Exhibit 10.25 LOAN AGREEMENT DATED JANUARY 25, 2002 by and between PARALLEL
PETROLEUM CORPORATION, as Borrower, AND FIRST AMERICAN BANK, SSB, as Lender
TABLE OF CONTENTS Page No. ARTICLE
I.....................................................................1
Definitions...................................................................1
1.1 Certain Defined Terms.......................................1 1.2 Other
Definitional Provisions...............................8 ARTICLE
II....................................................................8
Revolving Loan................................................................8
2.1 Revolving Commitment........................................8 2.2 Manner of
Borrowing.........................................9 2.3
Note........................................................9 2.4 Principal
Payments.........................................10 2.5 Interest Rate; Interest
Payments...........................10 2.6 Capital
Adequacy...........................................10 2.7
Prepayments................................................11 2.8 Manner and
Application of Payments.........................11 2.9 Rate
Elections.............................................12 2.10 Increased Cost of
Eurodollar Portion.......................12 2.11
Availability...............................................13 2.12 Funding
Losses.............................................13 2.13
Taxes......................................................14 ARTICLE
III..................................................................15
Borrowing Base and Required Prepayments Under Note...........................15
3.1 Borrowing Base.............................................15 3.2
Redeterminations of Borrowing Base and Monthly Automatic Borrowing Base
Reduction...................................15 3.3 Standards for
Redetermination..............................15 3.4 Borrowing Base
Redetermination Fee.........................15 3.5 Mandatory Increase in
Collateral or Prepayment of Principal of the
Note...................................16 3.6 Monthly Automatic Borrowing Base
Reduction and Prepayment of Principal of the
Note...................................16 3.7 Letters of
Credit..........................................16 ARTICLE
IV...................................................................17 Security
and Assignment......................................................17 ARTICLE
V....................................................................17
Conditions Precedent.........................................................17
5.1 Renewal and Extension......................................17 5.2 All
Advances...............................................18 ARTICLE
VI...................................................................19
Representations and Warranties...............................................19
6.1 Existence and Authority....................................19 6.2
Powers.....................................................19 6.3 Financial
Statements.......................................19 i 6.4
Liabilities................................................20 6.5
Litigation.................................................20 6.6
Taxes......................................................20 6.7 Purpose of
Loan............................................20 6.8 Properties;
Liens..........................................20 6.9 Material
Agreements........................................21 6.10
ERISA......................................................21 6.11 Location of
Records........................................21 6.12 Permits and Franchises,
Etc................................21 6.13
Subsidiaries...............................................21 6.14 Hazardous
Wastes and Substances............................22 6.15 Public Utility Holding
Company Act.........................22 6.16 Investment Company
Act.....................................22 6.17
General....................................................22 ARTICLE
VII..................................................................23
Affirmative Covenants........................................................23
7.1 Financial Statements and Other Information.................23 7.2
Taxes......................................................24 7.3 Discharge of
Contractual Obligations.......................24 7.4 Legal
Status...............................................25 7.5 Maintenance and
Evidence of Priority of Bank Liens.........25 7.6
Insurance..................................................25 7.7 Reimbursement
of Fees and Expenses.........................25 7.8
Indemnification............................................26 7.9 Curing of
Defects..........................................26 7.10 Inspection and
Visitation..................................26 7.11
Notices....................................................27 7.12 Bank Lien on
Other Assets..................................27 7.13
Compliance.................................................27 7.14 Compliance
with Environmental Laws.........................27 7.15 Use of
Proceeds............................................28 7.16 Deposit
Accounts...........................................28 7.17 Title
Curative.............................................28 ARTICLE
VIII.................................................................28 Negative
Covenants...........................................................28 8.1
Liens......................................................28 8.2
Indebtedness...............................................29 8.3 ERISA
Compliance...........................................29 8.4
Investments................................................30 8.5 Mergers,
Consolidations....................................30 8.6 Dividends and
Distributions................................30 8.7 Transactions with
