action necessary such that all Holder s share in the benefits of such collateral ratably in proportion to their Notes. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XIII REPRESENTATIONS AND WARRANTIES OF PURCHASERS -------------------------------------------- 13.1. Representations and Warranties of Each Purchaser. Each Purchaser represents and warrants to the Company, severally and not jointly, as of the date hereof and as of each date it receives Common Stock pursuant to Section 3.3(b), 3.5 or 3.6 as follows: (a) Purchase for its Own Account. Such Purchaser is purchasing the Restricted Securities for its own account, without a view to the distribution thereof in violation of the Securities Act, all without prejudice, however, to the right of such Purchaser at any time, in accordance with this Agreement or the Documents, lawfully to sell or otherwise to dispose of all or any part of the Restricted Securities held by it. (b) Accredited Investor. Such Purchaser is an "accredited investor" within the meaning of Regulation D under the Securities Act. (c) Authority, Etc. Such Purchaser has the power and authority to enter into and perform this Agreement and the execution and performance hereof have been duly authorized by all proper and necessary action; this Agreement constitutes the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with 68 its terms, except as limited by bankruptcy, insolvency or other similar laws now or hereafter in effect affecting the enforcement of creditors' rights and the application of equitable principles. (d) Securities Act Compliance. Such Purchaser understands that, as of the Closing Date, the Company has not registered the offer and sale of the Restricted Securities under the Securities Act, and each Purchaser agrees that the Restricted Securities may not be sold or transferred or offered for sale or transfer by it without registration under the Securities Act or the availability of an exemption therefrom, all as more fully provided in Article XV hereof. Such Purchaser understands that any transfer agent of the Company will be issued stop-transfer restrictions with respect to the Restricted Securities unless such transfer is subsequently registered under the Securities Act and applicable state and other securities laws or unless an exemption from such registration is available. Such Purchaser has experience in analyzing and investing in entities like the Company, such Purchaser can bear the economic risk of its investment, including the full loss of its investment, and by reason of its business or financial experience or the business or financial experience of its professional advisors has the capacity to evaluate the merits and risks of its investment and protect its own interest in connection with the purchase of the Restricted Securities from the Company on the Closing Date. Such Purchaser does not have any contract, undertaking, agreement or arrangements with any Person to sell, transfer or grant a participation to such Person or to any third Person, with respect to any of the Restricted Securities in violation of the Federal or any state securities laws. ARTICLE XIV SUBORDINATION OF NOTES ---------------------- 14.1. Subordination of Notes. The Company, for itself and its successors, and each Holder, by its acceptance of the Notes, agrees that (a) the payment of the principal of and interest on the Notes and (b) any payment on account of the acquisition or redemption of the Notes by the Company is subordinated, to the extent and in the manner provided in the Subordination Agreement and each Holder shall be bound by the provisions thereof. ARTICLE XV TRANSFER OF SECURITIES ---------------------- 15.1. Restriction on Transfer. The Restricted Securities shall not be transferable except a holder of Restricted Securities may transfer such Restricted Securities upon the conditions specified in this Article XV, which conditions are intended to ensure compliance with the provisions of the Securities Act in respect of the transfer thereof; provided, however, that any transferee, by acceptance of the Restricted Securities, will be deemed to have agreed to be bound by and entitled to the benefits of Section 16.15; and provided, further, that, so long as no Event of Default has occurred and is continuing, 69 neither the rights of any Holder under the Documents nor the Notes nor any part thereof or participation therein may be transferred or assigned to a Competitor, and the Notes may not be transferred or assigned in aggregate principal amounts of less than $3,000,000. By its acceptance of a Note, each transferee of Restricted Securities hereunder and will be deemed to have agreed to be bound by the provisions of this Article including the representations set forth in Section 13.1(a) and (d) of this Agreement. 15.2. Restrictive Legends. Each certificate for the Restricted Securities, and each certificate for any such securities issued to subsequent transferees of any such certificate shall (unless otherwise permitted by the provisions of Section 15.3 hereof) be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES OR BLUE SKY LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE NOTE PURCHASE AGREEMENT DATED AS OF OCTOBER 29, 2004, AMONG THE ISSUER HEREOF AND CERTAIN OTHER SIGNATORIES THERETO, AND NO TRANSFER OF THESE SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. UPON THE FULFILLMENT OF CERTAIN OF SUCH CONDITIONS, THE ISSUER HEREOF HAS AGREED TO DELIVER TO THE HOLDER HEREOF A NEW CERTIFICATE, NOT BEARING THIS LEGEND, FOR THE SECURITIES REPRESENTED HEREBY REGISTERED IN THE NAME OF THE HOLDER HEREOF. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THE CERTIFICATE TO THE SECRETARY OF THE ISSUER HEREOF. THIS NOTE IS SUBJECT TO THE PROVISIONS OF THE SUBORDINATION AGREEMENT, DATED AS OF OCTOBER 29, 2004, AMONG PCRL INVESTMENTS L.P., IN ITS CAPACITY AS PURCHASER AND AS COLLATERAL AGENT FOR THE HOLDERS PURSUANT TO THE PURCHASE AGREEMENT, HIBERNIA NATIONAL BANK, IN ITS CAPACITY AS ADMINISTRATIVE AGENT FOR THE FINANCIAL INSTITUTIONS PARTY TO THE SENIOR CREDIT AGREEMENT (AS DEFINED IN THE SUBORDINATION AGREEMENT) AND COMPANY. EACH HOLDER OF THIS PROMISSORY NOTE SHALL BE DEEMED, BY VIRTUE OF SUCH HOLDER'S ACQUISITION OF THIS PROMISSORY NOTE, TO HAVE AGREED TO PERFORM AND OBSERVE ALL OF THE TERMS, COVENANTS, AND CONDITIONS TO BE PERFORMED OR OBSERVED BY THE SUBORDINATED LENDER UNDER (AND AS DEFINED 70 IN) THE SUBORDINATION AGREEMENT. 15.3. Notice of Transfer. (a) Except as provided in the Registration Rights Agreement, each holder shall, prior to any Transfer of any Restricted Securities, give ten (10) Business Days prior written notice (or, if such ten (10) Business Day notice period is not reasonably practicable, such notice as is reasonably practicable), to the Company of such holder's intention to effect such Transfer and to comply in all other respects with the provisions of this Section 15.3 in making such proposed Transfer. Each such notice shall describe the manner and circumstances of the proposed Transfer. Upon request by the Company, the holder delivering such notice shall deliver a written opinion, addressed to the Company, of counsel for such holder (which may be one of its internal counsels), stating that in the opinion of such counsel (which opinion must be reasonably satisfactory to the Company) such proposed Transfer does not involve a transaction requiring registration of the offer and sale of such Restricted Securities under the Securities Act. Such holder shall thereupon be entitled to Transfer the Restricted Securities in accordance with the terms of the notice delivered to the Company, if the Company does not reasonably object to such Transfer and request such opinion, within five days after delivery of such notice or, if the Company does request such opinion, upon its receipt thereof. Notwithstanding anything to the contrary in any Document, the opinion required hereby must be presented in order that the securities be validly presented for transfer and that the Company's obligation to transfer begins to accrue and the Company shall have no obligation to transfer nor shall any liability nor penalty accrue for failure to transfer unless such opinion is presented. Each certificate or other instrument evidencing the securities issued upon the Transfer of any Restricted Securities (and each certificate or other instrument evidencing any untransferred balance of such Restricted Securities) shall bear the legend set forth in Section 15.2 above unless (i) such opinion of counsel is to the effect that registration of any future Transfer is not required by the applicable provisions of the Securities Act or (ii) the Company shall have waived the requirement of such legend. (b) Notwithstanding the foregoing provisions of this Section 15.3, the restrictions imposed by Section 15.3(a) upon the transferability of any Restricted Securities (other than the Notes in respect as to which Restricted Securities may be issued by the Company) shall cease and terminate when (i) such Restricted Securities are sold or otherwise disposed of pursuant to an effective registration statement under the Securities Act or as otherwise contemplated by paragraph (a) above in a manner that does not require that the Restricted Securities so transferred to continue to bear the legend set forth in Section 15.2 above or (ii) the holder of such Restricted Securities has met the requirements for Transfer of such Restricted Securities under Rule 144 or Rule 144(k). Whenever the restrictions imposed by this Section shall terminate, upon the written request of the holder of any Restricted Securities as to which such restrictions have terminated, as promptly as practicable but in any event within ten (10) Business Days of receipt of such request, the Company shall, without charge, issue, register and deliver a new instrument not bearing the restrictive legend set forth in Section 15.3 71 above and not containing any other reference to the restrictions imposed by this Section unless such Restricted Securities are Registrable Securities under the Registration Rights Agreement in which event the Company shall comply with Section 7 of the Registration Rights Agreement with respect to such Restricted Securities. ARTICLE XVI MISCELLANEOUS ------------- 16.1. Notices. All notices, demands and requests of any kind to be delivered to any party hereto in connection with this Agreement shall be (a) delivered personally, (b) sent by nationally-recognized overnight courier, (c) sent by first class, registered or certified mail, return receipt requested or (d) sent by facsimile, in each case to such party at its address as follows: (i) if to the Company, to: Carrizo Oil & Gas, Inc. 14701 St. Mary's Lane, Suite 800 Houston, Texas 77079 Attention: Chief Financial Officer Telephone No.: (281) 496-1352 Telecopier No.: (281) 496-1251 with a copy to: Baker Botts, L.L.P. One Shell Plaza 910 Louisiana Houston, Texas 77002-4915 Attention: Gene Oshman, Esq. Telephone No.: (713) 229-1178 Telecopier No.: (713) 229-1522 (ii) if to any Purchaser, to such Purchaser's address set forth in Schedule 2 hereto. (iii) if to any Holder, to such Holder's address as specified by such Holder in accordance with this Section 16.1 Any notice, demand or request so delivered shall constitute valid notice under this Agreement and shall be deemed to have been received (A) on the day of actual delivery in the case of personal delivery, (B) on the next Business Day after the date when sent in the case of delivery by nationally-recognized overnight courier, (C) on the fifth Business Day after the date 72 of deposit in the U.S. mail in the case of mailing or (D) upon receipt in the case of a facsimile transmission or the next Business Day is such day is not a Business Day. Any party hereto or any Holder may from time to time by notice in writing served upon the other as aforesaid designate a different mailing address or a different person to which all such notices, demands or requests thereafter are to be addressed. 16.2. Survival of Agreement. All agreements, representations and warranties contained herein or made in writing by or on behalf of the Company in connection with the transactions contemplated hereby shall survive the execution and delivery of this Agreement and the other Documents without limit. No termination or cancellation (regardless of cause or procedure) of this Agreement shall in any way affect or impair the powers, obligations, duties, rights and liabilities of the parties hereto in any way with respect to any transaction or event occurring prior to such termination or cancellation, or any of the representations contained in this Agreement and the other Documents and all such undertakings, agreements, covenants, warranties and representations shall survive such termination or cancellation as provided above. The Company further agrees that to the extent the Company makes a payment or payments to the Holders under this Agreement or any other Document, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy, insolvency or similar state or United States federal law, common law or equitable cause, then to the fullest extent permitted by applicable law, to the extent of such payment or repayment, the Indebtedness or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been received by the Holders. The Holders shall be entitled to rely upon, and shall be deemed to have relied upon, all representations, warranties and covenants to be performed prior to the Closing Date contained in any Document, notwithstanding any knowledge of the Holders to the contrary, or any contrary information delivered to the Holders by the Company or any other Person. 16.3. Successors and Assigns. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and permitted assigns of such party, and all covenants, promises and agreements by or on behalf of the Company or the Holders that are contained in the Documents shall bind and inure to the benefit of their respective successors and permitted assigns except that the Company shall not assign its rights or obligations hereunder without the consent of the Majority Holders. Each Holder shall have the right, subject to the provisions of Article XV hereof, to assign or otherwise transfer its rights under this Agreement (in connection with the transfer of Restricted Securities) or any Notes held by it. 16.4. Expenses of the Holders. Subject to a limitation of $75,000 upon attorney's fees and expenses of the Purchaser incurred in connection with the following clauses (i) and (ii) agreed to between the Company and the Purchaser, the Company shall pay (a) all out-of-pocket expenses reasonably incurred by the Holders (including, without limitation, the reasonable fees, charges and disbursements of counsel 73 for the Holders and any auditors, accountants, appraisers, consultants, advisors and agents employed or retained by the Holders) in connection with (i) the preparation, execution and delivery of this Agreement and the other Documents, (ii) the purchase of the Initial Notes hereunder (including the Holders' due diligence investigation in connection therewith), (iii) all filings, if any, by any Holder required to be made by the Commission in connection with the transactions contemplated by the Documents and (iv) the preparation of any modifications, amendments, consents or waivers in connection with the negotiation, preparation, execution and administration of the Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by Company; (b) all the actual costs and reasonable expenses of creating and perfecting Liens in favor of Collateral Agent, for the benefit of Holders pursuant hereto, including filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums and reasonable fees, expenses and disbursements of counsel to Collateral Agent and of counsel providing any opinions that the Collateral Agent or any Holder may request in respect of the Collateral or the Liens created pursuant to the Security Documents; (c) all the actual costs and reasonable fees, expenses and disbursements of any auditors, consultants or appraisers; (d) all the actual costs and reasonable expenses (including the reasonable fees, expenses and disbursements of any appraisers, consultants, advisors and agents employed or retained by Collateral Agent and its counsel) in connection with the custody or preservation of any of the Collateral; and (e) after the occurrence of a Default or an Event of Default, all costs and expenses, including reasonable attorneys' fees and costs of settlement, incurred by the Collateral Agent and the Holders in enforcing any Indebtedness of or in collecting any payments due from any Restricted Person hereunder or under the other Documents by reason of such Default or Event of Default (including in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Guaranty) or in connection with any refinancing or restructuring of the credit arrangements provided hereunder in the nature of a "work out" or pursuant to any insolvency or bankruptcy cases or proceedings. 16.5. Indemnification. (a) In addition to all rights and remedies available to the Holders at law or in equity, the Company shall indemnify the Holders and their affiliates, stockholders, officer, directors, employees, agents, representatives, counsel, successors and permitted assigns (collectively, the "Indemnified Persons") and save and hold each of them harmless against and pay on behalf of or reimburse such party as and when incurred for any loss (excluding any tax and any diminution in value of the Notes), liability, demand, claim, action, cause of action, cost, damage, deficiency, penalty, fine or expense, whether or not arising out of any claims by or on behalf of the Company or any third party, including interest, penalties, reasonable attorneys' fees and expenses and all amounts paid in investigation, defense or settlement of any of the foregoing (collectively, "Losses") which any such party may suffer, sustain or become subject to, to the extent arising out of or as a result of: (i) any misrepresentation or breach of a representation or warranty on the part of the Company under Article V of this Agreement; 74 (ii) any nonfulfillment or breach of any covenant or agreement on the part of the Company under this Agreement or any other Document; (iii) any action, demand, proceeding, investigation or claim by any third party (including, without limitation, governmental agencies) against any Indemnified Person that, if successful, would give rise to or evidence the existence of or relate to a breach of any of the representations, warranties or covenants of the Company; and (iv) any action, demand, proceeding, investigation or claim by any third party (including, without limitation, governmental agencies) against any Indemnified Person relating to or arising from Environmental Laws (including without limitation relating to or arising from any Hazardous Material regarding the Company or its Subsidiaries and relating to the Company or its Subsidiaries or any predecessor thereto or any of the operators, properties or assets of any of them). THE COVENANTS AND INDEMNITIES CONTAINED IN THIS SECTION 16.5(a) SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF ANY INDEMNIFIED PARTY; AND, PROVIDED, HOWEVER, NO RELEASE, WAIVER, DEFENSE OR INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 16.5(a) IN RESPECT OF ANY PROPERTY FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF THE COLLATERAL AGENT AND/OR THE HOLDERS OR THEIR AGENTS OR REPRESENTATIVES DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS, OR ITS AGENTS OR REPRESENTATIVES, SHALL HAVE OBTAINED OWNERSHIP, OPERATION OR POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE OR DEED IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE). ANY CLAIMS UNDER THIS SECTION 16.5(a) SHALL BE SUBJECT TO SECTION 16.5(b). (b) Notwithstanding the foregoing, and subject to the following part of this sentence, upon judicial determination, which is final and no longer appealable, that the act or omission giving rise to the indemnification hereinabove provided resulted primarily out of or was based primarily upon the Indemnified Person's gross negligence, fraud or willful misconduct (unless such action was based upon the Indemnified Person's reliance in good faith upon any of the representations, warranties, covenants or promises made by the Company in the Documents) by the Indemnified Person, the Company shall not be responsible for any Losses sought to be indemnified in connection therewith, and the Company shall be entitled to recover from the Indemnified Person all amounts previously paid in full or partial satisfaction of such indemnity with interest thereon at the rate of interest borne by the Notes, together with all costs and expenses of the Company reasonably incurred in effecting such recovery, if any. 75 (c) All indemnification rights hereunder shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby without limit, regardless of any investigation, inquiry or examination made for or on behalf of, or any knowledge of the Holders and/or any of the Indemnified Persons or the acceptance by the Holders of any certificate or opinion. (d) The indemnity obligations that the Company have under this Section 16.5 shall be in addition to any liability that the Company may otherwise have. The Company further agrees that the indemnification commitment set forth in this Agreement shall apply whether or not the Indemnified Person is a formal party to any such lawsuits, claims or other proceedings. (e) Any indemnification of the Holders or any other Indemnified Person by the Company pursuant to this Section 16.5 shall be effected by wire transfer of immediately available funds from the Company to an account designated by the Holders or any other Indemnified Person within fifteen (15) days after the determination thereof. 16.6. Third Party Claims. (a) If any claim (a "Third Party Claim") is asserted against an Indemnified Person and such Indemnified Person intends to seek indemnification hereunder from the Company (the "Indemnifying Person"), then such Indemnified Person shall give notice of the Third Party Claim to the Indemnifying Person as soon as practicable after the Indemnified Person has reason to believe that the Indemnifying Person will have an indemnification obligation with respect to such Third Party Claim and shall provide the Indemnifying Person with all papers served with respect to such Third Party Claim. Such notice shall describe in reasonable detail, to the extent known, the nature of the Third Party Claim, an estimate of the amount of damages attributable to the Third Party Claim and the basis of the Indemnified Person's request for indemnification under this Agreement. The failure of the Indemnified Person to so notify the Indemnifying Person of the Third Party Claim shall not relieve the Indemnifying Person from any duty to indemnify hereunder unless and to the extent that the Indemnifying Person demonstrates that the failure of the Indemnified Person to promptly notify it of such Third Party Claim prejudiced its ability to defend such Third Party Claim; provided, that the failure of the Indemnified Person to notify the Indemnifying Person shall not relieve the Indemnifying Person from any liability which it may have to the Indemnified Person otherwise than under this Agreement. Thereafter, the Indemnified Person shall deliver to the Indemnifying Person, within five business days after the Indemnified Person's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnified Person relating to the Third Party Claim. (b) The Indemnifying Person shall have the right to participate in, or assume control of, and the Indemnifying Person's insurance carrier shall have the right to participate in, the defense of the Third Party Claim at its own expense by giving prompt written notice to the Indemnified Person, using counsel of its choice reasonably acceptable to the Indemnified Person. If it elects to assume control of the defense of 76 such Third Party Claim, the Indemnifying Person shall defend such Third Party Claim by promptly and vigorously prosecuting all appropriate proceedings to a final conclusion or settlement. After notice from the Indemnifying Person to the Indemnified Person of its election to assume the defense of such Third Party Claim, the Indemnified Person shall have the right to participate in the defense of the Third Party Claim using counsel of its choice, but the Indemnifying Person shall not be liable to the Indemnified Person hereunder for any legal or other expenses subsequently incurred by the Indemnified Person in connection with its participation in the defense thereof unless (i) the employment thereof has been specifically authorized in writing by the Indemnifying Person, (ii) the Indemnifying Person fails to assume the defense or diligently prosecute the Third Party Claim or (iii) there shall exist or develop a conflict that would ethically prohibit counsel to the Indemnifying Person from representing the Indemnified Person. If requested by the Indemnifying Person, the Indemnified Person agrees to cooperate with the Indemnifying Person and its counsel in contesting any Third Party Claim that the Indemnifying Person elects to contest, including the making of any related counterclaim against the Third Party asserting the Third Party Claim or any cross-complaint against any Person, in each case only if and to the extent that any such counterclaim or cross-complaint arises from the same actions or facts giving rise to the Third Party Claim. The Indemnifying Person shall have the right, acting in good faith and with due regard to the interests of the Indemnified Person, to control all decisions regarding the handling of the defense without the consent of the Indemnified Person, but shall not have the right to admit liability with respect to, or compromise, settle or discharge any Third Party Claim or consent to the entry of any judgment with respect to such Third Party Claim without the consent of the Indemnified Person, which consent shall not be unreasonably withheld, unless such settlement, compromise or consent includes an unconditional release of the Indemnified Person from all liability and obligations arising out of such Third Party Claim and which would not otherwise adversely affect the Indemnified Person. (c) If the Indemnifying Person fails to assume the defense of a Third Party Claim within thirty (30) days after receipt of written notice of the Third Party Claim, then the Indemnified Person shall have the right to defend the Third Party Claim by promptly and vigorously prosecuting all appropriate proceedings to a final conclusion or settlement. The Indemnifying Person shall have the right to participate in the defense of the Third Party Claim using counsel of its choice, but the Indemnified Person shall not be liable to the Indemnifying Person hereunder for any legal or other expenses incurred by the Indemnifying Person in connection with its participation in the defense thereof. If requested by the Indemnified Person, the Indemnifying Person agrees to cooperate with the Indemnified Person and its counsel in contesting any Third Party Claim that the Indemnified Person elects to contest, including the making of any related counterclaim against the Third Party asserting the Third Party Claim or any cross-complaint against any Person, in each case only if and to the extent that any such counterclaim or cross-complaint arises from the same actions or facts giving rise to the Third Party Claim. The Indemnified Person shall have the right, acting in good faith and with due regard to the interests of the Indemnifying Person, to control all decisions 77 regarding the handling of the defense without the consent of the Indemnifying Person, but shall not have the right to compromise or settle any Third Party Claim or consent to the entry of any judgment with respect to such Third Party Claim without the consent of the Indemnifying Person, which consent shall not be unreasonably withheld, unless such settlement, compromise or consent includes an unconditional release of the Indemnifying Person from all liability and obligations arising out of such Third Party Claim. 16.7. Governing Law. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER IN THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. (b) THE PARTIES TO THIS AGREEMENT AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY HERETO PURSUANT TO THIS AGREEMENT SHALL LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF NEW YORK. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THEMSELVES AND IN RESPECT OF THEIR PROPERTY WITH RESPECT TO SUCH ACTION. THE PARTIES HERETO IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. (c) THE COMPANY HEREBY AGREES THAT SERVICE UPON THEM BY REGISTERED OR CERTIFIED MAIL (RETURN RECEIPT REQUESTED) SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE HOLDERS TO BRING PROCEEDINGS AGAINST THE COMPANY IN THE COURTS OF ANY OTHER JURISDICTION. (d) BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY, THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER 78 THIS AGREEMENT, THE DOCUMENTS OR ANY DOCUMENTS RELATED HERETO. 16.8. Waivers; Amendments. (a) No failure or delay of the Holders in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holders hereunder are cumulative and not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or any other Document or consent to any departure by the Company therefrom shall in any event be effective unless the same shall be authorized as provided in paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Company and the Majority Holders; provided that no such amendment, waiver or modification shall (i) reduce the principal amount of any Note or reduce the rate of interest thereon, without the written consent of each Holder affected thereby, (ii) postpone the scheduled date of payment of the principal amount of any Note, or any interest thereon, or reduce the amount of, waive or excuse any such payment, without the written consent of each Holder affected thereby, (iii) change Section 3.3 hereof in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Holder, (iv) change any of the provisions of this Section 16.8 or the definition of "Majority Holders" or any other provision hereof specifying the number or percentage of Holders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Holder or (v) increase the obligations of any Holder or otherwise disproportionately adversely affect any of the rights of any Holder under this Agreement, without the written consent of each Holder affected thereby. 16.9. Independence of Covenants. All covenants hereunder shall be given in any jurisdiction independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. 16.10. No Fiduciary Relationship. No provision in this Agreement or in any of the other Documents and no course of dealing between the parties shall be deemed to create any fiduciary duty by the Holders to the Company other than any fiduciary duty any Holder may have as a member of the Board of the Company. 79 16.11. No Duty. All attorneys, accountants, appraisers, and other professional Persons and consultants retained by the Purchasers shall have the right to act exclusively in the interest of the Purchasers and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to the Company or any of it's shareholders or any other Person. 16.12. Construction. The Company and the Purchasers acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Documents with its legal counsel and that this Agreement and the other Documents shall be construed as if jointly drafted by the Purchasers and the Company. 16.13. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under Applicable Law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any Applicable Law in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, and such invalid, void or otherwise unenforceable provisions shall be null and void. It is the intent of the parties, however, that any invalid, void or otherwise unenforceable provisions be automatically replaced by other provisions which are as similar as possible in terms to such invalid, void or otherwise unenforceable provisions but are valid and enforceable to the fullest extent permitted by Applicable Law. 16.14. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. 16.15. Confidentiality. (a) For the purposes of this Section 16.15, "Confidential Information" means information delivered to any Holder by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement and the other Documents (including, without limitation, any information regarding the transactions contemplated hereby provided prior to the Closing Date) that is identified as confidential or should reasonably be known to be confidential, provided that such term does not include information that (i) was publicly known or otherwise known to such Holder prior to the time of such disclosure, (ii) subsequently becomes publicly known through no act or omission by any Holder or any Person acting on its behalf, or (iii) otherwise becomes known to any Holder other than through disclosure by the Company or any Subsidiary. (b) Subject to Section 16.15(e), each Holder will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Holder in good faith to protect confidential information of third parties delivered to such Holder, provided that such Holder may deliver or disclose Confidential Information to the following Persons as to whom the Holder remains responsible for their maintenance of confidentiality to the extent required herein (other than the Persons 80 described in clauses (iii), (vi) and (vii)), (i) its directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by the Notes), (ii) its financial advisors and other professional advisors who are made aware of the confidential nature of such information, (iii) any other holder of Notes, (iv) any eligible Person to which any Holder sells or offers to sell Notes or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 16.15), (v) any Person from which such Holder offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 16.15), (vi) any federal or state regulatory authority having jurisdiction over such Holder, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about its investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Holder, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Holder is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Holder may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under the Notes and this Agreement. (c) Each Holder, by its acceptance of Notes, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 16.15 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee) such Holder will enter into an agreement with the Company embodying the provisions of this Section 16.15. (d) Notwithstanding anything to the contrary herein or in any other Document and unless otherwise requested by written notice of a Holder to the Company, the Company shall have no obligation to deliver any Confidential Information to any Holder. (e) If at any time after the Closing Date: (i) any Confidential Information not otherwise disclosed to such Holder prior to the Closing Date that is material and non-public regarding the Company or any of its Subsidiaries is delivered to a Holder by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement prior to delivery of the written notice specified in Section 16.15(d); (ii) at such time (A) such Holder, together with its Affiliates, is the holder of Registrable Securities representing five one-hundredths of one percent 81 (0.05%) or more of the outstanding Common Stock of the Company; or (B) the Issue Date related to any Significant Stock Payment Notice issued to such Holder has not occurred; and (iii) such Holder delivers written notice to the Company indicating that an Applicable Period has begun (a "Disclosure Notice"), then as of the end of the Applicable Period set forth in such Disclosure Notice (or such earlier date as the Company shall have complied with clause (x) of this Section 16.15(e)(iii)) (unless such Confidential Information is no longer material, or is no longer Confidential Information): (x) the Company shall be obligated to disclose such Confidential Information in a manner compliant with Regulation FD of the Exchange Act and in sufficient detail such that such Holder shall not be restricted from trading the securities of the Company under the U.S. or any state securities laws due to its knowledge of such Confidential Information; (y) the obligations to keep such Confidential Information confidential and not trade while in possession of such information of such Holder under Section 16.15(b) shall terminate; and (z) to the extent the Company shall not have complied with clause (x) of this Section 16.15(e)(iii) prior to the end of the Applicable Period, such Holder, without liability, risk or obligation to the Company or any of its Subsidiaries, may (following consultation with the Company, to the extent possible) disclose such Confidential Information in a manner compliant with Regulation FD of the Exchange Act but only in such detail such that such Holder shall not be restricted from trading the securities of the Company under the U.S. or any state securities laws due to its knowledge of such Confidential Information. (f) For purposes of this Section 16.15, "Applicable Period" means, as of the date any Holder receives Confidential Information prior to delivery of the written notice specified in Section 16.15(d) with respect to such Confidential Information, the period specified in the table below opposite the percentage ownership of the outstanding shares of Common Stock of the Company represented by the aggregate number of Registrable Securities issued to such Holder and its Affiliates during the period of thirty (30) consecutive Trading Days immediately preceding but excluding such date plus the aggregate number of shares of Registrable Securities to be issued pursuant to any Significant Stock Payment Notice then in effect:
------------------------------------- ---------------------------------- Percentage Ownership Applicable Period ------------------------------------- ---------------------------------- ------------------------------------- ---------------------------------- More than 0.05% but less than or Twelve (12) Trading Days equal to .75% ------------------------------------- ---------------------------------- ------------------------------------- ---------------------------------- More than .75% but less than or Five (5) Trading Days equal to 1.5% ------------------------------------- ---------------------------------- 82 ------------------------------------- ---------------------------------- More than 1.5% Three (3) Trading Days ------------------------------------- ----------------------------------
The Trading Days included in any Applicable Period during which any Holder is not permitted to sell Registrable Securities shall be included in the determination of whether an "Event" has occurred as such term is defined in and to the extent provided by the Registration Rights Agreement and to the extent such Trading Days include Trading Days that would otherwise be included in any Measurement Period, such Trading Days shall be excluded for such Measurement Period as if such Trading Days were not Trading Days (it being understood that such Measurement Period shall be extended so that the Measurement Period is the full applicable period of Trading Days), and the date for any payment relating to such Measurement Period shall be extended for the number of days equal to the Trading Days excluded from the Measurement Period. 16.16. Press Release. The Company shall consult with Purchasers prior to issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby, and shall not issue any such press release or otherwise make any such public statement without the prior consent of the Purchaser and its investment advisor. The Company shall not publicly disclose the name of the Purchaser or its investment advisor, or include the name of Purchaser or its investment advisor in any filing with the Commission, any regulatory agency, or trading market, without the prior written consent of the Purchaser and its investment advisor. 16.17. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 16.18. Entire Agreement. This Agreement and the agreements and documents referred to herein contain the entire agreement of the parties and supersede any and all prior agreements among the parties with respect to the subject matter hereof (including, without limitation, any term sheets or commitment letters). Notwithstanding the foregoing, nothing herein shall prohibit the matters set forth in, and actions of the Company and its Subsidiaries permitted by (i) the Consent Relating to the Amended and Restated Credit Agreement dated as of June 20, 2003 by and among the Company, CCBM and the Senior Lender as in effect on the date hereof and (ii) the Consent dated as of June 7, 2004 by and among the Company, CCBM and the Senior Lender as in effect on the date hereof but subject to the limitations contained in Section 7.5(c). [Signature pages follow] 83 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY: CARRIZO OIL & GAS, INC. By: /s/ PAUL F. BOLING ------------------- Name: Paul F. Boling Title: Vice President and Chief Financial Officer 14701 St. Mary's Lane, Suite 800 Houston, Texas 77079 Attention: Paul F. Boling Telephone: (281) 496-1352 Facsimile: (281) 496-1251 84 PCRL INVESTMENTS L.P., as Collateral Agent and as a Purchaser By: /s/ WILLIAM E. ROSE -------------------- Name: William E. Rose Title: Authorized Signatory PCRL Investments L.P. c/o HBK Investments L.P. 350 Park Avenue 19th Floor New York, New York 10022 Attention: Ken Hirsh Facsimile: (212) 446-1941 With a copy to: HBK Investments L.P. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attention: Legal Department Facsimile: (214) 979-1207 85 ANNEX A CALCULATION OF INVESTMENT BASE JULY 1, 2004 INVESTMENT BASE ESTIMATE
Non- PDP Conforming BP PUD SI TOTAL PV10 - Oil at $[ ] Bbl 1 7,271 0 4,228 1,529 0 PV10 - Gas at $[ ] Mcf 25,010 0 14,541 5,258 0 -------------------------------------------------------------------------------- Total PV10 $ 32,281 $0 $ 18,769 $ 6,787 $0 $ 57,837 -------------------------------------------------------------------------------- Total Reserves (exc Camp Hill) 2 32,282 0 18,768 6,786 0 57,836 Current Hedges 1,508 1,508 NEW Hedges 1,514 1,514 -------------------------------------------------------------------------------- TOTAL PV10 35,304 $0 $ 18,768 $ 6,786 $0 $ 60,858 -------------------------------------------------------------------------------- Initial Risking % 100% 60% 75% 50% 75% Risked Reserves 35,304 0 14,076 3,393 0 Maximum Non-producing Cap Non-producing at 1/3 of Total --------------------------------- Cap 35,304 18,187 53,491 Actual 17,469 Adj Risked Reserves 35,304 0 14,076 3,393 0 52,773 Additiona Risking % 70% 70% 30% 30% 30% Est. Borrowing Capacity $24,713 $0 $4,223 $1,018 $0 $29,954 Net Risking 70.0% 42.0% 22.5% 15.0% 22.5%
INTERNAL SUMMARY- 7.1.04 (above) 29,954 July Amortization (est) 2,015 8.1.04 Internal Est. 27,939 INVESTMENT BASE- 8.1.04 28,000
1 The prices for Oil and Gas shall be the average price then being used in the determination of the loan value of Oil and Gas Properties by three commercial money center banks reasonably acceptable to the Company and the Majority Holders, that are actively engaged in the business of making loans and extending credit secured by Oil and Gas Properties. 2 The Oil and Gas Properties located in the Camp Hill Field in East Texas shall be excluded from the calculation of Total Reserves unless such Oil and Gas Properties have been included in the determination of the Borrowing Base. EXHIBIT A THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR APPLICABLE STATE BLUE SKY LAWS. ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE NOTE PURCHASE AGREEMENT, DATED AS OF OCTOBER [__], 2004, BY AND AMONG THE ISSUER HEREOF, THE HOLDERS AND PCRL INVESTMENTS L.P., AS COLLATERAL AGENT FOR THE HOLDERS ("PURCHASE AGREEMENT"), AND NO TRANSFER OF THESE SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. UPON THE FULFILLMENT OF CERTAIN OF SUCH CONDITIONS, THE ISSUER HEREOF HAS AGREED TO DELIVER TO THE HOLDER HEREOF A NEW CERTIFICATE, NOT BEARING THIS LEGEND, FOR THE SECURITIES REPRESENTED HEREBY REGISTERED IN THE NAME OF THE HOLDER HEREOF. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE ISSUER HEREOF. THIS NOTE IS SUBJECT TO THE PROVISIONS OF THE SUBORDINATION AGREEMENT, DATED AS OF OCTOBER [__], 2004, AMONG PCRL INVESTMENTS L.P., IN ITS CAPACITY AS PURCHASER AND AS COLLATERAL AGENT FOR THE HOLDERS PURSUANT TO THE PURCHASE AGREEMENT, HIBERNIA NATIONAL BANK, IN ITS CAPACITY AS ADMINISTRATIVE AGENT FOR THE FINANCIAL INSTITUTIONS PARTY TO THE SENIOR CREDIT AGREEMENT (AS DEFINED IN THE SUBORDINATION AGREEMENT) AND COMPANY (THE "SUBORDINATION AGREEMENT"). EACH HOLDER OF THIS PROMISSORY NOTE SHALL BE DEEMED, BY VIRTUE OF SUCH HOLDER'S ACQUISITION OF THIS PROMISSORY NOTE, TO HAVE AGREED TO PERFORM AND OBSERVE ALL OF THE TERMS, COVENANTS, AND CONDITIONS TO BE PERFORMED OR OBSERVED BY THE SUBORDINATED LENDER UNDER (AND AS DEFINED IN) THE SUBORDINATION AGREEMENT. 10% SENIOR SUBORDINATED SECURED NOTE DUE DECEMBER 15, 2008 No. [__] U.S. [________________] Dated: October [__] FOR VALUE RECEIVED, the undersigned, CARRIZO OIL & GAS, INC., a Texas corporation (the "Company"), HEREBY PROMISES TO PAY to the order of [____________________________] (the "Holder") or its successors or assigns the principal sum of [______________________________________] and [____]/100 United States Dollars ([__________________]) or such greater or lesser principal amount of this Note then outstanding, on December 15, 2008 (the "Maturity Date"), with interest (calculated on the basis of a year of 360 days, consisting of twelve, 30-day months) (a) on the unpaid principal amount hereof at the rate of 10% per annum from [the date of initial issuance], payable quarterly in arrears each March 5, June 5, September 5 and December 5 (each a "Payment Date"), commencing [March 5, 2005 or if issued on or after March 5, 2005, the first Payment Date after issuance], until the principal hereof shall have become due and payable, and (b) on the unpaid balance hereof at a rate of 12% per annum upon the occurrence and during the continuance of an Event of Default as defined in the Purchase Agreement referred to below. Except as otherwise provided in Sections 3.3, 3.5 and 3.6 of the Purchase Agreement referred to below, payments of principal of, interest on and premium, if any, with respect to this Note are to be made in lawful money of the United States of America, by wire transfer of immediately available funds, to such account as the holder of this Note shall have specified by written notice to the Company from time to time; provided that notwithstanding the foregoing, on each Payment Date occurring on or before June 5, 2007, the Company may defer fifty percent (50%) of the interest due on such Payment Date and such deferred interest shall become a part of the principal due hereunder as of the Payment Date such interest became due, shall earn interest as provided hereunder and shall be due and payable on the Maturity Date unless the maturity of the amounts due hereunder are accelerated pursuant to the terms of this Agreement. This Note is one of the Notes (herein called the "Notes") issued pursuant to the Note Purchase Agreement, dated as of October 29, 2004 (as it may be amended, supplemented or otherwise modified from time to time, being the "Purchase Agreement"), by and among the Company, the Purchasers and PCRL Investments L.P., as Collateral Agent. Each holder of' this Note will be deemed, by its acceptance hereof, (i) to have made the representations set forth in Article XIII of the Purchase Agreement; (ii) to have agreed to be bound by the subordination provisions set forth in Article XIV of the Purchase Agreement; and (iii) to have agreed to be bound by the confidentiality provisions set forth in Section 16.15 of the Purchase Agreement. This Note is a registered Note and, as provided in the Purchase Agreement, upon surrender of this Note for registration of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, and compliance with other provisions of the Purchase Agreement, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to prepayment, in whole or from time to time in part, at the times and on the terms specified in the Purchase Agreement, but not otherwise. If an Event of Default, under and as defined in the Purchase Agreement, occurs and is continuing, the entire unpaid principal of this Note, together with accrued interest thereon, may be declared or otherwise become due and payable in the manner, at the price and with the effect provided in the Purchase Agreement. Demand, presentment, protest and notice of non-payment and protest are hereby waived by the Company. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. All capitalized terms used but not defined herein have the meanings ascribed to them in the Purchase Agreement referred to above. IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly authorized officer as of the date first set forth above. CARRIZO OIL & GAS, INC. By: Name: Its: ________________________________ GUARANTY For value received, CCBM, INC., a Texas corporation, pursuant to that certain Commercial Guaranty dated October 29, 2004, hereby unconditionally guarantees to the Holder of the Note upon which this Guaranty is endorsed (a) the due and punctual payment, on a limited and subordinated basis as set forth in Article XIV of the Purchase Agreement pursuant to which such Note and this Guaranty were issued, of the principal of, premium (if any) and interest on such Note when and as the same shall become due and payable for any reason according to the terms of such Note and Article IX of the Purchase Agreement, and (b) that all other obligations of the Company under the Agreement or the Notes will be promptly paid in full or performed in accordance with the terms of the Agreement and the Notes. CCBM, INC. By: --------------------------------- Name: Title: EXHIBIT B CERTIFICATE ACCOMPANYING FINANCIAL STATEMENTS -------------------- Reference is made to that certain Note Purchase Agreement dated as of October ___, 2004 (as from time to time amended, the "Agreement"), by and among Carrizo Oil & Gas, Inc., a Texas corporation ("Company"), PCRL Investments L.P., as Collateral Agent, and certain holders party thereto ("Holders"). Terms which are defined in the Agreement are used herein with the meanings given them in the Agreement. This Certificate is furnished pursuant to Section 6.1(c) of the Agreement. Together herewith Company is furnishing to the Collateral Agent and each Holder Company's *[audited/unaudited] financial statements (the "Financial Statements") as at ____________ (the "Reporting Date"). Company hereby represents, warrants, and acknowledges to Collateral Agent and each Holder that: (i) the officer of Company signing this instrument is the duly elected, qualified and acting ____________ of Company and as such is Company's Chief Financial Officer; (ii) the Financial Statements are accurate and complete and satisfy the requirements of the Agreement; (iii) attached hereto is a schedule of calculations showing compliance as of the Reporting Date with the requirements of Section [____ or ____] of the Agreement *[non-compliance as of such date with the requirements of Section [____ or ____ of the Agreement]; (iv) on the Reporting Date Company was, and on the date hereof Company is, in full compliance with the disclosure requirements of Section [____] of the Agreement, and no Default otherwise existed on the Reporting Date or otherwise exists on the date of this instrument *[except for Default(s) under Section(s) ____________ of the Agreement, which *[is/are] more fully described on a schedule attached hereto]. *[Unless otherwise disclosed on a schedule attached hereto,] The representations and warranties of Company set forth in the Agreement and the other Documents are true and correct on and as of the date hereof (except to the extent that such representations and warranties were made as of a specific date or updated, modified or supplemented as of a subsequent date with the consent of Majority holders and the Collateral Agent), with the same effect as though such representations and warranties had been made on and as of the date hereof. The officer of Company signing this instrument hereby certifies that he/she has reviewed the Documents and the Financial Statements and has otherwise undertaken such inquiry as is in his opinion necessary to enable him to express an informed opinion with respect to the above representations, warranties and acknowledgments of Company and, to the best of his knowledge, such representations, warranties, and acknowledgments are true, correct and complete. IN WITNESS WHEREOF, this instrument is executed as of ____________, 20__. CARRIZO OIL & GAS, INC. By: ------------------------------ Name: Title: EXHIBIT C CERTIFICATE OF EFFECTIVENESS This Certificate of Effectiveness (this "Certificate") is executed as of the [____] day of October, 2004, by and between Carrizo Oil & Gas, Inc., a Texas corporation (the "Company") and PCRL Investments L.P., as the Collateral Agent ("Collateral Agent") for the Holders under and as defined in that certain Note Purchase Agreement (the "Agreement"), dated as of October [__], 2004 by and among the Company, the Collateral Agent and the Holders named therein. This Certificate is executed pursuant to Section 4.2 of the Agreement and is the "Certificate of Effectiveness" therein referenced. Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Agreement. The Company and the Collateral Agent on behalf of itself and the Holders hereby acknowledge and agree as follows: 1. Company has satisfied each condition precedent to the effectiveness of the Agreement contained in Section 4.1 of the Agreement. 2. This Agreement is effective as of the date hereof. PCRL INVESTMENTS L.P., as the Collateral Agent for the Holders By: --------------------------------- Name: Title: CARRIZO OIL & GAS, INC., as the Company By: ---------------------------------- Name: Title: EXHIBIT D FORM OF COMPANY'S COUNSEL OPINION EXHIBIT E FORM OF SUBORDINATED NOTE AGREEMENT AMENDMENT EXHIBIT F FORM OF SENIOR CREDIT AGREEMENT AMENDMENT EXHIBIT G FORM OF REGISTRATION RIGHTS AGREEMENT EX-10 3 exh102.txt EXHIBIT 10.2 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR APPLICABLE STATE BLUE SKY LAWS. ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE NOTE PURCHASE AGREEMENT, DATED AS OF OCTOBER 29, 2004, BY AND AMONG THE ISSUER HEREOF, THE HOLDERS AND PCRL INVESTMENTS L.P., AS COLLATERAL AGENT FOR THE HOLDERS ("PURCHASE AGREEMENT"), AND NO TRANSFER OF THESE SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. UPON THE FULFILLMENT OF CERTAIN OF SUCH CONDITIONS, THE ISSUER HEREOF HAS AGREED TO DELIVER TO THE HOLDER HEREOF A NEW CERTIFICATE, NOT BEARING THIS LEGEND, FOR THE SECURITIES REPRESENTED HEREBY REGISTERED IN THE NAME OF THE HOLDER HEREOF. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE ISSUER HEREOF. THIS NOTE IS SUBJECT TO THE PROVISIONS OF THE SUBORDINATION AGREEMENT, DATED AS OF OCTOBER 29, 2004, AMONG PCRL INVESTMENTS L.P., IN ITS CAPACITY AS PURCHASER AND AS COLLATERAL AGENT FOR THE HOLDERS PURSUANT TO THE PURCHASE AGREEMENT, HIBERNIA NATIONAL BANK, IN ITS CAPACITY AS ADMINISTRATIVE AGENT FOR THE FINANCIAL INSTITUTIONS PARTY TO THE SENIOR CREDIT AGREEMENT (AS DEFINED IN THE SUBORDINATION AGREEMENT) AND COMPANY (THE "SUBORDINATION AGREEMENT"). EACH HOLDER OF THIS PROMISSORY NOTE SHALL BE DEEMED, BY VIRTUE OF SUCH HOLDER'S ACQUISITION OF THIS PROMISSORY NOTE, TO HAVE AGREED TO PERFORM AND OBSERVE ALL OF THE TERMS, COVENANTS, AND CONDITIONS TO BE PERFORMED OR OBSERVED BY THE SUBORDINATED LENDER UNDER (AND AS DEFINED IN) THE SUBORDINATION AGREEMENT. 10% SENIOR SUBORDINATED SECURED NOTE DUE DECEMBER 15, 2008 No. 1 U.S. $18,000,000.00 Dated: October 29, 2004 FOR VALUE RECEIVED, the undersigned, CARRIZO OIL & GAS, INC., a Texas corporation (the "Company"), HEREBY PROMISES TO PAY to the order of PCRL INVESTMENTS L.P. (the "Holder") or its successors or assigns the principal sum of EIGHTEEN MILLION AND NO/100 UNITED STATES DOLLARS ($18,000,000.00) or such greater or lesser principal amount of this Note then outstanding, on December 15, 2008 (the "Maturity Date"), with interest (calculated on the basis of a year of 360 days, consisting of twelve, 30-day months) (a) on the unpaid principal amount hereof at the rate of 10% per annum from October 29, 2004, payable quarterly in arrears each March 5, June 5, September 5 and December 5 (each a "Payment Date"), commencing March 5, 2004, until the principal hereof 1 shall have become due and payable, and (b) on the unpaid balance hereof at a rate of 12% per annum upon the occurrence and during the continuance of an Event of Default as defined in the Purchase Agreement referred to below. Except as otherwise provided in Sections 3.3, 3.5 and 3.6 of the Purchase Agreement referred to below, payments of principal of, interest on and premium, if any, with respect to this Note are to be made in lawful money of the United States of America, by wire transfer of immediately available funds, to such account as the holder of this Note shall have specified by written notice to the Company from time to time; provided that notwithstanding the foregoing, on each Payment Date occurring on or before June 5, 2007, the Company may defer fifty percent (50%) of the interest due on such Payment Date and such deferred interest shall become a part of the principal due hereunder as of the Payment Date such interest became due, shall earn interest as provided hereunder and shall be due and payable on the Maturity Date unless the maturity of the amounts due hereunder are accelerated pursuant to the terms of this Agreement. This Note is one of the Notes (herein called the "Notes") issued pursuant to the Note Purchase Agreement, dated as of October 29, 2004 (as it may be amended, supplemented or otherwise modified from time to time, being the "Purchase Agreement"), by and among the Company, the Purchasers and PCRL Investments L.P., as Collateral Agent. Each holder of' this Note will be deemed, by its acceptance hereof, (i) to have made the representations set forth in Article XIII of the Purchase Agreement; (ii) to have agreed to be bound by the subordination provisions set forth in Article XIV of the Purchase Agreement; and (iii) to have agreed to be bound by the confidentiality provisions set forth in Section 16.15 of the Purchase Agreement. This Note is a registered Note and, as provided in the Purchase Agreement, upon surrender of this Note for registration of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, and compliance with other provisions of the Purchase Agreement, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to prepayment, in whole or from time to time in part, at the times and on the terms specified in the Purchase Agreement, but not otherwise. If an Event of Default, under and as defined in the Purchase Agreement, occurs and is continuing, the entire unpaid principal of this Note, together with accrued interest thereon, may be declared or otherwise become due and payable in the manner, at the price and with the effect provided in the Purchase Agreement. Demand, presentment, protest and notice of non-payment and protest are hereby waived by the Company. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. 2 All capitalized terms used but not defined herein have the meanings ascribed to them in the Purchase Agreement referred to above. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 3 IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly authorized officer as of the date first set forth above. CARRIZO OIL & GAS, INC. By: /s/ S. P. JOHNSON IV -------------------- Name: S. P. Johnson IV Title: President GUARANTY For value received, CCBM, INC., a Texas corporation, pursuant to that certain Commercial Guaranty dated October 29, 2004, hereby unconditionally guarantees to the Holder of the Note upon which this Guaranty is endorsed (a) the due and punctual payment, on a limited and subordinated basis as set forth in Article XIV of the Purchase Agreement pursuant to which such Note and this Guaranty were issued, of the principal of, premium (if any) and interest on such Note when and as the same shall become due and payable for any reason according to the terms of such Note and Article IX of the Purchase Agreement, and (b) that all other obligations of the Company under the Agreement or the Notes will be promptly paid in full or performed in accordance with the terms of the Agreement and the Notes. CCBM, INC. By: /s/ S. P. JOHNSON IV -------------------- Name: S. P. Johnson IV Title: President EX-10 4 exh103.txt EXHIBIT 10.3 THIS STOCK PLEDGE AND SECURITY AGREEMENT IS SUBJECT TO THAT CERTAIN SUBORDINATION AGREEMENT, DATED OCTOBER 29, 2004, BETWEEN PCRL INVESTMENTS L.P., AND OTHERS, SAME BEING MORE PARTICULARLY IDENTIFIED AND DESCRIBED AT SECTION 20 BELOW. STOCK PLEDGE AND SECURITY AGREEMENT THIS STOCK PLEDGE AND SECURITY AGREEMENT (this "Agreement") is dated and effective as of October 29, 2004 by Carrizo Oil & Gas, Inc., a Texas corporation (hereinafter referred to as "Grantor"), in favor of PCRL Investments L.P., a Texas limited partnership (the "Collateral Agent"), as Collateral Agent for itself and each of the financial institutions (the "Holders") which now or hereafter become a holder of any of the Notes pursuant to that certain Purchase Agreement (as defined below), to secure the Indebtedness (as defined below) of the Grantor. Recitals A. The Grantor, the Collateral Agent, and the Holders are the parties to that certain Purchase Agreement of even date herewith. B. Pursuant to the Purchase Agreement, the Grantor has agreed to enter into and execute this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the premises, the Grantor and the Collateral Agent (for the ratable benefit of the Holders) do hereby agree and obligate themselves as follows: Section 1. Definitions. Any capitalized term defined in the Purchase Agreement (as defined below) and not otherwise defined herein shall have the meaning given to such term in the Purchase Agreement. In addition, the following terms shall have the following meanings when used in this Agreement: AGREEMENT. The term "Agreement" refers to this Stock Pledge and Security Agreement as this agreement may be modified, restated, or amended in writing from time to time, and to any exhibits or attachments to this Agreement. CCBM. The term "CCBM" means CCBM, Inc., a Delaware corporation, and its successors and assigns. COLLATERAL. The term "Collateral" refers individually, collectively and interchangeably to the Collateral as more fully described in Section 2 (A) of this Agreement. 1 GRANTOR. The term "Grantor" means Carrizo Oil & Gas, Inc., a Texas corporation, and its successors and assigns. HOLDERS. The term "Holders" means each Purchaser listed on Schedule 2 of the Purchase Agreement (so long as it holds the Notes) and any other holder of any of the Notes. INDEBTEDNESS. The term "Indebtedness" refers individually, collectively and interchangeably to (i) the present and future indebtedness, obligations, and liabilities of Grantor arising under the Purchase Agreement, including the Notes, as well as any future renewals, modifications, or extensions to any one or more of the Notes, (ii) all present and future indebtedness, obligations and liabilities of Company or any Guarantor to the Holders, or any Affiliate of any Holders, arising under or in connection with any Hedging Agreements and (iii) all obligations of Grantor arising under the Registration Rights Agreement, including, without limitation, all obligations of Grantor to repurchase shares of Common Stock issued in satisfaction of the Indebtedness described in the foregoing clause (i). NOTES. The term "Notes" refers to the 10% Senior Subordinated Secured Notes due December 15, 2008 in the maximum aggregate initial principal amount of up to $28,000,000, issued by the Grantor to any Holder as amended, modified, restated or supplemented from time to time. PURCHASE AGREEMENT. The term "Purchase Agreement" means that certain Note Purchase Agreement of even dated herewith by and among Grantor, the Collateral Agent, and the Purchasers, as the same may hereafter be amended, modified, and/or restated from time to time and in effect. REGISTRATION RIGHTS AGREEMENT. The term "Registration Rights Agreement" means that certain Registration Rights Agreement of even dated herewith by and among Grantor and the Purchasers, as the same may hereafter be amended, modified, and/or restated from time to time and in effect. SECURITYHOLDERS AGREEMENT. The term "Securityholders Agreement" means that certain SECURITYHOLDERS AGREEMENT, dated as of June 23, 2003 by and among Pinnacle Gas Resources, Inc., a Delaware corporation, CCBM, Inc., a Delaware corporation, Rocky Mountain Gas, Inc., a Wyoming corporation , each of the CSFB Parties (as defined herein), Peter G. Schoonmaker, a natural person , Gary Uhland, a natural person, Carrizo Oil & Gas, Inc., a Texas corporation and U.S. Energy Corporation, a Delaware corporation. "CSFB Parties" means, collectively, DLJ MB Partners III GmbH & Co. KG, a limited company organized under the laws of Germany, DLJ Offshore Partners III, C.V., a partnership organized under the laws of the Netherland Antilles, DLJ Offshore Partners III1, C.V., a partnership 2 organized under the laws of the Netherland Antilles, DLJ Offshore Partners III2, C.V., a partnership organized under the laws of the Netherland Antilles, Millennium Partners II, L.P., a Delaware limited partnership, DLJ Merchant Banking Partners III, L.P., a Delaware limited partnership, and MBP III Plan Investors, L.P., a Delaware limited partnership. Section 2. Security Interest. (A) To secure the full and punctual payment and performance of all present and future Indebtedness, the Grantor hereby pledges, transfers and grants to the Collateral Agent (for the ratable benefit of the Holders) a continuing security interest in and to all of the following property of the Grantor, whether now owned or existing or hereafter acquired or arising (collectively the "Collateral"): 1000 shares of the capital stock of CCBM represented by Certificate No. 1, dated June 29, 2001, registered in the Grantor's name, together with any additional shares of stock issued by CCBM to the Grantor hereafter as stock dividends, stock splits or otherwise, or shares received as a result of any merger or consolidation of CCBM, all cash, liquidation and other dividends now or hereafter declared thereon, all stock redemption payments and all other monies due or to become due thereunder, all stock warrants, options, pre-emptive rights, rights of first refusal, and other rights to subscribe to, purchase or receive any shares of common stock or other securities now or hereafter incident thereto or declared or granted in connection therewith, and all distributions (whether made in cash, instruments, income, or other property) made or to be made in connection therewith or incident thereto, and all proceeds of all or any of the foregoing, in whatever form, and all proceeds of such proceeds. (B) The security interest is granted as security only and shall not subject the Collateral Agent and/or the Holders to, or transfer or in any way affect or modify, any obligation or liability of the Grantor with respect to any of the Collateral or any transaction in connection therewith. Section 3. Delivery of Collateral. Subject to the terms and conditions of the Subordination Agreement, the Collateral Agent, or its designated representative, hereby accepts the delivery of the Collateral on behalf the Holders and on behalf of any future transferee of the Indebtedness. Subject to the terms and conditions of the Subordination Agreement, the Grantor will execute and deliver to the Collateral Agent, or its designated representative, all assignments, endorsements, powers and other documents reasonably requested at any time and from time to time by the Collateral Agent or the Holders with respect to the Collateral and the rights and powers granted to the Collateral Agent or the Holders hereunder, and will deliver to the Collateral Agent, or its designated representative, any stock certificates representing stock dividends on, or stock splits of, any of the Collateral, together with a stock power fully executed in blank. Section 4. Representations. Subject to the terms and conditions of the Subordination Agreement, the Grantor has not performed any acts or signed any agreements which might prevent the Collateral Agent from enforcing any of the terms of this Agreement or which would limit any of them in any such enforcement. Except for the Senior Credit Documents, no security agreement or similar or equivalent document or instrument covering all or any part of the Collateral has been executed by the Grantor and remains in effect. Subject to the terms and conditions of the 3 Subordination Agreement, no Collateral is in the possession of any Person (other than the Grantor) asserting any claim thereto or security interest therein, except that the Collateral Agent or its designee may have possession of Collateral as contemplated hereby. The Grantor further represents and warrants as follows: (a) There are no outstanding options, warrants or similar rights with respect to the Collateral; (b) The Grantor has the full power and authority to grant to the Collateral Agent a valid and enforceable perfected and continuing lien on and security interest in the Collateral pursuant to this Agreement; (c) The Collateral delivered to the Collateral Agent is fully paid and non-assessable, duly and validly authorized and issued and, upon execution hereof, will be duly and validly pledged to the Collateral Agent in accordance with all provisions of applicable law; (d) The Grantor has good and marketable title to, and is the legal and registered owner of, the Collateral, free and clear of all liens, except for the security interest created pursuant to this Agreement, and except for the lien and security interest granted to the Senior Agent; (e) Upon the execution and delivery of this Agreement and the delivery to the Collateral Agent of the Collateral, the Collateral Agent (for the ratable benefit of the Holders) shall have a valid and enforceable lien on and security interest in and to the Collateral; such lien and security interest shall constitute a perfected security interest in such Collateral, and except for the lien and security interest granted to the Senior Agent, superior to the rights and equitable interests of all other persons in the Collateral; (f) The execution, delivery and performance of this Agreement by the Grantor and the granting of a valid and enforceable lien and security interest in the Collateral will not (i) violate any provision of any law, any judgment, order, rule or regulation of any court, arbitration panel, or other governmental authority, domestic or foreign, or other person, (ii) violate any provision of any indenture, agreement, mortgage, contract or other instrument to which the Grantor is a party or by which any of its properties, assets or revenues are bound, or be in conflict with, result in an acceleration of any obligation or a breach of or constitute (with notice or lapse of time or both) a default under, any such indenture, agreement, mortgage, contract or other instrument, or (iii) result in the creation or imposition of any lien on any of the properties, assets or revenues of the Grantor, except those in favor of the Collateral Agent as provided herein. 4 (g) This Agreement has been duly executed and delivered by the Grantor and constitutes the legal, valid and binding obligation of the Grantor enforceable against it in accordance with its terms; (h) No registration with or consent or approval of, or other action by, any governmental authority, domestic or foreign, or other person is required (other than such approvals or consents which may have been obtained) in connection with the execution, delivery and performance of this Agreement and the granting of the valid and enforceable lien and security interest in the Collateral in favor of the Collateral Agent; (i) The Collateral constitutes not less than 100% of the issued and outstanding Capital Stock of CCBM; (j) The Grantor represents and warrants that until the Collateral Agent's security interest in the Collateral is terminated by the Collateral Agent, that the Collateral shall at all times constitute not less than 100% of the issued and outstanding Capital Stock of CCBM. To the extent necessary, the Grantor agrees that it shall not approve or authorize any issuance of Capital Stock by CCBM if such issuance would reduce the Collateral below the 100% calculation mentioned in the preceding sentence; (k) The Grantor represents and warrants that it is a corporation duly organized under the laws of its state of incorporation. As of the date hereof, Grantor's mailing address and the location of is its principal place of business (if it only has one) or its chief executive office (if it has more than one place of business) is at 14701 St. Mary's Lane, Suite 800, Houston, TX 77079. Grantor also represents and warrants that it has not conducted business under any name except the name in which it has executed this Agreement, which is the exact name as it appears in the Grantor's organizational documents, as amended, as filed with the Grantor's jurisdiction of organization. Grantor represents and warrants that its Federal employer identification number is 76-0415919. Grantor agrees that it will notify Collateral Agent in writing should Grantor ever change its name, legal status, or change or obtain a new Federal employer identification number. Grantor further agrees to notify Collateral Agent in writing of any change in Grantor's mailing address or the location of Grantor's principal office; and (l) The Grantor represents and warrants that it shall not execute any amendment to or modification of the Securityholders Agreement without first obtaining the prior written consent of Collateral Agent. Section 5. Voting Rights. (A) So long as no Event of Default (as such term is defined in the Purchase Agreement) shall have occurred and be continuing, the Grantor shall have the right, from time to time, to exercise voting and other consensual rights to give approvals, ratifications and 5 waivers pertaining to the Collateral, and the Collateral Agent upon receiving a written request from the Grantor accompanied by a certificate stating that no Event of Default has occurred will deliver to the Grantor (or as specified in such request) such proxies, approvals, ratifications, waivers and other instruments pertaining to the Collateral as may be specified in such request and be in form and substance satisfactory to the Collateral Agent. (B) Upon the occurrence and during the continuance of an Event of Default, the Collateral Agent shall have the right, at the Collateral Agent's option, to exercise the voting and other consensual rights to give approvals, ratifications and waivers and to take any other action with respect to all the Collateral with the same force and effect as if the Collateral Agent (for the ratable benefit of the Holders) was the absolute and sole owner thereof, and the Grantor's right to exercise such voting and other consensual rights shall, at the Collateral Agent's option, cease and become vested in the Collateral Agent. Section 6. Remedies upon Default. (A) Upon the occurrence and during the continuance of an Event of Default (as such term is defined in the Purchase Agreement) the Collateral Agent may exercise all rights of a secured party under the Uniform Commercial Code and other applicable law (including the Uniform Commercial Code as in effect from time to time in any applicable jurisdiction) and, in addition, the Collateral Agent may, without being required to give any notice, except as herein provided or as may be required by mandatory provisions of law, (i) transfer the whole or any part of the Collateral into the name of Collateral Agent or its nominee(s); (ii) sell the Collateral or any part thereof at a broker's board or on a securities exchange; or (iii) sell the Collateral or any part thereof at public or private sale, for cash, upon credit or for future delivery, and at such price or prices as the Collateral Agent may deem satisfactory. The Collateral Agent may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, at any private sale). The Grantor will execute and deliver such documents and take such other action as the Collateral Agent deems necessary or advisable in order that any such sale may be made in compliance with law. Upon any such sale the Collateral Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold to it absolutely and free from any claim or right of whatsoever kind, including any equity or right of redemption of the Grantor which may be waived, and the Grantor, to the extent permitted by law, hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted. The Grantor agrees that ten (10) days' prior written notice of the time and place of any sale or other intended disposition of any of the Collateral constitutes "reasonable notification" within the meaning of Section 9-612 of the Uniform Commercial Code (or any successor provision from time to time in effect) except that shorter or no notice shall be reasonable as to any Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The notice (if any) of such sale shall (1) in case of a public sale, state the time and place fixed for such sale, and (2) in the case of a private sale, state the day after which such sale may be consummated. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Collateral Agent may fix in the notice of such sale. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Collateral Agent may determine. The Collateral Agent shall not be obligated to make any such sale 6 pursuant to any such notice. The Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Collateral Agent until the selling price is paid by the purchaser thereof, but the Collateral Agent shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. (B) The Collateral Agent, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the security interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. The Grantor does by these presents consent, agree and stipulate that upon the occurrence of an Event of Default it shall be lawful for the Collateral Agent, and the Grantor does hereby authorize the Collateral Agent, to cause all and singular the Collateral to be seized and sold under executory or ordinary process, at the Collateral Agent's sole option, without appraisement, appraisement being hereby expressly waived, as an entirety or in parcels as the Collateral Agent may determine, to the highest bidder, and otherwise exercise the rights, powers and remedies afforded herein and under applicable New York law. (C) The Grantor recognizes that the Collateral Agent may be unable to effect a public sale of all or part of the Collateral by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obligated to agree, among other things, to acquire all or a part of the Collateral for their own account, for investment, and not with a view to the distribution or resale thereof. If the Collateral Agent deems it advisable to do so for the foregoing or for other reasons, the Collateral Agent is authorized to limit the prospective bidders on or purchasers of any of the Collateral to such a restricted group of purchasers and may cause to be placed on certificates for any or all of the Collateral a legend to the effect that such security has not been registered under the Securities Act of 1933, as amended, and may not be disposed of in violation of the provision of said act, and to impose such other limitations or conditions in connection with any such sale as the Collateral Agent deems necessary or advisable in order to comply with said act or any other securities or other laws. The Grantor acknowledges and agrees that any private sale so made may be at prices and on other terms less favorable to the seller than if such Collateral were sold at public sale and that the Collateral Agent has no obligation to delay the sale of such Collateral for the period of time necessary to permit the registration of such Collateral for public sale under any securities laws. The Grantor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. If any consent, approval, or authorization of any federal, state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or other disposition of the Collateral, or any partial sale or other disposition of the Collateral, the Grantor will execute all applications and other instruments as may be required in connection with securing any such consent, approval or authorization and will otherwise use its best efforts to secure same. In addition, if the Collateral is disposed of pursuant to Rule 144, the Grantor agrees to complete and execute a Form 144, or comparable successor form, at the Collateral Agent's request; and the 7 Grantor agrees to provide any material adverse information in regard to the current and prospective operations of any corporation whose stock constitutes all or a portion of the Collateral of which the Grantor has knowledge and which has not been publicly disclosed, and the Grantor hereby acknowledges that the Grantor's failure to provide such information may result in criminal and/or civil liability. (D) In addition, to the extent permitted by applicable law, the Grantor hereby unconditionally and irrevocably authorizes and instructs CCBM, upon the occurrence and continuance of an Event of Default, to transfer record ownership of the Collateral to the Holders. Notice of said occurrence and continuance of an Event of Default to CCBM shall be the issuance of a written notification thereof by the Collateral Agent to CCBM. (E) Application of Proceeds. All payments received by the Collateral Agent and/or the Holders hereunder shall be applied by the Holders to payment of the Indebtedness in the following order unless a court of competent jurisdiction shall otherwise direct: (i) FIRST, to payment of all costs and expenses of the Collateral Agent incurred in connection with the collection and enforcement of the Indebtedness or of any security interest granted to the Collateral Agent for the benefit of the Holders in connection with any collateral securing the Indebtedness; (ii) SECOND, to payment of that portion of the Indebtedness constituting accrued and unpaid interest and fees, to the Collateral Agent and the Holders and their Affiliates in accordance with the amount of such accrued and unpaid interest and fees owing to each of them; (iii)THIRD, to payment of the principal outstanding under the Notes and any amount due by the Grantor to Holders (or any affiliate of Holders) under Hedging Agreements (to the extent constituting Indebtedness); and (iv) FOURTH, to payment of any remaining Indebtedness. (F) Notwithstanding anything herein to the contrary, the Grantor and the Collateral Agent hereby acknowledge and agree, among themselves and for the benefit of Pinnacle that (i) insofar and only insofar as the Pinnacle Shares (as defined below) are concerned, each agrees to be bound by the terms of the Securityholders Agreement, (ii) the Collateral Agent shall notify (using the names and addresses of such parties as provided in Section 9.5 of the Securityholders Agreement) Pinnacle and the nonpledging Shareholder (as defined in the Securityholders Agreement) of the date, time and location of any foreclosure upon pledged or encumbered Collateral at least 60 days prior to the foreclosure, (iii) that any notice of foreclosure shall be deemed to be an Involuntary Transfer subject to Section 5.6 of the Securityholders Agreement, and (iv) if Pinnacle elects to purchase the Pinnacle shares held by Grantor (the "Pinnacle Shares") pursuant to Section 5.6 of the Securityholders Agreement, the foreclosure shall not be held and the Pinnacle Shares shall be sold and delivered by the Collateral Agent and the Grantor to the Persons entitled to purchase such Pinnacle Shares under Section 5.6 of the Securityholders 8 Agreement in accordance with Section 5.6 of the Securityholders Agreement. If for any reason the pledged Collateral is foreclosed upon, the foreclosure shall be considered an Involuntary Transfer and the provisions of Section 5.6 of the Securityholders Agreement shall govern. Section 7. Limitation on Duty. Beyond the exercise of reasonable care in the custody thereof, the Collateral Agent shall have no duty as to any Collateral in its possession or control or in the possession or control of the Holders or bailee or any income thereon. The Collateral Agent shall be deemed to have exercised reasonable care in the custody of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property, and shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any broker or other Holder or bailee selected by the Collateral Agent in good faith. The Collateral Agent shall be deemed to have exercised reasonable care with respect to any of the Collateral in its possession if the Collateral Agent takes such action for that purpose as the Grantor shall reasonably request in writing; but no failure to comply with any such request shall, of itself, be deemed a failure to exercise reasonable care. Section 8. Appointment of Collateral Agent. At any time or times, in order to comply with any legal requirement in any jurisdiction, the Holders may appoint a bank or trust company or one or more other Persons with such power and authority as may be necessary for the effectual operation of the provisions hereof and may be specified in the instrument of appointment. Section 9. Revised Article 9. Grantor hereby confirms that by signing this Agreement, that Grantor has authenticated this Agreement, within the meaning of Revised Article 9 of the Uniform Commercial Code as now or hereafter in effect in any jurisdiction ("Revised Article 9"). This Agreement shall constitute full authorization in favor of the Collateral Agent to file appropriate financing statements, initial or "in lieu" financing statements, continuation statements, and statements of amendment, with or without Grantor's signature, as may be necessary or advisable to perfect and maintain the perfection and priority of the security interest granted to the Holders in this Agreement, including any such filings containing such information required by Part 5 of Revised Article 9 for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether Grantor is an organization, the type of organization and any organization number issued to the Grantor. Grantor shall furnish such information to Collateral Agent upon Collateral Agent's request. Any such financing statements, continuation statements or amendments requiring the signature of Grantor may be signed by Collateral Agent on Grantor's behalf. Any such filings by Collateral Agent may be by delivery of originals or photocopies, by electronic communication, or such other authorized form of communication as may be therein permitted. Section 10. Expenses. In the event that the Grantor fails to comply with any provisions of the Purchase Agreement or this Agreement, such that the value of any Collateral or the validity, perfection, rank or value of any security interest hereunder is thereby diminished or potentially diminished or put at risk, the Collateral Agent may upon reasonable prior notice, but shall not be required to, effect such compliance on behalf of the Grantor, and the Grantor shall reimburse the Collateral Agent for the costs thereof on demand. All insurance expenses and all expenses of 9 protecting, storing, appraising, preparing for sale, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any federal, state or local authority on any of the Collateral, all expenses in respect of periodic appraisals and inspections of the Collateral to the extent the same may be reasonably requested from time to time, and all expenses in respect of the sale or other disposition thereof shall be borne and paid by the Grantor, and if the Grantor fails to promptly pay any portion thereof when due, the Collateral Agent may, at its option, but shall not be required to, pay the same and charge the Grantor's account therefor, and the Grantor agrees to reimburse the Collateral Agent therefor on demand. Subject to Section 11.8 of the Purchase Agreement, all sums so paid or incurred by the Collateral Agent for any of the foregoing and any and all other sums for which the Grantor may become liable hereunder and all costs and expenses (including reasonable attorneys' fees, legal expenses and court costs) incurred by the Collateral Agent in enforcing or protecting any of the rights or remedies under this Agreement, together with interest thereon until paid at the rate equal the then highest rate of interest charged on the principal of any of the Indebtedness due under the Notes plus one percent (1%), shall be additional Indebtedness hereunder and the Grantor agrees to pay all of the foregoing sums promptly on demand. Section 11. Termination. This Agreement shall terminate upon the satisfaction of all of the following conditions: (1) upon the payment in full of the Indebtedness, (2) the termination of the Purchase Agreement (and all obligations of the Holders thereunder), (3) the termination of all obligations with respect to Hedging Agreements (to the extent constituting Indebtedness), (4) the payment of all obligations with respect to Hedging Agreements (to the extent constituting Indebtedness), and, (5) in the event any portion of the Indebtedness was paid by the issuance of shares of Common Stock to any Holder of a Note, the earlier of (a) the expiration of the Repurchase Period (as such term is defined in the Registration Rights Agreement) or (b) sale by such Holder of all such shares of Common Stock. Upon request of the Grantor, the Collateral Agent shall deliver the remaining Collateral (if any) to the Grantor unless any Senior Indebtedness (as defined in the Subordination Agreement) is outstanding. Section 12. Notices. Any notice or demand which, by provision of this Agreement, is required or permitted to be given or served to the Grantor, the Collateral Agent, the Holders, and/or CCBM shall be deemed to have been sufficiently given and served for all purposes if made in accordance with the Purchase Agreement. Section 13. Amendment. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated orally or in any manner other than by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. Section 14. Waivers. No course of dealing on the part of the Collateral Agent or the Holders, their officers, employees, consultants or agents, nor any failure or delay by the Collateral Agent or the Holders with respect to exercising any of its rights, powers or privileges under this Agreement shall operate as a waiver thereof. 10 Section 15. Cumulative Rights. The rights and remedies of the Collateral Agent and the Holders under this Agreement shall be cumulative and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. Section 16. Titles of Sections. All titles or headings to sections of this Agreement are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such sections, such other content being controlling as to the agreement between the parties hereto. SECTION 17. GOVERNING LAW. THIS AGREEMENT IS A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF NEW YORK. Section 18. Successors and Assigns. All covenants and agreements made by or on behalf of the Grantor in this Agreement shall bind Grantor's successors and assigns and shall inure to the benefit of the Collateral Agent, the Holders (and in the case of Hedging Agreements, Affiliates of any Holders) and their successors and assigns. This Agreement is for the benefit of the Collateral Agent and the Holders and for such other Person or Persons as may from time to time become or be the holders of any of the Indebtedness (including any Affiliates of any Holders with respect to obligations under Hedging Agreements), and this Agreement shall be transferable with the same force and effect and to the same extent as the Indebtedness may be transferable, it being understood that, upon the transfer or assignment by the Collateral Agent or the Holders of any of the Indebtedness, the legal holder of such Indebtedness shall have all of the rights granted to the Collateral Agent and the Holders (or Affiliates of such Holders with respect to obligations under Hedging Agreements) under this Agreement. Section 19. Counterparts. This Agreement may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof, each counterpart shall be deemed an original, but all of which when taken together shall constitute one and the same instrument. Section 20. Subordination Agreement. Reference is made herein for all purposes to that certain Subordination Agreement (the "Subordination Agreement") dated as of October 29, 2004, executed among the Collateral Agent, in its capacity as collateral agent for the financial institutions and investment funds party to the Purchase Agreement, Hibernia National Bank, in its capacity as administrative agent (the "Senior Agent") for the financial institutions party to the Senior Credit Agreement and Company. Notwithstanding anything to the contrary herein, until such time as the Senior Indebtedness (as such term is defined in the Subordination Agreement) is paid in full and the commitments evidenced by the Senior Credit Documents have been terminated, the provisions of this Stock Pledge and Security Agreement are subject to the terms, covenants, conditions and provisions of the Subordination Agreement, which, among other things, provide that the interests of the Collateral Agent in and to the Collateral shall be inferior, and subordinate to the interests of Senior Agent in accordance with the Subordination Agreement. In the event of any inconsistency between the terms and provisions of this Stock 11 Pledge and Security Agreement and the Subordination Agreement, the terms, covenants, conditions and provisions of the Subordination Agreement shall prevail until such time as the Senior Indebtedness (as such term is defined in the Subordination Agreement) is paid in full and the commitments evidenced by the Senior Credit Documents have been terminated. THIS WRITTEN STOCK PLEDGE AND SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [Remainder of page intentionally left blank.] 12 IN WITNESS WHEREOF, the Grantor and the Collateral Agent have caused this Agreement to be duly executed as of the date first above written. GRANTOR: CARRIZO OIL & GAS, INC. By: /s/ PAUL F. BOLING ------------------- Name: Paul F. Boling Title: Vice President and Chief Financial Officer COLLATERAL AGENT: PCRL INVESTMENTS L.P., Collateral Agent for the Holders By: /s/ WILLIAM E. ROSE ------------------- Name: William E. Rose Title: Authorized Signatory EX-10 5 exh104.txt EXHIBIT 10.4 THIS COMMERCIAL GUARANTY IS SUBJECT TO THAT CERTAIN SUBORDINATION AGREEMENT, DATED OCTOBER 29, 2004, BETWEEN PCRL INVESTMENTS L.P., AND OTHERS, SAME BEING MORE PARTICULARLY IDENTIFIED AND DESCRIBED AT SECTION 19 BELOW. COMMERCIAL GUARANTY COMMERCIAL GUARANTY (this "Agreement") made and entered into as of October 29, 2004, by CCBM, Inc., a Delaware corporation (hereinafter referred to as "Guarantor"), in favor of PCRL INVESTMENTS L.P., a Texas limited partnership, as collateral agent ("Collateral Agent") for itself and each of the financial institutions (the "Holders") which now or hereafter become a holder of any of the Notes (as defined below) pursuant to that certain Purchase Agreement (as defined below), guarantying the Indebtedness (as defined below) of CARRIZO OIL & GAS, INC., a Texas corporation (hereinafter referred to as "Company"). WITNESSETH: FOR VALUE RECEIVED, and in consideration of and for credit and financial accommodations extended, to be extended, or continued to or for the account of the above named Company, the undersigned Guarantor, hereby jointly and severally, agrees as follows: SECTION 1. Continuing Guaranty of Company's Indebtedness. Guarantor hereby absolutely and unconditionally agrees to, and by these presents does hereby, guarantee the prompt and punctual payment, performance and satisfaction of any and all notes, loans, extensions of credit and/or other obligations that Company may now and/or in the future owe to and/or incur in favor of any Holder under or pursuant to that certain Note Purchase Agreement dated of even date herewith, by and among Company, the Collateral Agent, and Holders, as the same may be amended and/or restated from time to time and in effect (the "Purchase Agreement"), including the indebtedness of Company evidenced by (i) those certain 10% Senior Subordinated Secured Notes dated of even date herewith, in the maximum aggregate initial principal amount of up to $28,000,000.00 (plus interest added to such principal amount in accordance with the terms of the Purchase Agreement and the Notes), executed by Company pursuant to the Purchase Agreement (the "Notes"), and any and all renewals, extensions, substitutions, modifications and replacements of said Notes from time to time and in effect, and whether such indebtedness and/or obligations are absolute or contingent, liquidated or unliquidated, due or to become due, secured or unsecured, and whether now existing or hereafter arising, of any nature or kind whatsoever, up to a maximum principal amount outstanding at any one or more times not to exceed TWENTY-EIGHT MILLION AND NO/100 DOLLARS (U.S. $28,000,000.00) plus interest added to the principal amount outstanding in accordance with the terms of the Purchase Agreement and the Notes, together with interest, costs and attorneys' fees thereon, (ii) all obligations, indebtedness, and liabilities, whether now existing or arising in the future, of the Company to the Collateral Agent, the Holders or any Affiliate (as defined in the 1 Purchase Agreement) of any Holder pursuant to a Hedging Agreement (as defined in the Purchase Agreement) or other commodity or price management transaction (including all renewals, extensions, modifications and substitutions thereof and therefore) and all cancellations, buy backs, reversals, terminations or assignments of Hedge Agreements, and (iii) all obligations, indebtedness, and liabilities, whether now existing or arising in the future, of the Company to the Holders pursuant to that certain Registration Rights Agreement, dated of even date herewith, by and among the Company and the Purchasers, including, without limitation, all obligations of Company to repurchase shares of Common Stock issued in satisfaction of the Indebtedness described in the foregoing clause (i) (with all of Company's indebtedness and/or obligations described in this Section 1 being hereinafter individually and collectively referred to under this Agreement as "Company's Indebtedness" or the "Indebtedness"). SECTION 2. Limitation on Liability. The liability of Guarantor hereunder with respect to the Indebtedness shall be limited to the maximum amount of liability that can be incurred without rendering this Commercial Guaranty, as it relates to Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, and not for any greater amount. SECTION 3. Joint and Several Liability. Guarantor further agrees that its obligations and liabilities for the prompt and punctual payment, performance and satisfaction of all of Company's Indebtedness shall be on a "joint and several" basis along with Company to the same degree and extent as if Guarantor had been and/or will be a co-borrower, co-principal obligor and/or co-maker of all of Company's Indebtedness. In the event that there is more than one guarantor under this Agreement, or in the event that there are other guarantors, endorsers or sureties of all or any portion of Company's Indebtedness, Guarantor's obligations and liabilities hereunder shall be on a "joint and several" basis along with such other guarantor or guarantors, endorsers and/or sureties. SECTION 4. Duration; Cancellation of Agreement. This Agreement and Guarantor's obligations and liabilities hereunder shall remain in full force and effect until such time as each and every Indebtedness of Company shall be paid, performed and/or satisfied in full, in principal, interest, costs and attorneys' fees, or until such time as this Agreement may be cancelled or otherwise terminated by Collateral Agent under a written cancellation instrument in favor of Guarantor (subject to the automatic reinstatement provision hereinbelow). Unless otherwise indicated under such a written cancellation instrument, Collateral Agent's agreement to terminate or otherwise cancel this Agreement shall only effect and shall be expressly limited to Guarantor's continuing obligations and liabilities to guarantee the prompt and punctual payment, performance and satisfaction of Company's Indebtedness incurred, originated and/or extended or committed to by Collateral Agent and/or Holders after the date of such a written cancellation instrument; with Guarantor remaining fully obligated and liable under this Agreement for the prompt and punctual payment, performance and satisfaction of any and all of Company's then outstanding Indebtedness together with continuing assessment of interest thereon) that was incurred, originated, extended or committed to prior to the date of such a written cancellation instrument. Nothing under this Agreement or under any other agreement or understanding by and between Guarantor, Collateral Agent, and Holders, shall in any way obligate, or be construed to obligate, Collateral Agent and/or Holders to agree to the subsequent 2 termination or cancellation of Guarantor's obligations and liabilities hereunder, it being fully understood and agreed by Guarantor that Collateral Agent and/or Holders may, within their sole and uncontrolled discretion and judgment, refuse to release Guarantor from any of its obligations and liabilities under this Agreement for any reason whatsoever as long as any of Company's Indebtedness remains unpaid and outstanding. SECTION 5. Default of Company. Upon the occurrence of an Event of Default as provided in the Purchase Agreement, Guarantor unconditionally and absolutely agrees to pay in full the then unpaid amount of all of Company's Indebtedness guaranteed hereunder, in principal interest, costs and reasonable attorneys' fees. Such payment or payments shall be made immediately following demand by Collateral Agent at its offices at 300 Crescent Court, Suite 700, Dallas, Texas 75201. Other than the demand referred to in the immediately preceding sentence, Guarantor hereby waives notice of acceptance of this Agreement and of any Indebtedness to which it applies or may apply. Guarantor further waives presentation and demand for payment of Company's Indebtedness, notice of dishonor and of nonpayment, notice of intention to accelerate, notice of acceleration, protest and notice of protest, collection or institution of any suit or other action by Collateral Agent in collection thereof, including any notice of default in payment thereof or other notice to, or demand for payment thereof on any party. SECTION 6. Guarantor's Subordination of Rights to Holders. In the event that Guarantor should for any reason (i) make any payment for and on behalf of Company under any of Company's Indebtedness, and/or (ii) make any payments to Collateral Agent and/or Holders in total or partial satisfaction of Guarantor's obligations and liabilities hereunder, Guarantor hereby agrees that any and all rights that Guarantor may have or acquire to collect or to be reimbursed by Company (or by any guarantor, endorser or surety of Company's Indebtedness), whether Guarantor's rights of collection or reimbursement arise by way of subrogation to the rights of Holders or otherwise, shall in all respects be subordinate, inferior and junior to Collateral Agent's and/or Holders' rights to collect and enforce payment, performance and satisfaction of Company's then remaining Indebtedness, until such time as all of Company's Indebtedness is fully paid and satisfied. Upon the occurrence and continuance of an Event of Default (as defined in the Purchase Agreement) any and all amounts owed by Company to Guarantor shall in all respects be subordinate, inferior and junior to Collateral Agent's and/or Holders' rights to collect and enforce payment, performance and satisfaction of Company's then remaining Indebtedness, until such time as all of Company's Indebtedness is fully paid and satisfied. Guarantor further agrees to refrain from attempting to collect and/or enforce any of Guarantor's aforesaid rights against Company (or any other guarantor, surety or endorser of Company's Indebtedness), arising by way of subrogation or otherwise, until such time as all of Company's then remaining Indebtedness in favor of Holders is fully paid and satisfied, in principal, interest, costs and attorneys' fees. SECTION 7. Additional Covenants. Guarantor further agrees that Collateral Agent and/or Holders may, at its/their sole option, at any time, and from time to time, without the consent of or notice to Guarantor, or to any other party, and without incurring any responsibility to Guarantor or to any other party (other than the Company to the extent provided 3 in the Documents as such term is defined in the Purchase Agreement), and without impairing or releasing the obligations of Guarantor under this Agreement: (A) Discharge or release any party (including, but not limited to, Company or any guarantor under this Agreement) who is or may be liable to Collateral Agent and/or Holders for any of Company's Indebtedness; (B) Sell, exchange, release, surrender, realize upon or otherwise deal with, in any manner and in any order, any collateral directly or indirectly securing repayment of any of Company's Indebtedness; (C) Change the manner, place or terms of payment, or change or extend the time of payment of or renew, as often and for such periods as Collateral Agent and/or Holders may determine, or after, any of Company's Indebtedness; (D) Settle or compromise any of Company's Indebtedness; (E) Subordinate and/or agree to subordinate the payment of all or any of Company's Indebtedness or Collateral Agent's and/or Holders' security rights in and/or to any collateral directly