Affiliates...............................30 8.8 Accounting Method and Fiscal
Year..........................30 8.9 Nature of
Business.........................................31 8.10 Disposition of
Assets......................................31 8.11 Current
Ratio..............................................31 8.12
Leases.....................................................31 8.13 Net
Worth..................................................31 8.14 Debt Service
Ratio.........................................31 8.15
Derivatives................................................31 8.16 Employee
Agreements........................................32 ARTICLE
IX...................................................................32 Default
and Remedies.........................................................32 ii 9.1
Events of Default..........................................32 9.2
Remedies...................................................34 ARTICLE
X....................................................................34
Miscellaneous................................................................34
10.1 Survival of Representations and Warranties.................34 10.2
Communications.............................................34 10.3
Non-Waiver.................................................35 10.4 Strict
Compliance..........................................35 10.5 Cumulative
Rights..........................................35 10.6 GOVERNING
LAW..............................................35 10.7 CHOICE OF FORUM;
CONSENT TO SERVICE OF PROCESS; JURISDICTION; AND WAIVER OF JURY
TRIAL.....................36 10.8 Usury Savings
Clause.......................................36 10.9
Enforceability.............................................37 10.10 Binding
Effect.............................................37 10.11 No Third Party
Beneficiary.................................37 10.12 Delegation by
Lender.......................................37 10.13
Setoff.....................................................37 10.14 Additional
Documents.......................................38 10.15
Counterparts...............................................38 10.16
Amendments.................................................38 10.17
Headings...................................................38 10.18
Conflicts..................................................38 10.19
Entirety...................................................38 10.20
Participations.............................................38 10.21 Notice of
Final Agreement..................................39 Exhibit 2.2 - Request for
Advance Exhibit 2.4 - Promissory Note Exhibit 2.9 - Form of Rate Election
Schedule 5.1 - Closing Documents Schedule 6.5 - Litigation Schedule 6.9 -
Material Agreements Exhibit 7.1 - Compliance Certificate iii LOAN AGREEMENT THIS
LOAN AGREEMENT (this "Agreement") is entered into this 25th day of January,
2002, by and between PARALLEL PETROLEUM CORPORATION, a Delaware corporation
("Borrower") and FIRST AMERICAN BANK, SSB, a state savings bank ("Lender").
RECITALS A. Borrower and Washington Mutual Bank, FA, successor by merger to Bank
United ("Prior Lender") entered into that certain Loan Agreement dated December
18, 2000 (the "Prior Loan Agreement"). B. Contemporaneously with the execution
hereof, the Prior Lender has assigned to Lender all of the Prior Lender's
interests in and under the Prior Loan Agreement, the Prior Note (defined below)
and all liens and security interests securing Borrower's obligations to Prior
Lender under the Prior Loan Agreement and the Prior Note. C. Borrower has
requested that Lender provide Borrower with a reducing revolving line of credit
facility in an amount up to $30,000,000, and Lender is willing to make such
facility available to Borrower, subject to the terms and conditions contained
herein. The parties hereto agree that this Agreement replaces the Prior Loan
Agreement and that this Agreement and the other Loan Papers executed in
connection herewith shall govern the terms of the loans made hereunder in their
entirety and shall control over the Prior Loan Agreement. AGREEMENT NOW
THEREFORE, in consideration of the premises and the mutual covenants herein
contained and other good and valuable consideration, it is hereby agreed between
the parties as follows: ARTICLE I Definitions 1.1 Certain Defined Terms. For the
purposes of this Agreement, the following terms shall have the respective
meanings assigned to them in this section or in the section or recital referred
to below: "Adjusted Eurodollar Rate" means, with respect to each particular
Eurodollar Portion and the associated Eurodollar Rate and Reserve Percentage,
the greater of (i) five percent (5.00%), or (ii) the rate per annum calculated
by Lender (rounded upwards, if necessary, to the next higher 1/100th of 1%)
determined on a daily basis pursuant to the following formula: 1 AER = ER + EM
--------- 1.00 - RP AER = Adjusted Eurodollar Rate ER = Eurodollar Rate RP =
Reserve Percentage EM = Eurodollar Margin The Adjusted Eurodollar Rate shall
change as the associated Reserve Percentage changes. "Advance" means any
disbursement to or on behalf of Borrower under any of the Loan Papers,
including, without limitation, all amounts advanced under the Prior Note or the
Note. "Agreement": the preamble. "Bank Liens" means Liens in favor of Lender,
securing all or any portion of the Obligation, including, without limitation,
Rights in any of the Collateral created in favor of Lender, whether by mortgage,
pledge, hypothecation, assignment, transfer or other granting or creation of
Liens. "Base Rate" means, as of any date, the greater of (i) five percent
(5.00%), or (ii) the fluctuating rate of interest per annum published in the
Money Rates section of The Wall Street Journal as the U.S. "prime rate." If the
Money Rates section of The Wall Street Journal contains more than one U.S.