or indirectly securing any such indebtedness, to the payment and/or security rights of any other present and/or future creditors of Company; (F) Apply any sums paid to any of Company's Indebtedness, with such payments being applied in such priority or with such preferences as Collateral Agent and/or Holders may determine in its/their sole discretion, regardless of what Indebtedness of Company remains unpaid; (G) Take or accept any other security for any or all of Company's Indebtedness; and/or (H) Enter into, deliver, modify, amend or waive compliance with, any instrument or arrangement (other than this Agreement) evidencing, securing or otherwise affecting, all or any part of Company's Indebtedness. In addition, no course of dealing between Collateral Agent and Company, and/or the Holders and Company (or any other guarantor, surety or endorser of Company's Indebtedness), nor any failure or delay on the part of Collateral Agent and/or Holders to exercise any of its/their rights and remedies, or any other agreement or agreements by and between Collateral Agent and Company and/or Holders and Company (or any other guarantor, surety or endorser) shall have the affect of impairing or releasing Guarantor's obligations and liabilities to Collateral Agent and Holders or of waiving any of Collateral Agent's and/or Holders' rights and remedies. Any partial exercise of any rights and remedies granted to Collateral Agent and/or Holders shall furthermore not constitute a waiver of any of Collateral Agent's and/or Holders' other rights and remedies, it being Guarantor's intent and agreement that Collateral Agent's and Holders' rights and remedies shall be cumulative in nature. Guarantor further agrees that, should Company default under any of its Indebtedness, any waiver or forbearance on the part of 4 Collateral Agent and/or Holders to pursue the rights and remedies available to Collateral Agent shall be binding upon Collateral Agent and Holders only to the extent that Holders specifically agree to such waiver or forbearance in writing. A waiver or forbearance on the part of Collateral Agent and/or Holders as to one Event of Default shall not constitute a waiver of forbearance as to any other Event of Default or Default (as defined in the Purchase Agreement). SECTION 8. No Release of Guarantor. Guarantor's obligations and liabilities under this Agreement shall not be released, impaired, reduced or otherwise affected by, and shall continue in full force and effect, notwithstanding the occurrence of any event (other than performance hereunder), including without limitation any one of the following events: (A) Insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, dissolution or lack of authority (whether corporate, partnership or trust) of Company (or any person acting on Company's behalf), or any other guarantor, surety or endorser of any of Company's Indebtedness; (B) Partial payment or payments of any amount due and/or outstanding under any of Company's Indebtedness; (C) Any payment of Company or any other party to Collateral Agent is held to constitute a preferential transfer or a fraudulent conveyance under any applicable law, or for any reason, Collateral Agent and/or Holders are required to refund such payment or pay such amount to Company or to any other person; (D) Any dissolution of Company or any sale, lease or transfer of all or any part of Company's assets; (E) Any failure of Collateral Agent to notify Guarantor of the acceptance of this Agreement or of the making of loans or other extensions of credit in reliance on this Agreement or of the failure of Company to make any payment due by Company to Collateral Agent; (F) Any application of any sums paid to any of Company's Indebtedness, with such payments being applied in such priority or with such preferences as Collateral Agent and/or Holders may determine in its/their own discretion, regardless of what Indebtedness of Company remains unpaid; (G) Any taking or acceptance of any other security for any or all of Company's Indebtedness; and/or (H) Any entry into, delivery, modification, amendment or waiver of compliance with, any instrument or arrangement evidencing, securing or otherwise affecting, all or any part of Company's Indebtedness. This Agreement and Guarantor's obligations and liabilities hereunder shall continue to be effective, and/or shall automatically and retroactively be reinstated if a release or 5 discharge has occurred, as the case may be, if at any time any payment or part thereof to Collateral Agent with respect to any of Company's Indebtedness is rescinded or must otherwise be restored by Collateral Agent and/or Holders pursuant to any insolvency, bankruptcy, reorganization, receivership, or any other debt relief granted to Company or to any other party. In the event that Collateral Agent and/or Holders must rescind or restore any payment received by Collateral Agent and/or Holders in satisfaction of Company's Indebtedness, any prior release or discharge from the terms of this Agreement given to Guarantor shall be without effect, and this Agreement and Guarantor's obligations and liabilities hereunder shall automatically be renewed or reinstated and shall remain in full force and effect to the same degree and extent as if such a release or discharge was never granted. It is the intention of Collateral Agent, Holders and Guarantor that Guarantor's obligations and liabilities hereunder shall not be discharged except by Guarantor's full and complete performance of such obligations and liabilities and then only to the extent of such performance. SECTION 9. Enforcement of Guarantor's Obligations and Liabilities. Guarantor agrees that, should Collateral Agent and/or Holders deem it necessary to file an appropriate collection action to enforce Guarantor's obligations and liabilities under this Agreement, Collateral Agent may commence such a civil action against Guarantor without the necessity of first (i) attempting to collect Company's Indebtedness from Company or from any other guarantor, surety or endorser, whether through filing of suit or otherwise, (ii) attempting to exercise against any collateral directly or indirectly securing repayment of any of Company's Indebtedness, whether through the filing of an appropriate foreclosure action or otherwise, or (iii) including Company or any other guarantor, surety or endorser of any of Company's Indebtedness as an additional party defendant in such a collection action against Guarantor. In the event that Collateral Agent should ever deem it necessary to refer this Agreement to an attorney-at-law for the purpose of enforcing Guarantor obligations and liabilities hereunder, or of protecting or preserving Collateral Agent's and/or Holders' rights hereunder, Guarantor (on a joint and several basis) agrees to reimburse Collateral Agent and/or Holders for the reasonable fees of such an attorney. Guarantor additionally agrees that Collateral Agent and/or Holders shall not be liable for failure to use diligence in the collection of any of Company's Indebtedness or any collateral security therefor, or in creating or preserving the liability of any person liable on any such Indebtedness, or in creating, perfecting or preserving any security for any such Indebtedness. SECTION 10. Additional Documents. Upon the reasonable request of Collateral Agent, Guarantor will, at any time, and from time to time, duly execute and deliver to Holder any and all such further instruments and documents, and supply such additional information as may be reasonably necessary or advisable in the opinion of Collateral Agent, to obtain the full benefits of this Agreement. SECTION 11. Transfer of Indebtedness. This agreement is for the benefit of Holders and for such other person or persons as may from time to time become or be the holders of any of Company's Indebtedness hereby guaranteed and this Agreement shall be transferable and negotiable, with the same force and effect and to the same extent as Company's Indebtedness may be transferable under Article 15 of the Purchase Agreement, it being understood that, upon the transfer or assignment by Holders of any of Company's Indebtedness 6 hereby guaranteed, the legal holder or holders of such Indebtedness shall have all the rights granted to Holders under this Agreement. Guarantor hereby recognizes and agrees that Holders may, from time to time, one or more times, transfer all or any portion of Company's Indebtedness to one or more third parties. Such transfers may include, but are not limited to, sales of a participation or syndication interest in such Indebtedness in favor of one or more third parties in accordance with Article 15 of the Purchase Agreement. Guarantor specifically agrees and consents to all such transfers and assignments in accordance with Article 15 of the Purchase Agreement and Guarantor further waives any subsequent notice of and right to consent to any such transfers and assignments as may be provided under applicable New York law. Guarantor additionally agrees that the purchaser of a syndication interest in Company's Indebtedness will be considered as the absolute owner of an interest in, or a percentage interest of, such Indebtedness and that such a purchaser shall have all of the rights granted to the purchaser under any agreement governing the sale of such a syndication interest and all rights of Holders from whom the syndication interest was purchased under the Purchase Agreement. Guarantor further waives any right of offset that Guarantor may have against Holders and/or any purchaser of such a participation or syndication interest in Company's Indebtedness and Guarantor unconditionally agrees that either Holders or such a purchaser may enforce Guarantor's obligations and liabilities under this Agreement, irrespective of the failure or insolvency of Holders or any such purchaser. Guarantor further agrees that, upon any transfer, in accordance with Article 15 of the Purchase Agreement, of all or any portion of Company's Indebtedness, Holders may transfer and deliver any and all collateral securing repayment of such Indebtedness including, but not limited to, any collateral provided by Guarantor) to the transferee of such Indebtedness and such collateral (again, including but not limited to Guarantor's collateral) shall secure any and all of Company's Indebtedness in favor of such transferee. Guarantor additionally agrees that, after any such transfer or assignment has taken place in accordance with Article 15 of the Purchase Agreement, Holders shall be fully discharged from any and all liability and responsibility to Company (and Guarantor) with respect to such collateral, and the transferee thereafter shall be vested with all the powers and rights with respect to such collateral. SECTION 12. Right of Offset. As collateral security for the repayment of Guarantor's obligations and liabilities under this Agreement, Guarantor hereby grants Holders, as well as their successors and assigns, the right to apply, upon the occurrence of an Event of Default under the Purchase Agreement, any and all funds that Guarantor may then have on deposit with or in the possession or control of any Holder and its successors or assigns (with the exception of funds deposited in any IRA, pension or other tax-deferred deposit accounts), towards repayment of any of Company's Indebtedness subject to this Agreement. SECTION 13. Construction. The provisions of this Agreement shall be in addition to and cumulative of, and not in substitution, novation or discharge of, any and all prior or contemporaneous guaranty or other agreements by Guarantor, in favor of Collateral Agent or assigned to Collateral Agent by others, all of which shall be construed as complementing each other. Nothing herein contained shall prevent Collateral Agent from enforcing any and all such guaranties or agreements in accordance with their respective terms. 7 SECTION 14. Amendment. No amendment, modification, consent or waiver of any provision of this Agreement, and no consent to any departure by Guarantor therefrom, shall be effective unless the same shall be in writing signed by the Collateral Agent, and then shall be effective only to the specific instance and for the specific purpose for which given. SECTION 15. Successors and Assigns Bound. Guarantor's obligations and liabilities under this Agreement shall be binding upon Guarantor's successors and assigns. The rights and remedies granted to Collateral Agent and Holders under this Agreement shall also inure to the benefit of Collateral Agent's and Holders' (and any Holder's Affiliate in the case of any obligations of Company and/or Guarantor under any Hedging Agreement) successors and assigns, as well as to any and all subsequent holder or holders of any of Company's Indebtedness subject to this Agreement. SECTION 16. Caption Heading. Caption headings of the section of this Agreement are for convenience purposes only and are not to be used to interpret or to define their provisions. In this Agreement, whenever the context so requires, the singular includes the plural and the plural also includes the singular. SECTION 17. Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK. SECTION 18. Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof; such provision shall be fully severable, this Agreement shall be construed and enforceable as if the illegal, invalid or unenforceable provision had never comprised a part of it, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement, a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and legal, valid and enforceable. SECTION 19. Subordination Agreement. Reference is made herein for all purposes to that certain Subordination Agreement (the "Subordination Agreement") dated as of October 29, 2004, executed among the Collateral Agent, in its capacity as collateral agent for the financial institutions and investment funds party to the Purchase Agreement, Hibernia National Bank, in its capacity as agent (the "Senior Agent") for the financial institutions party to the Senior Credit Agreement and Company. Notwithstanding anything to the contrary herein, until such time as the Senior Indebtedness (as such term is defined in the Subordination Agreement) is paid in full and the commitments evidenced by the Senior Credit Documents have been terminated, the provisions of this Guaranty are subject to the terms, covenants, conditions and provisions of the Subordination Agreement, which, among other things, provide that the interests of the Collateral Agent in and to the Collateral shall be inferior, and subordinate to the interests of Senior Agent in accordance with the Subordination Agreement. In the event of any inconsistency between the terms and provisions of this Guaranty and the Subordination Agreement, the terms, covenants, conditions and provisions of the Subordination Agreement 8 shall prevail until such time as the Senior Indebtedness (as such term is defined in the Subordination Agreement) is paid in full and the commitments evidenced by the Senior Credit Documents have been terminated. THIS WRITTEN COMMERCIAL GUARANTY AND THE OTHER DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [Remainder of page intentionally left blank.] 9 IN WITNESS WHEREOF, Guarantor has executed this Agreement in favor of the Collateral Agent for the ratable benefit of the Holders on the day, month, and year first written above. GUARANTOR: CCBM, INC., a Delaware corporation By: /s/ PAUL F. BOLING ------------------------- Name: Paul F. Boling Title: Vice President and Chief Financial Officer 10 EX-10 6 exh105.txt EXHIBIT 10.5 EXECUTION VERSION ----------------- REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of October 29, 2004, among Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), and the investors signatory hereto (each such investor is a "Purchaser" and all such investors are, collectively, the "Purchasers"). WHEREAS, the parties have agreed to enter into this Agreement in connection with, and as a condition to the Closing under, the Note Purchase Agreement, dated as of the date hereof, among the Company the Purchasers and PCRL Investments L.P., as Collateral Agent (the "Purchase Agreement"); NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and the Purchasers agree as follows: 1. Definitions. In addition to the terms defined elsewhere in this Agreement, (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Purchase Agreement, and (b) the following terms have the meanings indicated: "Blackout Restriction Period" means, a period beginning on the date on which the aggregate number of Registrable Securities issued to any holder of the Notes during the period of six (6) consecutive calendar months immediately preceding such date and then held on such date exceeds three-quarters of one percent (.75%) of the Common Stock issued and outstanding on such date and ending on the date that such holder holds less than sixty-five one hundredths of one percent (.65%) of the Common Stock issued and outstanding. "Current Value" means, with respect to the calculation of the liquidated damages due any Holder pursuant to Section 2(b) hereof, the sum of the number of shares of Registrable Securities then owned by such Holder multiplied by the Current VWAP Price. "Current VWAP Price" means, on any date of determination, that price which shall be computed as the arithmetic average of the Volume Weighted Average Price of the Common Stock on each of the ten (10) consecutive Trading Days immediately preceding (but not including), the date of determination. "Damage Notice" means, with respect to any Holder, a written statement of all damages, costs and expenses incurred by such Holder as a result of the failure of the Company to comply with its obligations under Sections 7(a) or 7(b) hereof. "Effective Date" means that date the initial Registration Statement becomes effective. 1 "Holder" means any holder, from time to time, of Registrable Securities and, so long as any Notes are outstanding, any other holder of a Note. "Proceeding" means, with respect to any Person (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or similar case or proceeding in connection therewith, relative to such Person, or to its assets, or (ii) any proceeding for liquidation, dissolution or other winding up of such Person, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of such Person. "Prospectus" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Qualified Registrable Securities" means any Registrable Securities held by any Holder at any time such Holder is not permitted to sell Registrable Securities under a Registration Statement. "Registrable Securities" means any Common Stock issued or issuable pursuant to the Documents, together with any other securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing, provided that the same have not had their restrictive legends removed pursuant to Rule 144(k); provided, however, that such securities shall be treated as Registrable Securities only if and only for so long as they are held by a Holder or a permitted transferee pursuant to the terms hereof, and (i) they have not been disposed of pursuant to a registration statement declared effective by the Commission, so that all transfer restrictions and restrictive legends with respect to compliance with the Securities Act are removed upon the consummation of such transfer, or (ii) they have not been transferred in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act, so that all transfer restrictions and restrictive legends with respect to compliance with the Securities Act are removed upon the consummation of such transfer, or (iii) the registration rights as to the Holder of such Registrable Securities have not terminated pursuant to Section 9(m) unless the failure of the Company to comply with its obligations under Sections 7(a) or 7(b) of this Agreement is the reason (directly or indirectly) such registration rights have not terminated in which case such securities shall continue to be Registrable Securities. "Registration Statement" means a registration statement filed hereunder, including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits 2 thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Repurchasable Registrable Securities" means, with respect to any Holder on the date of any Repurchase Notice delivered by such Holder, the Registrable Securities then held by such Holder that were issued by the Company to such Holder within the Repurchase Period. "Repurchase Period" means, with respect to any Repurchase Notice, the period of six (6) consecutive calendar months ending on the Trading Day immediately preceding the date of such Repurchase Notice; provided that if during such six (6) month period the Holder delivering such Repurchase Notice was not permitted to sell Registrable Securities under a Registration Statement for any reason (other than such Holder's failure to perform its obligations hereunder), or the Common Stock was not listed or quoted or was suspended from trading, or the Company failed for any reason to timely deliver any certificate evidencing any shares of Common Stock as required by the Purchase Agreement or failed to comply with Section 7 or 8 hereof, the commencement date of such six (6) month period shall be extended to an earlier date by a number of days equal to the aggregate number of days that any one or more of such events or circumstances existed, without duplication. "Required Holders" means Holders holding a majority of the Registrable Securities, the Purchaser (so long as the Purchaser and its Affiliates hold at least ten percent (10%) of the Registrable Securities then outstanding and/or Notes representing not less than ten percent (10%) of the outstanding principal balance of the Notes then outstanding) and at any time any Notes are outstanding, the Majority Holders. "Rule 144" "Rule 144A" "Rule 144(k)" "Rule 415," "Rule 424" and "Rule 461" means Rule 144, Rule 144A, Rule 144(k), Rule 415, Rule 424 and Rule 461, respectively, promulgated by the Commission pursuant to the Securities Act, as such Rules may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Special Counsel" means one special counsel to the Holders. Unless the Holders notify the Company otherwise, the Special Counsel will be Gardere Wynne Sewell LLP. 2. Shelf Registration (a) As a condition to the delivery of any Stock Payment Notice and the issuance of shares of Common Stock to any holder of a Note in satisfaction of all or any portion of the Indebtedness, the Company shall prepare and file with the Commission a "Shelf" Registration Statement covering the resale of all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith as the Holders may consent, which consent may not be unreasonably withheld) and shall contain (except if otherwise directed by the Holders) the "Plan of Distribution" attached hereto as Annex 3 A with such changes therein as shall be required by the Commission or as is necessary to comply with any law, rule or regulation or, with the prior written consent of the Required Holders (which may not be unreasonably withheld), as is necessary to take into account the plan of distribution of the Company or other selling stockholders. The Company shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until the earliest of (i) the second anniversary of the last issuance of Registrable Securities to any holder of a Note; (ii) when all Registrable Securities covered by such Registration Statement have been sold; and (iii) the registration rights of all Holders of such Registrable Securities have expired pursuant to Section 9(m) hereof (the "Effectiveness Period"). The Company shall notify each Holder in writing promptly (and in any event within one business day) after receiving notification from the Commission that a Registration Statement has been declared effective. (b) At such time as Registrable Securities are held by any Holder, upon the occurrence of any Event (as defined below) at any time after the Effective Date and on every monthly anniversary of such Event until the applicable Event is cured, as partial relief for the damages suffered therefrom by such Holder (which remedy shall not be exclusive of any other remedies available at law or in equity), the Company shall pay to such Holder an amount in cash, as damages and not as a penalty, equal to 1% of the Current Value of the Registrable Securities held by such Holder calculated as of the date of such Event. The damages payable pursuant to the terms hereof shall apply on a pro-rata basis for any portion of a month prior to the cure of an Event. For such purposes, each of the following shall constitute an event requiring a damages payment under this Agreement (an "Event"): (i) such Holder is not permitted to sell Registrable Securities under a Registration Statement for any reason for (A) if during a Blackout Restriction Period, twenty (20) or more Trading Days (whether or not consecutive) per year or (B) at any other time, thirty (30) or more Trading Days (whether or not consecutive) per year, in each case with respect to the foregoing clauses (A) and (B) excluding any period in which such Holder is not permitted to sell Registrable Securities solely (but directly or indirectly) as a result of (x) such Holder's failure to perform its obligations under Section 3(a) or 9(e) hereof or (y) the delivery by such Holder to the Company pursuant to Section 6(b) hereof of notice of the occurrence of an event or circumstance relating to such Holder requiring the filing of an amendment or supplement to a Registration Statement so long as the Company uses its best efforts to file and/or cause such amendment or supplement to be declared effective (but including, without limitation, periods in which such Holder may not make sales in accordance with the provisions of Section 6(a) or Section 6(c) hereof or as a result of the receipt of Confidential Information as contemplated by Section 16.15 of the Purchase Agreement); provided that such an Event shall be deemed "cured" when and during such period such Holder is able to sell Registrable Securities under such Registration Statement; (ii) at any time Registrable Securities are outstanding, the Common Stock is not listed or quoted, or is suspended from trading, on an Eligible Market for a period of at least five (5) consecutive Trading Days provided that such an Event shall be deemed "cured" when and during such period such Common Stock is so listed and quoted and not suspended from trading; or 4 (iii) the Company fails for any reason to deliver a certificate evidencing any shares of Common Stock issued to such Holder or to provide required letters of instruction within three (3) Trading Days after delivery of such certificate and/or required letters of instruction is required pursuant to any Document (other than a Section 7 Event described in Section 2(d) hereof); provided that such an Event shall be deemed "cured" upon the delivery of such certificate (it being understood no such delivery shall be required until the Company has received any opinion, payment of transfer taxes, if any, or any other documentation contemplated by the Documents). (c) If at any time Registrable Securities are outstanding (i) any Event (other than an Event described in Section 2(b)(i) at any time during a Blackout Restriction Period) occurs and remains uncured for 30 days or (ii) any Event described in Section 2(b)(i) above occurs during a Blackout Restriction Period and remains uncured for twenty (20) days, then at any time or times thereafter any Holder may deliver to the Company a notice (a "Repurchase Notice") requiring the Company to repurchase all or any portion of the Repurchasable Registrable Securities then specified by such Holder in such Repurchase Notice at a price per share equal to (x) the Interest Payment Price, Voluntary Redemption Price or the Maturity Date Price, as the case may be, at which such Repurchasable Registered Securities were issued to such Holder divided by (y) 0.90 (the "Repurchase Price"). If a Holder delivers a Repurchase Notice pursuant to this Section, the Company shall pay the aggregate Repurchase Price (together with any other payments, expenses and liquidated damages then due and payable pursuant to the this Agreement, but net of any liquidated damages previously paid to such Holder) to such Holder in cash no later than the tenth (10th) day following the date of delivery of the Repurchase Notice (the "Repurchase Date"), and upon receipt thereof such Holder shall deliver certificates evidencing the Registrable Securities so repurchased to the Company (to the extent such certificates have been delivered to such Holder). Notwithstanding the repurchase rights granted to each Holder in this Section 2(c), the Company shall not be required to repurchase shares of Common Stock on the Repurchase Date to the extent that (i) after giving effect to the repurchase, the Company would be insolvent, (ii) the net assets of the Company are less than the amount of the proposed repurchase or (iii) funds are not otherwise legally available therefor under the Texas Business Corporation Act, as from time to time amended (together with any successor law, the "TBCA"). In the event that any of the circumstances described in the foregoing clauses (i), (ii) or (iii) prevents the purchase of such shares of Common Stock, the Company shall repurchase that portion of such shares of Common Stock of each Holder that may be repurchased by the Company without causing any such circumstances to occur ratably on the Repurchase Date based on the aggregate repurchase amount payable with respect to such shares of Common Stock then to be repurchased. Notwithstanding the foregoing, in the event the Company is the debtor in any Proceeding, each Holder may file a proof of claim in such Proceeding and seek and obtain a recovery on such claim in accordance with Applicable Law regardless of whether any of the circumstances described in the foregoing clauses (i), (ii) or (iii) would prevent the repurchase by the Company of any shares of Common Stock the Company is otherwise obligated to repurchase under this Section 2(c). 