"prime rate," then the "prime rate" for purposes of this definition shall be the
higher of said rates. If the Money Rates section of The Wall Street Journal does
not have a rate designated by it as its "prime rate," then the "prime rate"
shall be deemed to be the fluctuating rate of interest per annum which is the
general reference rate designated by Lender as its "reference rate," "base rate"
or other similar rate and which is comparable to the "prime rate" as described
above. The Base Rate is used by Lender as a general reference rate of interest,
taking into account such factors as Lender may deem appropriate, it being
understood that it is not necessarily the lowest or best rate actually charged
to any customer and that Lender may make various commercial or other loans at
rates of interest having no relationship to such rate. Each change in the Base
Rate shall become effective without prior notice to Borrower automatically as of
the opening of business on the date of such change in the Base Rate. "Base Rate
Portion" means that portion of the unpaid principal balance of the Revolving
Loan which is not made up of Eurodollar Portions. "Borrower": the preamble.
"Borrowing Base": Section 3.1. "Borrowing Base Redetermination Fee": Section
3.4. 2 "Business Day" means a day on which commercial banks are open for
business with the public in the State of Texas. Any Business Day in any way
relating to Eurodollar Portions (such as the day on which a Eurodollar Interest
Period begins or ends) must also be a day on which, in the judgment of Lender,
significant transactions in Dollars are carried out in the London interbank
market. "Cash Flow" means Borrower's Net Income for each fiscal quarter of
Borrower, less preferred dividends paid by Borrower during each such fiscal
quarter, plus depreciation, depletion and other non-cash charges of Borrower
during each such fiscal quarter determined on an unconsolidated basis. "Claims":
Section 7.8. "Collateral": Article IV. "Current Assets" of any person shall
mean, as of any date, the current assets that would be reflected on an
unconsolidated balance sheet of such person prepared as of such date in
conformity with GAAP. "Current Liabilities" of any person shall mean, as of any
date, the current liabilities that would be reflected on an unconsolidated
balance sheet of such person prepared as of such date in conformity with GAAP.
"Current Ratio" means, as of any date, the ratio of Borrower's Current Assets
(including, for purposes of this calculation, unused availability under the
Revolving Commitment) to its Current Liabilities (excluding, for purposes of
this calculation, current maturities of the Note). "Debt Service Ratio" means,
as of the end of each fiscal quarter of Borrower, the ratio of Borrower's Cash
Flow during such fiscal quarter to the Total Monthly Automatic Borrowing Base
Reductions during such fiscal quarter. "Deed of Trust" means one or more
mortgages, deeds of trust, assignments of production and security agreements and
financing statements in favor of Lender encumbering every interest of Borrower
in every oil and gas property owned by Borrower and selected by Lender to be
encumbered as security for the Obligation, including, without limitation, any
such property consisting of royalty interests, overriding royalty interests
and/or reversionary rights relating to either developed or undeveloped leasehold
acreage, it being specifically recognized that if any such interest selected is
in a state where a mortgage, deed of trust, assignment of production and
security agreement or financing statement is, or may be, ineffective, a document
appropriate for use in that state shall be required. "Derivatives" means,
foreign exchange transactions and commodity, currency and interest rate swaps,
floors, caps, collars, forward sales, options, other similar transactions and
combinations of the foregoing, including without limitation, Rate Management
Transactions. "Dollars" and "$" mean lawful money of the United States of
America. 3 "ERISA": Section 6.10. "Eurodollar Interest Period" means, with
respect to each particular Eurodollar Portion, a period of thirty (30), sixty
(60) or ninety (90) days (or such longer period as may be requested by Borrower
and agreed to by Lender in its sole discretion), as specified in the Rate
Election applicable thereto, beginning on and including the date specified in
such Rate Election (which must be a Business Day), and ending thirty (30), sixty
(60) or ninety (90) days (or the number of days requested by Borrower and agreed
to by Lender in its sole discretion) thereafter, provided that each Eurodollar
Interest Period which would otherwise end on a day which is not a Business Day
shall end on the next succeeding Business Day (unless such next succeeding
Business Day is in the next calendar month, in which case such Eurodollar
Interest Period shall end on the immediately preceding Business Day). No
Eurodollar Interest Period may be elected for any Eurodollar Portion which would
extend past the Revolving Maturity Date. "Eurodollar Margin" means, with respect
to each Eurodollar Portion of the Revolving Loan, two and three-fourths percent
(2.75%). "Eurodollar Portion" means any portion of the unpaid principal balance
of the Revolving Loan which Borrower designates as such in a Rate Election.
"Eurodollar Rate" means, with respect to each particular Eurodollar Portion for
any Interest Period therefor, the rate of interest per annum at which deposits
in immediately available and freely transferrable funds in Dollars are offered
to Lender (at approximately 10:00 a.m. Dallas, Texas time three Business Days
prior to the first day of each Interest Period) in the London interbank market
for delivery on the first day of such Interest Period in an amount equal to or
comparable to the principal amount of the Eurodollar Portion to which such
Interest Period relates. Each determination of the Eurodollar Rate by Lender
shall, in the absence of error, be conclusive and binding. "Event of Default":
Section 9.1. "GAAP" shall mean those generally accepted accounting principles
and practices that are recognized as such by the American Institute of Certified
Public Accountants acting through its Accounting Principles Board or by the
Financial Accounting Standards Board (or any other appropriate board or
committee thereof), applied on a basis consistent with that of prior periods so
as to properly reflect the financial condition, results of operations and cash
flows of a person, except that any accounting principle or practice required to
be changed by the said Accounting Principles Board or Financial Accounting
Standards Board (or any other board or committee thereof) in order to continue
as a generally accepted accounting principle or practice may so be changed and
when so changed shall constitute generally accepted accounting principles in
accordance with the terms hereof. "Highest Lawful Rate" means the maximum
nonusurious rate of interest (or, if the context so requires, an amount
calculated at such rate) that Lender is allowed to contract for, charge, take,
reserve or receive under applicable law after taking into account, to the extent
required by applicable law, any and all relevant payments or charges under the
Loan Papers. 4 "Interest Period" means, with respect to any Eurodollar Portion,
the related Eurodollar Interest Period. "Investments": Section 8.4. "Lender":
the preamble. "Lien" means any lien, mortgage, security interest, charge, or
encumbrance of any kind, including, without limitation, the Rights of a vendor,
lessor, or similar party under any conditional sales agreement or other title
retention agreement or lease substantially equivalent thereto, any production
payment, and any other Right of, or arrangement with, any creditor to have his
claim satisfied out of any property or assets, or the proceeds therefrom, prior
to the general creditors of the owner thereof. "Loan Papers" means (i) this
Agreement, (ii) any and all notes, mortgages, deeds of trust, security
agreements, financing statements, guaranties, and other agreements, documents,
certificates, letters and instruments ever delivered or executed pursuant to, or
in connection with, this Agreement, as any of the same may hereafter be amended,
supplemented or restated (including, without limitation, the Note and the Deed
of Trust), (iii) any and all agreements, documents and instruments ever
delivered or executed pursuant to, or in connection with, Rate Management
Transactions, and (iv) any and all future renewals and extensions or
restatements of, or amendments or supplements to, all or any part of the
foregoing. "Margin Regulations" means, as applicable, Regulations G, U and X of
the Board of Governors of the Federal Reserve System, as from time to time in
effect. "Material Adverse Change" means any set of circumstances or events that
(i) will or could reasonably be expected to have any adverse effect upon the
validity, performance, or enforceability of any Loan Paper, (ii) is or could
reasonably be expected to be material and adverse to the financial condition or
business operations of Borrower, (iii) will or could reasonably be expected to
impair the ability of Borrower to fulfill its obligations under the terms and
conditions of the Loan Papers, or (iv) will or could reasonably be expected to
cause an Event of Default. "Material Agreement" of any person means any material
written or oral agreement, contract, commitment, or understanding to which such
person is a party, by which such person is directly or indirectly bound, or to
which any asset of such person may be subject, which is not cancelable by such
person upon 30 days or less notice without liability for further payment other
than nominal penalty. "Mineral Interests" means Rights, estates, titles, and
interests in and to oil, gas, sulphur, or other mineral (or any combination