5 If a Repurchase Notice is given and the Company is unable to repurchase all of the Common Stock on the Repurchase Date that are the subject of such notice because (i) after giving effect to the repurchase the Company would be insolvent, (ii) the net assets of the Company are less than the amount of the proposed redemption or (iii) funds are not legally available therefor under the TBCA, the obligation of the Company to repurchase any shares of Common Stock on the Repurchase Date shall continue until the first date on which Company is not prohibited to repurchase such Common Stock in accordance with this Section at which date the Company shall be obligated to immediately repurchase such shares of Common Stock in accordance with the provisions hereof. (d) If at any time Registrable Securities are outstanding and the Company fails to comply with Section 7(a) or 7(b) hereof with respect to any Holder, unless the Company is unable to comply with such Section solely (but directly or indirectly) as a result of such Holder's failure to perform its obligations under such Section (a "Section 7 Event"), the Company shall pay to such Holder the actual damages suffered by such Holder as a result of such Section 7 Event. Such payment shall be made by the Company to such Holder within 10 days of delivery of a Damage Notice by a Holder. (e) If at any time Registrable Securities are outstanding and the Company fails to timely file its periodic filings with the Commission (including any safe harbors provided by Form 8-K and grace periods pursuant to Rule 12b-25) pursuant to Section 8 hereof and such failure remains uncured for 10 Trading Days (a "Periodic Filing Event"), then the Company shall be obligated, upon receipt of a Repurchase Notice from any Holder, to repurchase all of the Repurchasable Registrable Securities issued to such Holder by the Company during the ninety days immediately preceding the date of the Periodic Filing Event that is specified in a Repurchase Notice at a price per share equal to the Repurchase Price. Such amount shall be paid to such Holder no later than the Repurchase Date. Additionally, if the Company's failure to comply with Section 8 hereof continues for an additional 10 Trading Days beyond the Periodic Filing Event specified in such Repurchase Notice, then the Company shall be obligated to repurchase all Repurchasable Registrable Securities issued to such Holder by the Company in the time period of the ninety-one to one hundred eighty days immediately preceding the date of such Periodic Filing Event at a price per share equal to the Repurchase Price. Such amount shall be paid no later than ten (10) days after the end of such additional 10 Trading Day period. (f) Payments made to any Holder pursuant to Sections 2(d) and 2(e) hereof shall be such Holder's exclusive remedy for the damages resulting from a Section 7 Event or a Periodic Filing Event. To the extent that a Section 7 Event or a Periodic Filing Event relates to only a portion of the Registrable Securities, the obligation to pay damages and the repurchase obligation provided hereunder with respect to a Section 7 Event or a Periodic Filing Event shall be payable only with respect to such portion of such Registrable Securities. 3. Registration Procedures. In connection with the Company's registration obligations hereunder, the Company shall: (a) Not less than three (3) Trading Days (or one (1) Trading Day prior to any filing of a supplement or amendment of a Registration Statement or Prospectus) prior to the initial filing of each Registration Statement or any related Prospectus (excluding any document 6 that would be incorporated or deemed to be incorporated therein by reference), the Company shall (i) furnish to the Holders and their Special Counsel copies of all such documents proposed to be filed, (other than those incorporated or deemed to be incorporated by reference) which documents will be subject to the review of such Holders and their Special Counsel, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. Except as otherwise required by law, the Company shall not file a Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Required Holders and their Special Counsel shall reasonably object provided the Company is notified of such objection within a reasonable time taking into account the business and legal exigencies but in any event not less than the second Trading Day (or one (1) Trading Day prior to any filing of a supplement or amendment of a Registration Statement or Prospectus) after the Holders have been so furnished copies of such document. The parties agree that if the Holders or the Special Counsel shall fail to provide comments to the Company or their counsel to a proposed Registration Statement or Prospectus within a reasonable time taking into account the business and legal exigencies, but in any event not less than the second Trading Day (or one (1) Trading Day prior to any filing of a supplement or amendment of a Registration Statement or Prospectus) following the date on which they received the same for review, then the Company may proceed with the registration process without such comments. The time periods under this Section 3(a) applicable to any period prior to the Effective Date shall be shortened to the extent that failure by the Company to file a document with the Commission could cause the Company to be in violation of any law, rule, regulation or contract and such restrictions shall not apply if the amendment or supplement relates solely to an underwritten offering by another selling shareholder of the Company or by the Company for its own account in which the Holders are not participating. No delay in filing of documents beyond the periods specified in this Section 3(a) that are solely attributable to the review by a Holder or Special Counsel for the periods specified herein shall contribute to determining whether an Event has occurred nor counted in determining the length of a time period with respect to an Event. (b) (i) To the extent Registrable Securities are outstanding and subject to Section 6(c), prepare and file with the Commission such amendments, including post-effective amendments, to any Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement effective to the extent required hereby as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) use reasonable best efforts to respond as promptly as practicable but in any event within twenty (20) calendar days of receipt, to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to the Registration Statement except those relating to an underwritten offering by the Company for its own account or other selling shareholders of the Company in which the Holders are not participating; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the 7 Effectiveness Period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) To the extent any Registrable Securities are then outstanding and subject to Section 6(c), notify the Holders of Registrable Securities to be sold and their Special Counsel as promptly as reasonably possible, and (if requested by any such Person) confirm such notice in writing no later than one Trading Day thereafter, of any of the following events: (i) the Commission notifies the Company whether there will be a "review" of any Registration Statement; (ii) the Commission comments in writing on any Registration Statement (in which case the Company shall deliver to each Holder and the Special Counsel a copy of such comments and of all written responses thereto except those relating to an underwritten offering by the Company for its own account or other selling shareholders of the Company in which the Holders are not participating); (iii) any Registration Statement or any post-effective amendment is declared effective; (iv) the Commission or any other Federal or state governmental authority requests any amendment or supplement to a Registration Statement or Prospectus or requests additional information related thereto; (v) the Commission issues any stop order suspending the effectiveness of any Registration Statement or initiates any Proceedings for that purpose; (vi) the Company receives notice of any suspension of the qualification or exemption from qualification of any Registrable Securities for sale in any jurisdiction, or the initiation or threat of any Action for such purpose; or (vii) the financial statements included in any Registration Statement become ineligible for inclusion therein or any statement made in any Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference is untrue in any material respect or any revision to a Registration Statement, Prospectus or other document is required so that it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) To the extent any Registrable Securities are then outstanding and subject to Section 6(c), use its best efforts to avoid the issuance of or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of any Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) Furnish to each Holder and their Special Counsel, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (f) Promptly deliver to each Holder and their Special Counsel, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request. Subject to the provisions hereof, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering 8 and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto to the extent permitted by federal and state securities laws and regulations. (g) Use its best efforts to list the Registrable Securities covered by such Registration Statement on an Eligible Market. (h) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder reasonably requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably requested in writing that are necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement provided, that the Company shall not be required to qualify generally to do business or qualify as a dealer or consent to service of process in any jurisdiction where it is not now so qualified or has not so consented or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (i) Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Documents and applicable law, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request. (j) Subject to Section 6(c), upon the occurrence of any event described in Section 3(c)(vii) or receipt of information from a Holder pursuant to the second sentence of Section 6(b), use its best efforts to, as promptly as reasonably practicable, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (k) Cooperate with any reasonable due diligence investigation undertaken by the Holders in connection with the sale of Registrable Securities, including without limitation by making available any reasonably requested documents and information. (l) Notwithstanding anything to the contrary contained herein, the Registration Statement may not be used by the Holders for any underwritten offering, nor may such Holders participate in any underwritten offering by the Company or any other selling shareholders under a Registration Statement. (m) Comply with all applicable rules and regulations of the Commission. 4. Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or 9 not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (a) all registration and filing fees (including, without limitation, fees and expenses (i) with respect to filings required to be made with any Eligible Market, and (ii) in compliance with applicable state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as requested by the Holders), (b) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses reasonably requested by the Holders), (c) messenger, telephone and delivery expenses, (d) fees and disbursements of counsel for the Company and one Special Counsel for the Holders and (e) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement; provided, that the Company shall have no obligation or liability for any underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered for resale by the Holders and, except as set forth above, any fees and disbursements of counsel for any Holder. 5. Indemnification (a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, partners, members, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, partners, members, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and reasonable attorneys' fees and disbursements) and expenses, including expenses of investigation (collectively, "Losses"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder or the Special Counsel expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder or the Special Counsel expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto ("Holder Information") or (ii) in the case of an occurrence of an event of the type specified in Section 3(c)(v)-(vii), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(b). The Company shall notify the Holders promptly of the 10 institution, threat or assertion of any Action of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising solely out of any untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. If any action shall be brought or asserted against any Person entitled to indemnity hereunder (an "Indemnified Party"), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the "Indemnifying Party") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all reasonable fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (i) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (ii) the Indemnifying Party shall have failed promptly to assume the defense of such proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such proceeding; or (iii) the named parties to any such 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 a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying 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 thereof and such counsel shall be at the expense of the Indemnifying Party) provided that the Indemnifying Party shall have no liability for more than one such separate counsel for all Indemnified Parties and local counsel. The Indemnifying Party shall not be liable for any settlement of any such action effected without its written consent, which consent shall not be unreasonably withheld. No 11 Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending action in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading 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; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) Contribution. If the indemnification under Section 5(a) or 5(b) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party (by reason of public policy or otherwise) with respect to any Losses, then each 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, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on one hand and the Indemnified Party on the other in connection with the actions, statements or omissions that resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party on one hand and such Indemnified Party on the other shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of material fact or omission or alleged omission to state a material fact, relates to information supplied by such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by an Indemnified Party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any attorneys' or other fees or expenses reasonably incurred by such Indemnified Party in connection with any action to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section 5 was available to such party in accordance with its terms. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the action exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged 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. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 12 (e) THE PARTIES HERETO INTEND THAT THE INDEMNITIES SET FORTH IN SECTION 5 BE CONSTRUED AND APPLIED AS WRITTEN ABOVE NOTWITHSTANDING ANY RULE OF CONSTRUCTION TO THE CONTRARY. WITHOUT LIMITING THE FOREGOING, THE INDEMNITIES SHALL TO THE FULLEST EXTENT ALLOWED BY LAW, APPLY NOTWITHSTANDING ANY STATE'S "EXPRESS NEGLIGENCE RULE" OR SIMILAR RULE THAT WOULD DENY COVERAGE BASED ON AN INDEMNIFIED PERSON'S SOLE, CONCURRENT OR CONTRIBUTORY ACTIVE OR PASSIVE NEGLIGENCE OR STRICT LIABILITY. IT IS THE INTENT OF THE PARTIES THAT, TO THE EXTENT PROVIDED IN SECTION 5, THE INDEMNITIES SET FORTH HEREIN SHALL, TO THE FULLEST EXTENT ALLOWED BY LAW, APPLY TO AN INDEMNIFIED PERSON'S SOLE, CONCURRENT OR CONTRIBUTORY ACTIVE OR PASSIVE NEGLIGENCE OR STRICT LIABILITY. THE PARTIES AGREE THAT THIS PROVISION IS "CONSPICUOUS" FOR PURPOSES OF ALL STATE LAWS. 6. Holder Covenants (a) Each Holder agrees that, upon receipt of any written notice from the Company of (i) the happening of any event requiring the preparation of a supplement or amendment to a prospectus relating to Registrable Securities so that, as thereafter delivered to such Holder, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) the occurrence of an event of the kind described in Sections 3(c)(v), 3(c)(vi) or 3(c)(vii), each Holder will forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statements until its receipt of copies of the supplemented or amended prospectus from the Company as contemplated by Section 3(j) or until it is advised in writing (the "Advice") by the Company that use of the applicable Prospectus may be resumed and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. If so directed by the Company, each Holder shall deliver to the Company all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities that is current at the time of receipt of such notice. (b) The Holder(s) included in any registration shall furnish to the Company such information regarding such Holder(s), the Registrable Securities owned by such Holders and the distribution proposed by such Holder(s), as the Company may reasonably request in writing and as shall be reasonably required under applicable law in connection with any registration, qualification or compliance referred to in this Agreement. Each Holder agrees to notify the Company of the occurrence of any event relating to such Holder which requires the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of Registrable Securities the Holder Information with respect to such Holder in such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading relating to such Holder, and such Holder shall promptly deliver to the Company information necessary to enable the Company to prepare any such supplement or amendment. Each Holder agrees not to take any action with respect to any distribution deemed to be made pursuant to such registration statement that constitutes a violation of Regulation M under the Exchange Act or any other applicable rule, regulation or law. 13 (c) Each Holder acknowledges and agrees that it will not effect any public sale or distribution of Registrable Securities pursuant to a Registration Statement at any time that the Company shall have advised the Holders in writing that the sale by such Holders pursuant to such Registration Statement should be suspended, which may be utilized by the Company for any reason, including without limitation, to facilitate an offering of the Company's securities for its own account. The Company may provide appropriate stop orders to enforce the provisions of this Section 6(c). 7. Rule 144 and Rule 144(k) Requirements. (a) Rule 144. At any time and from time to time after Qualified Registrable Securities become eligible for sale under Rule 144, upon receipt by the Company of (i) written notice from any Holder of such Holder's desire to sell Qualified Registrable Securities pursuant to Rule 144 and (ii) a written representation from each of such Holder and its selling broker in form reasonably satisfactory to the Company that each has complied with the requirements of Rule 144 in connection with such sale and such other documentation as is reasonably satisfactory to the Company (the "Rule 144 Documentation"), the Company shall cause its legal counsel to deliver a letter, reasonably acceptable to such Holder, to the Company, such Holder and the Company's transfer agent stating that the transfer may be made free of the restrictive legend limiting transferability under the Securities Act and cause its transfer agent to clear the sale of such Qualified Registrable Securities within 3 Trading Days of receipt of the Rule 144 Documentation by the Company and receipt of the physical certificates representing such shares by the Company's transfer agent. Unless otherwise requested by the Company, such Holder(s) shall deliver the original physical certificates representing such shares to the Company's transfer agent directly. (b) Rule 144(k). At any time and from time to time after any Registrable Securities become eligible for sale under Rule 144(k), each Holder of such Registrable Securities may deliver to the Company written notice of such Holder's desire to have the restrictive legend removed from certificates representing such Registrable Securities pursuant to Rule 144(k). Upon receipt of such written notice and presentation by such Holder of documentation as is reasonably satisfactory to the Company that such Registrable Securities are eligible for removal of the restrictive legend on such shares pursuant to Rule 144(k) (the "Rule 144(k) Documentation"), the Company shall cause its legal counsel to deliver to the Company, such Holder and the Company's transfer agent a letter, reasonably acceptable to such Holder, stating that the removal of the restrictive legend on the subject shares of Common Stock by the transfer agent is appropriate under the Securities Act and shall cause its transfer agent to remove the restrictive legend from such shares or to make an entry in the Company's share transfer records in the event the shares without the restrictive legend are to be held in book-entry form in the Depository Trust Company system within three (3) Trading Days of receipt of the Rule 144(k) Documentation by the Company and receipt of the physical certificates representing the shares by the Company's transfer agent. Unless otherwise requested by the Company, such Holder(s) shall deliver the original physical certificates representing such shares to the Company's transfer agent directly. 14 8. Public Reporting. So long as any Holder holds Registrable Securities, the Company shall remain current in its public reporting obligations under the Exchange Act and the rules of any Eligible Market on which the Common Stock is then either listed or quoted and otherwise shall fulfill all of its obligations in order for the provisions of Rule 144 and 144A to be available to such Holder for the sale of such Common Stock. 9. Miscellaneous (a) Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Holders and the Company will be entitled to specific performance under this Agreement. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. In addition, the Company hereby acknowledges and agrees that its duties and obligations under this Agreement are secured by the Collateral and that, in addition to any other remedies available at law or in equity, the Holders may exercise the rights and remedies under the Security Documents in the event the Company fails to comply with its obligations under this Agreement, including Section 2(c) hereof. (b) Amendments and Waivers. (i) No failure or delay of the Holders in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holders hereunder are cumulative and not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Company therefrom shall in any event be effective unless the same shall be authorized as provided in paragraph (ii) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. (ii) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Company and the Required Holders; provided that no such amendment, waiver or modification shall (a) change any of the provisions of this Section 9(b) or the definition of "Required Holders" or any other provision hereof specifying the number or percentage of Holders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Holder or (b) increase the obligations of any Holder or otherwise disproportionately adversely affect any of the rights of any Holder under this Agreement, without the written consent of each Investor affected thereby. 15 (c) No Inconsistent Agreements. Neither the Company nor any of its Subsidiaries has entered, as of the date hereof, nor shall the Company or any of its Subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as and to the extent specified in the applicable schedule to the Purchase Agreement, neither the Company nor any Subsidiary has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been satisfied in full. (d) No Piggyback on Registrations. Neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statements filed pursuant to this Agreement other than the Registrable Securities. (e) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act and other requirements of the Exchange Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. Notwithstanding anything to the contrary contained herein the holders shall transfer their Registrable Securities only in accordance with the Plan of Distribution contained therein, and the Company shall have no responsibility for any such failure of Holder to so comply, for the failure of such transfer to comply with applicable law nor for any delay associated with the filing of any document with the Commission or the clearance of comments to the extent solely attributable to the Plan of Distribution requested by the Holders. (f) Notices. All notices, demands and requests of any kind to be delivered to any party hereto in connection with this Agreement shall be (a) delivered personally, (b) sent by nationally recognized overnight courier, (c) sent by first class, registered or certified mail, return receipt requested or (d) sent by facsimile, in each case to such party at its address as set forth in the Purchase Agreement. Any notice, demand or request so delivered shall constitute valid notice under this Agreement and shall be deemed to have been received (A) on the day of actual delivery in the case of personal delivery, (B) on the next Business Day after the date when sent in the case of delivery by nationally-recognized overnight courier, (C) on the fifth Business Day after the date of deposit in the U.S. mail in the case of mailing or (D) upon receipt in the case of a facsimile transmission or e-mail communication, on the date of such facsimile transmission or e-mail communication or the next Business Day if such day is not a Business Day provided that confirmation of such transmission or communication is received by the sending party. Any party hereto may from time to time by notice in writing served upon the other as aforesaid designate a different mailing address or a different person to which all such notices, demands or requests thereafter are to be addressed. (g) Successors and Assigns. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and permitted assigns of such party, and all covenants, promises and agreements by or on behalf of the Company or the Holders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and permitted assigns except that the Company shall not assign its rights or obligations hereunder without the consent of the Required Holders. Each Holder shall have the right to assign or otherwise transfer its rights under this Agreement in the manner and to 16 the extent permitted under the Purchase Agreement provided that: (i) such transfer may otherwise be effected in accordance with applicable securities laws, (ii) unless such assignee or transferee is a Holder, such assignee or transferee acquires (a) Notes in an aggregate principal amount of at least $3,000,000, or (b) Registrable Securities consisting of at least 250,000 shares of Common Stock (subject to appropriate adjustment for any stock splits, dividends, subdivisions, combinations, recapitalizations and the like) and (iii) the Holder notifies the Company in writing of the transfer or assignment, stating the name and the address of the transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned and the assignee or transferee agrees in writing to be bound by the provisions of this Agreement. (h) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. (i) Governing Law; Waiver Of Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Texas, without regard to the principles of conflicts of law thereof. Each party hereto hereby irrevocably waives to the fullest extent permitted by applicable law personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or any of the Documents or the transactions contemplated hereby or thereby. If either party shall commence an action or proceeding to enforce any provisions of this Agreement or any Document, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys fees and other reasonable costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. (j) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (k) Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties 17 will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. (l) Headings. Article and Section headings used herein are for convenience of reference only and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. (m) Termination. The registration rights granted pursuant to this Agreement shall terminate as to any Registrable Securities and the Holder of such Registrable Securities as such (but not as to that Holder with respect to any Registrable Securities, the registration rights of which have not expired) at such time that such Registrable Securities either (i) have had their restrictive legends removed pursuant to Rule 144(k) and such Registrable Securities are freely transferable without restriction under the Securities Act or (ii) may have their restrictive legend removed in accordance with the provisions of Rule 144(k) upon the request of such Holder pursuant to Section 7(b) hereof and the performance by such Holder of its obligations under Section 7(b) and upon removal of such restrictive legend such Registrable Securities will be freely transferable without restriction under the Securities Act, or (iii) have been transferred under a Registration Statement or pursuant to Rule 144 (including Rule 144(k)). Notwithstanding the termination of the registration rights granted pursuant to this Agreement, all other obligations of the Company and the Holder hereunder not pertaining to the registration of such Registrable Securities, including without limitation, Section 2 (but no amount shall become payable in respect of Common Stock as to any Event that occurs after the time such shares cease to be Registrable Securities), Section 5 and Sections 7(b) and 7(c) hereof but excluding, without limitation, Section 3 hereof, shall survive the termination of such registration rights. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES TO FOLLOW] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. CARRIZO OIL & GAS, INC. By: /s/ PAUL F. BOLING ------------------ Name: Paul F. Boling Title: Vice President and Chief Financial Officer [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES OF PURCHASERS TO FOLLOW] PCRL Investments L.P. By: /s/ WILLIAM E. ROSE ------------------- Name: William E. Rose Title: Authorized Signatory Address for Notice: PCRL Investments L.P. c/o HBK Investments L.P. 350 Park Avenue 19th Floor New York, New York 10022 Attention: Ken Hirsh Facsimile: (212) 446-1941 With a copy to: HBK Investments L.P. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attention: Legal Department Facsimile: (214) 758-1207 And with copies (which shall not constitute notice) to: Gardere Wynne Sewell LLP 1601 Elm Street, Suite 3000 Dallas, Texas 75201-4761 Facsimile No.: (214) 999-3341 Telephone No.: (214) 999-4341 Attn: Gary B. Clark, Esq. Annex A Plan of Distribution The selling stockholders may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares: o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o an exchange distribution in accordance with the rules of the applicable exchange; o privately negotiated transactions; o short sales; o broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; o a combination of any such methods of sale; and o any other method permitted pursuant to applicable law. The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades. Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. Any profits on the resale of shares of common stock by a broker-dealer acting as principal might be deemed to be underwriting discounts or commissions under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by a selling stockholder. The selling stockholders may agree to indemnify any 18 agent, dealer or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act. The selling stockholders may from time to time pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus after we have filed a supplement or an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus and may sell the shares of common stock from time to time under this prospectus after we have filed a supplement or an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders and any broker-dealers or agents that are involved in selling the shares of common stock may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. We are required to pay all fees and expenses incident to the registration of the shares of common stock, including the fees and disbursements of counsel to the selling stockholders. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. The selling stockholders have advised us that they have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares of common stock, nor is there an underwriter or coordinating broker acting in connection with a proposed sale of shares of common stock by any selling stockholder. If we are notified by any selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of shares of common stock, if required, we will file a supplement to this prospectus. If the selling stockholders use this prospectus for any sale of the shares of common stock, they will be subject to the prospectus delivery requirements of the Securities Act. The anti-manipulation rules of Regulation M under the Securities Exchange Act of 1934 may apply to sales of our common stock and activities of the selling stockholders. EX-10 7 exh106.txt EXHIBIT 10.6 FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT is dated and effective as of October 29, 2004 (this "First Amendment"), by and among CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"), CCBM, INC., a Delaware corporation (the "Guarantor"), and HIBERNIA NATIONAL BANK, a national banking association, individually as a Lender and as Administrative Agent, and UNION BANK OF CALIFORNIA, N.A., a national banking association, individually as a Lender and as Co-Agent. RECITALS: 1. The Borrower, the Guarantor, the Agent, and the Lenders have heretofore entered into that certain Second Amended and Restated Credit Agreement dated as of September 30, 2004 (the "Agreement"), pursuant to which the Lenders established in favor of Borrower a Line of Credit as more fully described therein. 2. All Loans by the Lenders to the Borrower are guaranteed by the Guarantor. 3. The parties desire to amend the Agreement as set forth herein. NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants hereinafter set forth and intending to be legally bound hereby, do hereby amend and supplement the Agreement as follows: A. Defined Terms. Capitalized terms used herein which are defined in the Agreement are used herein with such defined meanings, as said definitions may be amended and/or supplemented by this First Amendment. B. Revision to Defined Terms. 1. The definition of the term "Secured Subordinated Debt" in Section 1.1 of the Agreement is hereby deleted and restated as follows: "Secured Subordinated Debt" shall mean indebtedness of the Borrower (and any Subsidiary of Borrower that is a Guarantor) outside of the Line of Credit, issued for total net proceeds not to exceed $28,000,000.00, which indebtedness may bear stated cash interest expense of up to 12% per annum (prior to default); provided that (i) the documents governing the issuance thereof are entered into on or before December 31, 2004 (provided that additional notes may be issued thereunder prior to October 29, 2006), (ii) if such indebtedness is secured by a mortgage lien on the Mortgaged Properties, such lien shall be subordinate and inferior to 19 the Agent's mortgage lien on the Mortgaged Properties, and (iii) the Required Lenders have reviewed and approved the documents governing said issuance. 2. The following new definitions are hereby added to Section 1.1 of the Agreement: "First Amendment" shall mean that certain First Amendment to Second Amended and Restated Credit Agreement dated as of October 29, 2004, by and among the Borrower, the Guarantor, the Agent, and the Lenders. "Interest Expense" means, for any period, total interest expense (including that portion attributable to capital lease obligations in accordance with GAAP and capitalized interest) of the Borrower and its Subsidiaries (other than Unrestricted Subsidiaries) on a consolidated basis with respect to all outstanding Obligations of the Borrower and its Subsidiaries (other than Unrestricted Subsidiaries) to the extent the promissory notes, leases or other instruments or agreements evidencing such Obligations require the payment of such interest in cash during such period. "Secured Subordinated Note Purchase Agreement" means the Note Purchase Agreement dated as of October 29, 2004 among the Borrower, the Purchasers (as defined therein) and PCRL Investments, L.P., as Collateral Agent, as amended, modified or restated from time to time. "Tangible Net Worth" means, with respect to any Person, the total assets of such Person (other than with respect to the Borrower, its Unrestricted Subsidiaries), on a consolidated basis, exclusive of (a) those assets classified as intangible, including, without limitation, goodwill, patents, trademarks, trade names, copyrights, franchises and deferred charges, (b) treasury stock and minority interests in any Person, (c) cash set apart and held in sinking or other analogous funds established for the purpose of redemption or other retirement of capital stock, (d) to the extent not already deducted from total assets, allowances for depreciation, depletion, obsolescence and/or amortization of properties, uncollectible accounts, and contingent but probable liabilities as to which an amount can be established, (e) deferred taxes and (f) all assets arising from advances to officers, former officers or sales representatives of such Person or any of its Subsidiaries (other than with respect to the Borrower, its Unrestricted Subsidiaries) made outside the ordinary course of business; less total liabilities of such Person and its Subsidiaries (other than with respect to the Borrower, its Unrestricted Subsidiaries), on a consolidated basis, 2 all of the above being determined in accordance with GAAP and, with respect to the Borrower, excluding the effect of any cumulative after-tax amounts of ceiling test write-downs (not to exceed an aggregate of $30 million) incurred subsequent to December 31, 2001 pursuant to Rule 4.10 of Regulation S-X promulgated by the Commission. C. Revised Schedule 11.1. Schedule 11.1 as attached to the Agreement is hereby deleted in its entirety and replaced with the Schedule 11.1 attached to this First Amendment. D. Restatement of Section 11.21. Section 11.21 of the Agreement is hereby deleted in its entirety and restated as follows: Section 11.21. Security Agreement. The Security Agreement constitutes a first priority security interest affecting one hundred percent (100%) of the issued and outstanding stock of the Guarantor, and there are no other Encumbrances affecting the said stock except as permitted by Section 13.4(r). E. Restatement of Section 12.8(d). Section 12.8(d) of the Agreement is hereby deleted in its entirety and restated as follows: (d) Minimum Shareholder's Equity. The Borrower shall maintain at all times a minimum shareholder's equity of not less than $100,000,000.00, plus (i) 100% of all common and preferred equity contributed by shareholders of Borrower subsequent to June 30, 2004, plus (ii) 50% of all positive earnings occurring subsequent to June 30, 2004, plus (iii) 180 days after Borrower's issuance of any of the Secured Subordinated Debt, an amount equal to 50% of the net proceeds from the issuance of any Secured Subordinated Debt; provided, however, the minimum shareholder's equity on and after April 30, 2005 shall be not less than $112,500,000.00. For purposes of this covenant, the calculation of Borrower's "shareholder's equity" will exclude the effects, if any, of ceiling test write-downs pursuant to Regulation SX4.10 of the Securities and Exchange Commission. F. Addition of New Affirmative Covenants. Article XII of the Agreement is hereby amended and supplemented to include the following new affirmative covenants as Section 12.8 (e) and Section 12.18, respectively: (e) EBITA to Interest Expense Ratio. The Borrower shall maintain as of the last day of each fiscal quarter a ratio of EBITDA for the four fiscal quarter period ending on such day to Interest Expense for such period of at least 2.60 to 1.0. 3 Section 12.18. Additional Mortgaged Properties. (a) The Borrower agrees to execute and deliver from time to time such documents as are reasonably requested by the Agent to provide that at least 90% of the net present value of the proved oil and gas reserves owned by the Borrower and each Guarantor, taken as a whole, are Mortgaged Properties, excluding Borrower's interests in the Camp Hill Field in East Texas. (b) In the event the Tangible Net Worth of any Guarantor (calculated with respect to CCBM without including the capital stock of Pinnacle so long as Pinnacle is not a Subsidiary of the Borrower) exceeds 3% or more of the Tangible Net Worth of the Borrower and its Subsidiaries, on a consolidated basis, the Borrower shall cause such Guarantor to execute and deliver to Agent, for the benefit of each Lender, Mortgages in form and substance reasonably acceptable to the Agent together with such other assignments, conveyances, amendments, agreements and other writings (each duly authorized and executed) as Agent shall reasonably deem necessary or appropriate to grant, evidence and perfect the Encumbrances in the assets and properties of such Guarantor (provided in no event shall the capital stock of Pinnacle be pledged so long as Pinnacle is not a Subsidiary). G. Restatement of Section 13.4(r). Section 13.4(r) of the Agreement is hereby deleted in its entirety and restated as follows: (r) Encumbrances affecting all or part of the Collateral that secure Secured Subordinated Debt and other indebtedness referred to in Section 13.5(l) and such other obligations and liabilities related thereto, in each case, that is subject to, and permitted to be secured by, a written subordination agreement executed by the Agent on behalf of the Lenders. H. Restatement of Section 13.5(l). Section 13.5(l) of the Agreement is hereby deleted in its entirety and restated as follows: (l) Subject to the provisions of Sections 10.2 and 13.4(r), the indebtedness evidenced by the Secured Subordinated Debt, capitalized interest thereon, and indebtedness arising under hedging agreements between the Borrower and any holder of such debt or any affiliate thereof, and guarantees executed by any Subsidiary of Borrower guaranteeing payment thereof. I. Restatement of Section 13.7. Section 13.7 of the Agreement is hereby deleted in its entirety and restated as follows: 4 Section 13.7. Other Agreements. Except as set forth in Schedule 11.1, the Borrower will not enter into any agreement containing any provision which would be violated or breached by the performance of its obligations hereunder or under any instrument or document delivered or to be delivered by it hereunder or in connection herewith; provided that the Borrower may agree to the redemption or repurchase of its securities upon a change of control or dissolution, winding-up or liquidation of, or the merger or sale of substantially all the assets of, the Borrower (provided that nothing in this Section 13.7 shall permit any action otherwise prohibited by Sections 13.1 and 13.2 hereof). J. Restatement of Section 13.11. Section 13.11 of the Agreement is hereby deleted in its entirety and restated as follows: Section 13.11. Payments on Secured Subordinated Debt. Subject to the terms and conditions of the subordination agreement referenced in Section 10.2 above, the Borrower agrees that the only scheduled payments on the Secured Subordinated Debt due prior to the later of the stated Facility A Termination Date and the stated Facility B Termination Date will be scheduled interest payments on promissory notes evidencing Secured Subordinated Debt. In addition, the Borrower agrees to the extent it has the discretion to do so, to make said interest payments by the issuance of debt or equity securities to the maximum extent permitted by the documents evidencing the Secured Subordinated Debt; provided, however, (i) during such time as the Borrower is permitted to make all or any portion of said interest payments by the issuance of debt, any remaining portion of such interest payments may be paid in cash and (ii) the Borrower shall have no obligation to issue common stock in respect of any payment under the Secured Subordinated Note Purchase Agreement to the extent such issuance would require the Borrower to issue common stock below the Floor Price (as defined in the Secured Subordinated Note Purchase Agreement) for that payment. K. Consent by Lenders to Secured Subordinated Debt. Subject to the terms and conditions of that certain Subordination Agreement of even date herewith by and among the Agent, PCRL Investments L.P. (as Subordinate Debt Agent and Purchaser), and Borrower, the Lenders do hereby permit the Secured Subordinated Debt to be issued, and the liens contemplated thereby to be granted by Borrower pursuant to the Secured Subordinated Note Purchase Agreement, and the execution of the guarantees contemplated thereby, and authorize, ratify and confirm the Agent's execution of the foregoing Subordination Agreement on behalf of the Lenders. 5 L. Confirmation of Related Documents. It is the intention of the parties that all of the liens, privileges, priorities, and equities existing and to exist under and in accordance with the terms of the Related Documents are hereby renewed, extended, and carried forward as security for the Indebtedness. In addition, the Guarantor hereby confirms its guaranty of the Indebtedness, which guaranty is evidenced by that certain Commercial Guaranty dated September 30, 2004 by Guarantor in favor of Agent. M. Representations; No Default. On and as of the date of this First Amendment, and after giving effect to this First Amendment, the Borrower and the Guarantor confirm, reaffirm, and restate the representations and warranties set forth in the Agreement and the Loan Documents; provided, that each reference to the Agreement herein shall be deemed to include the Agreement as amended by this First Amendment. N. Payment of Expenses. The Borrower agrees to pay or reimburse the Lender for all legal fees and expenses of counsel to the Agent in connection with (i) the transactions contemplated by this First Amendment and (ii) a review of the documentation for the Secured Subordinated Debt and preparation of the required subordination agreement. O. Amendments. The Agreement and this First Amendment are credit or loan agreements as described in LA. R.S. 6:ss.1121, et seq. There are no oral agreements between the Agent and Lenders and the Borrower and/or Guarantor. The Agreement, as amended by this First Amendment, and the other Loan Documents set forth the entire agreement of the parties with respect to the subject matter hereof and supersede all prior written and oral understandings between the Borrower, the Guarantor, the Agent, and the Lenders, with respect to the matters herein and therein set forth. The Agreement, as amended by this First Amendment, cannot be modified or amended except by a writing signed and delivered by the Borrower, the Guarantor, the Agent and the Lenders. P. Waiver of Defenses. In consideration of the Lenders' execution of this First Amendment, the Borrower and Guarantor do hereby irrevocably waive any and all claims and/or defenses to payment on any indebtedness arising under the Agreement and owed by any of them to the Lender that may exist as of the date of execution of this First Amendment. Q. Governing Law: Counterparts. The First Amendment shall be governed by and construed in accordance with the laws of the State of Louisiana. This First Amendment may be executed in any number of counterparts, all of which counterparts, when taken together, shall constitute one and the same instrument. R. Continued Effect. Except as expressly modified herein, the Agreement shall continue in full force and effect. The Agreement as amended herein is hereby ratified and confirmed by the parties hereto. S. Reliance on Corporate Resolutions. The Borrower and the Guarantor hereby certify to the Lenders that the resolutions delivered in connection with the Agreement remain in effect, and that Paul F. Boling is authorized to execute this First Amendment on behalf of Borrower and Guarantor. 6 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed and delivered as of the date hereinabove provided by the authorized officers each hereunto duly authorized. Borrower: CARRIZO OIL & GAS, INC. a Texas corporation By: /s/ Paul F. Boling ------------------- Name: Paul F. Boling Title: Vice President and Chief Financial Officer Guarantor: CCBM, INC. a Delaware corporation By: /s/ Paul F. Boling ------------------ Name: Paul F. Boling Title: Vice President and Chief Financial Officer Agent: HIBERNIA NATIONAL BANK, as Agent By: /s/ David R. Reid ----------------- Name: David R. Reid Title: Senior Vice President Lenders: HIBERNIA NATIONAL BANK By: /s/ David R. Reid ----------------- Name: David R. Reid Title: Senior Vice President UNION BANK OF CALIFORNIA, N.A. By: /s/ Damien Meiburger -------------------- Name: Damien Meiburger Title: Senior Vice President 7 Schedule 11.1 Although the Borrower is not required by the documents evidencing the Secured Subordinated Debt to issue Capital Stock in payment of the Secured Subordinated Debt, pursuant to such documents it has the option to do so. Under certain circumstances the Borrower is required to repurchase such Capital Stock. Such repurchase would violate Section 13.3 of the Agreement. EX-10 8 exh107.txt EXHIBIT 10.7 EXECUTION VERSION ----------------- SECOND AMENDMENT TO SECURITIES PURCHASE AGREEMENT This Second Amendment to Securities Purchase Agreement (this "Second Amendment") is entered into as of the 29th day of October, 2004, by and among Carrizo Oil & Gas, Inc., a Texas corporation (the "Company") and the Investors listed on the signature pages hereto (each an "Investor" and collectively, the "Investors"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company and the initial investors thereunder entered into that certain Securities Purchase Agreement dated as of December 15, 1999, as amended by that certain First Amendment dated as of June 7, 2004 (as amended, the "Securities Purchase Agreement"; unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Securities Purchase Agreement); and WHEREAS, the Company has requested that the Investors amend the Securities Purchase Agreement and waive the right to an additional financial covenant arising pursuant to Section 8.13(c) of the Securities Purchase Agreement as a result of the addition of an EBITDA to Interest Expense Ratio covenant to Section 12.8(e) of the Senior Credit Agreement; and WHEREAS, subject to the terms and conditions set forth herein, the Investors have agreed to the Company's requests. NOW THEREFORE, for and in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the Company and the Investors hereby agree as follows: SECTION 1. Amendments. In reliance on the representations, warranties, covenants and agreements contained in this Second Amendment, the Securities Purchase Agreement shall be amended effective as of the date hereof in the manner provided in this Section 1. 1.1 Amended Definitions. (a) The definition of "Applicable Prepayment Premium" in Section 1.1 of the Securities Purchase Agreement shall be and it hereby is amended and restated in its entirety to read as follows: "Applicable Prepayment Premium" means, at any date of determination in connection with a prepayment of the Notes in accordance with Sections 3.5 and 3.6 hereof during any period set forth below, an amount equal to the amount set forth below opposite such period:
Prepayment Rate During the Period % of Principal Being Paid --------------------------------- ------------------------- June 1, 2004 to and including the fifth anniversary of the Closing Date 3% 1 At anytime after the fifth anniversary of the Closing Date to and including the eighth anniversary of the Closing Date 1% At anytime after the eighth anniversary of the Closing Date 0%
(b) Subparagraph (a) of the definition of "Senior Indebtedness" in Section1.1 of the Securities Purchase Agreement shall be and it hereby is amended in its entirety to read as follows: (a) all "Indebtedness" as defined in the Senior Credit Agreement, now existing or hereinafter created; 1.2 Additional Definitions. Section 1.1 of the Securities Purchase Agreement shall be and it hereby is amended by adding the following definitions in proper alphabetical order: "Applicable Period" as defined in Section 12.15. "Disclosure Notice" as defined in Section 12.15. "Registrable Securities" as defined in the Secured Note Purchase Agreement. "Secured Note Purchase Agreement" means that certain Note Purchase Agreement dated as of October 29, 2004, by and among the Company, the Secured Noteholders, and PCRL Investments L.P., as collateral agent for the Secured Noteholders, as such agreement may be amended, restated, refinanced, replaced, supplemented or modified from time to time. "Secured Notes" means the 10% Senior Subordinated Secured Notes due December 15, 2008 issued by the Company to the Secured Noteholders pursuant to the terms of the Secured Note Purchase Agreement, as such notes, may be amended, restated, supplemented or modified from time to time. "Secured Noteholders" means the holders from time to time of the Secured Notes issued pursuant to the Secured Note Purchase Agreement. "Senior Secured Indebtedness" means the "Indebtedness" as defined in the Secured Note Purchase Agreement. "Trading Day" as defined in the Secured Note Purchase Agreement. 1.3 Indebtedness. (a) Subparagraph (k) of Section 8.1 of the Securities Purchase Agreement shall be and it hereby is amended by deleting "and" at the end of such subparagraph. 2 (b) Subparagraph (l) of Section 8.1 of the Securities Purchase Agreement shall be and it hereby is amended by deleting "." at the end of such subparagraph and inserting ";" in lieu thereof. (c) Subparagraph (m) of Section 8.1 of the Securities Purchase Agreement shall be and it hereby is amended by deleting "." at the end of such subparagraph and inserting "; and" in lieu thereof. (d) Section 8.1 of the Securities Purchase Agreement is hereby amended by adding the following subparagraph at the end of such section: (m) The Senior Secured Indebtedness. 1.4 Liens. (a) Subparagraph (p) of Section 8.2 of the Securities Purchase Agreement shall be and it hereby is amended by deleting "and" at the end of such subparagraph. (b) Subparagraph (q) of Section 8.2 of the Securities Purchase Agreement shall be and it hereby is amended by deleting "." at the end of such subparagraph and inserting ";" in lieu thereof. (c) Subparagraph (r) of Section 8.2 of the Securities Purchase Agreement shall be and it hereby is amended by deleting "." at the end of such subparagraph and inserting "; and" in lieu thereof. (d) Section 8.2 of the Securities Purchase Agreement is hereby amended by adding the following subparagraph at the end of such section: (m) Liens securing the Senior Secured Indebtedness. 1.5 Repurchase of Common Stock. Section 8.5(a) of the Securities Purchase Agreement shall be and it hereby is amended by adding the following subsection at the end thereof: and (vi) the Company may repurchase its common stock as contemplated by Section 2(c) of the Registration Rights Agreement (as defined in the Secured Note Purchase Agreement). 1.6 Restrictions on Ability of Subsidiaries to Make or Repay Intercompany Loans. Section 8.5(b)(ii) of the Securities Purchase Agreement shall be and it hereby is amended by adding the following provision after the phrase "permitted Secured Indebtedness)": and Section 7.6 of the Secured Note Purchase Agreement 3 1.7 Confidentiality. Section 12.15 of the Securities Purchase Agreement shall be and it hereby is amended by adding the following at the end of such section: (a) For the purposes of this Section 12.15, "Confidential Information" means information delivered to any Investor by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement and the other Note Documents (including, without limitation, any information regarding the transactions contemplated by the Secured Note Purchase Agreement provided prior to October 29, 2004) that is identified as confidential or should reasonably be known to be confidential, provided that such term does not include information that (i) was publicly known or otherwise known to such Investor prior to the time of such disclosure, (ii) subsequently becomes publicly known through no act or omission by any Investor or any Person acting on its behalf, or (iii) otherwise becomes known to any Investor other than through disclosure by the Company or any Subsidiary. (b) Subject to Section 12.15(e), each Investor will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Investor in good faith to protect confidential information of third parties delivered to such Investor, provided that such Investor may deliver or disclose Confidential Information to the following Persons as to whom the Investor remains responsible for their maintenance of confidentiality to the extent required herein (other than the Persons described in clauses (iii), (vi) and (vii)), (i) its directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by the Notes), (ii) its financial advisors and other professional advisors who are made aware of the confidential nature of such information, (iii) any other holder of Notes, (iv) any eligible Person to which any Investor sells or offers to sell Notes or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 12.15), (v) any Person from which such Investor offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 12.15), (vi) any federal or state regulatory authority having jurisdiction over such Investor, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about its investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Investor, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Investor is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Investor may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under the Notes and this Agreement. (c) Each Investor, by its acceptance of Notes, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 12.15 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Investor of information required to be delivered to such Investor under 4 this Agreement or requested by such Investor (other than an Investor that is a party to this Agreement or its nominee) such Investor will enter into an agreement with the Company embodying the provisions of this Section 12.15. (d) Notwithstanding anything to the contrary herein or in any other Note Document and unless otherwise requested by written notice of an Investor to the Company, the Company shall have no obligation to deliver any Confidential Information to any Investor. (e) If at any time after the Closing Date: (i) any Confidential Information not disclosed to such Investor prior to October 29, 2004 that is material and non-public regarding the Company or any of its Subsidiaries is delivered to an Investor by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement prior to delivery of the written notice specified in Section 12.15(d); (ii) at such time (A) such Investor, together with its Affiliates, is the holder of Registrable Securities (as defined in the Secured Note Purchase Agreement) representing five one-hundredths of one percent (0.05%) or more of the outstanding Common Stock of the Company; or (B) the Issue Date related to any Significant Stock Payment Notice (as defined in the Secured Note Purchase Agreement) issued to such Investor or any of its Affiliates has not occurred; and (iii) such Investor delivers written notice to the Company indicating that an Applicable Period has begun (a "Disclosure Notice"), then as of the end of the Applicable Period set forth in such Disclosure Notice (or such earlier date as the Company shall have complied with clause (x) of this Section 12.15(e)(iii)) (unless such Confidential Information is no longer material, or is no longer Confidential Information): (x) the Company shall be obligated to disclose such Confidential Information in a manner compliant with Regulation FD of the Exchange Act and in sufficient detail such that such Investor shall not be restricted from trading the securities of the Company under the U.S. or any state securities laws due to its knowledge of such Confidential Information; (y) the obligations to keep such Confidential Information confidential and not trade while in possession of such information of such Investor under Section 12.15(b) shall terminate; and (z) to the extent the Company shall not have complied with clause (x) of this Section 12.15(e)(iii) prior to the end of the Applicable Period, such Investor, without liability, risk or obligation to the Company or any of its Subsidiaries, may (following consultation with the Company, to the extent possible) disclose such Confidential Information in a manner 5 compliant with Regulation FD of the Exchange Act but only in such detail such that such Investor shall not be restricted from trading the securities of the Company under the U.S. or any state securities laws due to its knowledge of such Confidential Information. (f) For purposes of this Section 12.15, "Applicable Period" means, as of the date any Investors receives Confidential Information prior to delivery of the written notice specified in Section 12.15(d) with respect to such Confidential Information, the period specified in the table below opposite the percentage ownership of the outstanding shares of Common Stock of the Company represented by the aggregate number of Registrable Securities issued to such Investor and its Affiliates during the period of thirty (30) consecutive Trading Days immediately preceding but excluding such date plus the aggregate number of shares of Registrable Securities to be issued pursuant to any Significant Stock Payment Notice then in effect:
------------------------------------- ---------------------------------- Percentage Ownership Applicable Period ------------------------------------- ---------------------------------- More than 0.05% but less than or Twelve (12) Trading Days equal to .75% ------------------------------------- ---------------------------------- More than .75% but less than or Five (5) Trading Days equal to 1.5% ------------------------------------- ---------------------------------- More than 1.5% Three (3) Trading Days ------------------------------------- ----------------------------------
The Trading Days included in any Applicable Period during which any Investor is not permitted to sell Registrable Securities shall be included in the determination of whether an "Event" has occurred as such term is defined in and to the extent provided by the Registration Rights Agreement (as defined in the Secured Notes Purchase Agreement) and to the extent such Trading Days include Trading Days that would otherwise be included in any Measurement Period (as defined in the Secured Notes Purchase Agreement), such Trading Days shall be excluded for such Measurement Period as if such Trading Days were not Trading Days (it being understood that such Measurement Period shall be extended so that the Measurement Period is the full applicable period of Trading Days), and the date for any payment relating to such Measurement Period shall be extended for the number of days equal to the Trading Days excluded from the Measurement Period. SECTION 2. Waiver. Effective as of the date hereof, upon satisfaction of the conditions precedent set forth in Section 4.4 hereof, and in reliance upon the representations and warranties of the Company set forth in the Securities Purchase Agreement and in this Second Amendment, and notwithstanding anything to the contrary contained in the Securities Purchase Agreement (including pursuant to Section 8.13(c) of the Securities Purchase Agreement), the Investors hereby waive their right to an additional financial covenant to the Securities Purchase Agreement arising pursuant to Section 8.13(c) as a result of the addition of an EBITDA to Interest Expense Ratio to Section 12.8(e) of the Senior Credit Agreement. Nothing contained herein shall obligate any Investor to grant any additional or future waiver of the obligations to comply with Section 6 8.13(c) of the Securities Purchase Agreement or any other provision thereof or any other Note Document. SECTION 3. Representations and Warranties. In order to induce the Investors to enter into this Second Amendment, the Company hereby represents and warrants to the Investors that upon the effectiveness of this Second Amendment: (a) each representation and warranty of the Company contained in the Securities Purchase Agreement is true and correct in all material respects as of the date hereof (except to the extent that any such representation and warranty is expressly made as of a particular date, in which event such representation and warranty was true and correct as of such date); (b) neither a Default nor an Event of Default has occurred which is continuing; and (c) the Company does not have any defenses to payment, counterclaims or rights of set-off with respect to any of its obligations pursuant to the Securities Purchase Agreement on the date hereof. SECTION 4. Miscellaneous. 4.1 Reaffirmation. The terms and provisions set forth in this Second Amendment shall modify and supersede all inconsistent terms and provisions of the Securities Purchase Agreement and shall not be deemed to be a consent to the modification or waiver of any other term or condition of the Securities Purchase Agreement. Except as expressly modified and superseded by this Second Amendment, the terms and provisions of the Securities Purchase Agreement are ratified and confirmed and shall continue in full force and effect. 4.2 Parties in Interest. All of the terms and provisions of this Second Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 4.3 Expenses. The Company hereby agrees to pay on demand all reasonable fees and expenses of counsel to the Investors incurred by the Investors in connection with the preparation, negotiation and execution of this Second Amendment and all related documents. 4.4 Effectiveness. This Second Amendment shall become effective upon satisfaction of each of the conditions precedent set forth in this Section 4.4. A. The Company and the Investors shall have executed and delivered this Second Amendment. B. No Default or Event of Default shall exist. C. The Investors shall have received a copy of a duly executed amendment to the Senior Credit Agreement in form and substance acceptable to the Investors. 7 4.5 Counterparts. This Second Amendment may be executed in counterparts, and all parties need not execute the same counterpart; however, no party shall be bound by this Second Amendment until this Second Amendment has been executed by the Company and the Investors at which time this Second Amendment shall be binding on, enforceable against and inure to the benefit of the Company and the Investors. Facsimiles shall be effective as originals. 4.6 COMPLETE AGREEMENT. THE SECURITIES PURCHASE AGREEMENT, AS AMENDED, AND THE OTHER DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 4.7 Headings. The headings, captions and arrangements used in this Second Amendment are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of this Second Amendment, nor affect the meaning thereof. 4.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER IN THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. [Signature pages follow] 8 IN WITNESS WHEREOF, this Second Amendment has been duly executed by the parties set forth below as of the date first written above. CARRIZO OIL & GAS, INC. By: /s/ PAUL F. BOLING ------------------------------------------------- Name: Paul F. Boling Title: Vice President and Chief Financial Officer INVESTORS: STEELHEAD INVESTMENTS LTD. By: HBK Investments L.P. Title: Investment Advisor By: /s/ WILLIAM E. ROSE ------------------------------------------------- Name: William E. Rose Title: Authorized Signatory EX-99.1 9 exh991.txt EXHIBIT 99.1 PRESS RELEASE Contact: Carrizo Oil & Gas, Inc. B. Allen Connell, Director of Investor Relations Paul F. Boling, Chief Financial Officer (281) 496-1352 CARRIZO OIL & GAS, INC. COMPLETES DEBT FINANCING AND UPDATES THIRD QUARTER OPERATIONS HOUSTON, November 3, 2004 - Carrizo Oil & Gas, Inc. (Nasdaq: CRZO) announced today that it has entered into a debt agreement, issuing $18 million of 10% secured senior subordinated Notes due in December 2008 (the "Notes"). The Notes and Carrizo's Senior Subordinated Notes are held by affiliates of HBK Investments L.P. (the "Purchaser"). The Company's obligations under the Notes are (1) secured by a 2nd lien on Carrizo's assets and (2) subordinated to Carrizo's senior bank debt. Net of a 10% discount on the face amount of the Notes (before debt issuance costs), the Company received proceeds of approximately $16.2 million which will primarily be used in its aggressive Barnett Shale development which has now grown to more than 20,000 net acres. Current Barnett Shale operations include the drilling of four horizontal wells (Operated: - in Wise County - 73% W.I. and Parker County - 63% W.I.; and Non-operated: - in Denton County - 22% W.I. and Tarrant County 22% W.I.). These wells will bring Carrizo's well count in the four counties to 59 gross (22 net). The debt agreement also provides Carrizo the option to issue up to $10 million of additional Notes to the Purchaser over the next two years under the same terms. Certain terms and conditions of the Notes and other Carrizo options, include: (1) no mandatory amortization before maturity in 2008, (2) the option, subject to certain conditions, to make interest payments, principal prepayments and payments at maturity with Carrizo's common stock (issuable at 90 percent of an average market price as determined prior to issuance), (3) the option at any time to redeem all or any portion of the outstanding Notes with no prepayment penalty and (4) a "PIK" interest option, during the period ended June 5, 2006, to pay-in-kind 50% of the interest due each period by increasing the principal balance by a like amount. Paul F. Boling, Carrizo's Vice President and Chief Financial Officer, commented, "This new financing provides significant flexibility along with improved liquidity for the Company, funds to continue aggressive development of our Barnett Shale play and helps optimize the level of borrowing capacity with our senior bank facility. Other than our option to use common stock as a source of repayment, Carrizo has been able to obtain this financing without issuing common equity." Carrizo also today announced the operating results for the third quarter of 2004. In South Texas and Louisiana, the Company participated in the drilling of eight gross exploratory wells, six of which were successful, resulting in a 75 percent apparent success rate for the quarter. One of the wells went to sales in September, four more went online in October and one well is waiting on a pipeline hookup. As of the end of the third quarter, drilling operations were underway on four additional wells. Through the first nine months of the year, Carrizo drilled 29 wells, 23 of which were successful, for an apparent 79 percent success rate in South Texas and Louisiana. In the Company's Barnett Shale play in North Texas, Carrizo participated in the drilling of eight gross wells in the third quarter, all of which were successful. Two wells have been completed to sales and six wells are in the process of being completed. Drilling operations are currently underway on four additional wells, all of which are horizontals. Since the beginning of the year, Carrizo has drilled 27 gross Barnett Shale wells, all of which were successful, bringing our total to 59 gross wells with 32 wells on production. Production during the third quarter of 2004 was estimated to be 2.04 Bcfe, or three percent above the 1.99 Bcfe of production in the second quarter of 2004. Third quarter 2004 production would have been 2.08 Bcfe or five percent above the previous quarter if not for the impact of (1) shutdowns on four wells in South Louisiana for Hurricane Ivan and (2) the six-day workover of the Carrizo operated Shadyside #1 well in September. The Shadyside #1 was placed back on production on September 28, 2004. Estimated production during the first nine months of 2004 has reached a level of 5.89 Bcfe or five percent above the 5.61 Bcfe of production in the first nine months of 2003. Natural gas comprised 79 percent of total third quarter 2004 production equivalent. Carrizo estimates that third quarter 2004 sales prices averaged approximately $5.70 per Mcf and $43.57 per barrel. These prices include the effects of hedging activities, which resulted in a decrease of the realized price of natural gas by approximately $0.13 per Mcf and a decrease in the realized price of oil by approximately $2.44 per barrel. "While production in the third quarter continued our sequential growth, it would have been more favorable without the impact of Hurricane Ivan, the Shadyside #1 workover and delays in completions," commented S.P. Johnson IV, Carrizo's President and Chief Executive Officer. "We are quite encouraged by the rapid increase in production in the second half of October. Production is currently 26.0 Mmcfe per day compared to the average 22.2 Mmcfe per day in the third quarter. In addition, we expect additional production from three Gulf Coast wells and several Barnett Shales currently being completed to sales." Carrizo Oil & Gas, Inc., is a Houston-based energy company actively engaged in the exploration, development, exploitation and production of oil and natural gas primarily in proven onshore trends along the Texas and Louisiana Gulf Coast regions. Carrizo controls significant prospective acreage blocks and utilizes advanced 3-D seismic techniques to identify potential oil and gas reserves and drilling opportunities. Additional information regarding the Notes and related transactions is included in the Company's Current Report on Form 8-K, expected to be filed soon with the SEC. Statements in this news release, including but not limited to those relating to the Company's or management's intentions, beliefs, expectations, hopes, projections, assessment of risks, estimations, plans or predictions for the future including the use of proceeds, options to issue common stock or Notes, potential effects or timing, cash flow, reserve growth and shareholder value, the expected timing of drilling of additional wells, plans for the drilling program and other statements and other statements that are not historical facts are forward looking statements that are based on current expectations. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that these expectations will prove correct. Important factors that could cause actual results to differ materially from those in the forward looking statements include the satisfaction of required conditions for the exercise of the option for the Company to issue additional Notes or to issue common stock, the results and dependence on exploratory drilling activities, operating risks, oil and gas price levels, land issues, availability of equipment, weather and other risks described in the Company's Form 10-K for the year ended December 31, 2003 and its other filings with the Securities and Exchange Commission. -----END PRIVACY-ENHANCED MESSAGE-----