thereof) leases (and all extensions, amendments, ratifications, and subleases
thereof or thereunder) and any mineral interests, royalty and overriding royalty
interests, production payment and net profits interests, mineral fee interests,
and rights therein, including, without limitation, any reversionary or carried
interests relating to the foregoing, together with Rights, titles, and interests
created by or arising under 5 the terms of any unitization, communitization, and
pooling agreements or arrangements, and all properties, rights, and interests
covered thereby, whether arising by contract, by order, or by operation of law,
which now or hereafter include all or any part of the foregoing. "Monthly
Automatic Borrowing Base Reduction": Section 3.6. "Net Income" means Borrower's
unconsolidated net income, determined in accordance with GAAP. "Net Worth"
means, as of any date, an amount equal to Borrower's unconsolidated
stockholders' equity, as determined in accordance with GAAP. "Note": Section
2.3(a). "Obligation" means all present and future indebtedness, obligations and
liabilities, and all renewals and extensions thereof, or any part thereof, now
or hereafter owed to Lender by Borrower, arising from, by virtue of, or pursuant
to any Loan Paper (including, without limitation, amounts owed to Lender by
Borrower on account of any letters of credit issued by Lender for the account of
Borrower and any and all obligations, contingent or otherwise, whether now
existing or hereafter arising, of Borrower to Lender arising under or in
connection with Rate Management Transactions), or otherwise, together with all
interest accruing thereon and reasonable costs, expenses, and attorneys' fees
incurred in the enforcement or collection thereof, whether such indebtedness,
obligations, and liabilities are direct, indirect, fixed, contingent,
liquidated, unliquidated, joint, several, or joint and several or were, prior to
acquisition thereof by Lender, owed to some other person. "Plan" means any plan
subject to Title IV of ERISA and maintained by Borrower, or any such plan to
which Borrower is required to contribute on behalf of its employees. "Prior
Lender": Recital A. "Prior Loan Agreement": Recital A. "Prior Note" means that
certain promissory note dated December 18, 2000, in the original principal
amount of $30,000,000 executed by Borrower and payable to the order of Prior
Lender. "Rate Election" has the meaning given it in Section 2.9. "Rate
Management Transaction" means any transaction (including an agreement with
respect thereto) now existing or hereafter entered into between Borrower and
Lender, or any affiliate of Lender, which is a rate swap, basis swap, forward
rate transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
forward transaction, currency swap transaction, cross-currency rate swap
transaction, currency option or any other similar transaction (including any
option with respect 6 to any of these transaction) or any combination thereof,
whether linked to one or more interest rates, foreign currencies, commodity
prices, equity prices or other financial measures. "Regulation D" means
Regulation D of the Board of Governors of the Federal Reserve System, as from
time to time in effect. "Reserve Percentage" means, on any day with respect to
each particular Eurodollar Portion in a Tranche, the maximum reserve
requirement, as determined by Lender (including without limitation any basic,
supplemental, marginal, emergency or similar reserves), expressed as a decimal
and rounded to the next higher .01 of 1%, which would then apply to Lender under
Regulation D or successor regulations issued from time to time by the Board of
Governors of the Federal Reserve System with respect to "Eurocurrency
liabilities" (as such term is defined in Regulation D) equal in amount to
Lender's Eurodollar Portion in such Tranche, were Lender to have any such
"Eurocurrency liabilities". If such reserve requirement shall change after the
date hereof, the Reserve Percentage shall be automatically increased or
decreased, as the case may be, from time to time as of the effective time of
each such change in such reserve requirement. "Revolving Commitment": Section
2.1(a). "Revolving Loan" means a loan or loans made under the Revolving
Commitment pursuant to Section 2.1(a). "Revolving Maturity Date" means January
25, 2006. "Rights" means rights, remedies, powers, privileges and benefits.
"Subsidiary" means any corporation or other entity fifty percent (50%) or more
of the Voting Shares of which is owned, directly or indirectly, by Borrower.
"Taxes" has the meaning given it in Section 2.13. "Total Monthly Automatic
Borrowing Base Reductions" means the sum of the Monthly Automatic Borrowing Base
Reductions during each fiscal quarter of Borrower. "Tranche" has the meaning
given it in Section 2.9. "Voting Shares" of any corporation or other entity
shall mean outstanding shares of capital stock or other ownership interests of
any class or classes (however designated) having ordinary voting power for the
election of at least a majority of the members of the Board of Directors (or
other governing body) of such corporation or other entity, other than shares
having such power only by reason of the happening of a contingency. 7 1.2 Other
Definitional Provisions. (a) All terms defined in this Agreement shall have the
above described meanings when used in any other Loan Paper or in any
certificate, report or other document made or delivered pursuant to this
Agreement, unless same shall otherwise expressly require. (b) Terms used herein
in the singular shall import the plural and vice versa. (c) Terms not
specifically defined herein shall have the meanings accorded them under GAAP,
customary oil and gas industry practices or the Texas Uniform Commercial Code,
as appropriate. (d) The words "hereof," "herein," "hereto," "hereunder" and
similar terms when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. ARTICLE II
Revolving Loan 2.1 Revolving Commitment. (a) Subject to the terms and conditions
hereof, during the period beginning on the date hereof and ending on the
Revolving Maturity Date, Lender agrees to extend to Borrower a revolving line of
credit which shall not exceed at any time outstanding the lesser of (i)
$30,000,000, or (ii) the Borrowing Base from time to time in effect (such lesser
amount being referred to herein as the "Revolving Commitment"). Subject to the
foregoing limitations and the requirements set forth herein and in the Note,
Borrower may borrow, repay, and reborrow hereunder during the period beginning
on the date hereof and ending on the Revolving Maturity Date. Notwithstanding
any other provisions of this Agreement, no Advance shall be required to be made
hereunder if any Event of Default has occurred and is continuing. (b) Borrower
may at any time prior to the Revolving Maturity Date upon at least one (1)
Business Day's notice in writing to Lender reduce (in $100,000 integer
multiples) or terminate the Revolving Commitment. If the Revolving Commitment is
reduced, Lender shall thereafter have no obligation to make any Advance that
would result in the Revolving Loan exceeding the Revolving Commitment as so
reduced; if the Revolving Commitment is terminated, no further Advance shall be
made pursuant to this Agreement. Notwithstanding anything to the contrary
contained herein, (i) once reduced or terminated, the Revolving Commitment may
not be increased or reinstated except upon the mutual written agreement of
Borrower and Lender; and (ii) Borrower shall not reduce the Revolving Commitment
to an amount that is less than the outstanding balance of the Revolving Loan on
the effective date of such reduction. 8 2.2 Manner of Borrowing. (a) Each
request by Borrower to Lender for an Advance shall be in the form of Exhibit 2.2
hereto and shall specify the aggregate amount of such requested Advance and the
requested date of such Advance. Borrower shall furnish to Lender each request
for Advance not later than 10:00 a.m. Midland, Texas time, (i) one (1) Business
Day prior to the requested borrowing date (which must be a Business Day) in the
case of Advances to be made as Base Rate Portions, and (ii) three (3) days prior
to the requested borrowing date (which must be a Business Day) in the case of
Advances to be made as Eurodollar Portions; provided that, any Advance to be
made as a Eurodollar Portion shall require, in addition, a Rate Election as set
forth in Section 2.9. Subject to Section 2.9, each Advance shall be in the
minimum amount of $50,000 or the unadvanced portion of the Revolving Commitment,
whichever is less. (b) Upon fulfillment of all applicable conditions set forth
in Section 5.2 hereof (and assuming the prior satisfaction of all conditions
pursuant to Section 5.1 hereof), Lender shall before 2:00 o'clock p.m. (Midland,
Texas time) on the requested borrowing date, pay or deliver each Advance to or
upon the order of Borrower at the principal banking office of Lender in Midland,
Texas in immediately available funds. 2.3 Note. (a) The Advances made by Lender
under the Revolving Loan shall be evidenced by a promissory note (the "Note"),
which shall be (i) dated as of the date hereof, (ii) in the principal amount of
$30,000,000, and (iii) in the form of Exhibit 2.3 hereto with blanks
appropriately completed in conformity herewith. Notwithstanding the principal
amount of the Note as stated on the face thereof, the amount of principal
actually owing on the Note at any given time shall be the aggregate of all
Advances theretofore made to Borrower under the Revolving Loan, less all
payments of principal theretofore actually received by Lender and applied to the
Note. (b) It is expressly agreed that the Note is given, to the extent of
$12,065,589.00, in renewal, extension and rearrangement, but not in
extinguishment or novation, of the unpaid principal balance of the Prior Note.
2.4 Principal Payments. The principal of the Note shall be due and payable on
the Revolving Maturity Date, unless earlier due in whole or in part pursuant to
the mandatory prepayment requirements of Section 3.5, Section 3.6 or the other
terms hereof. 2.5 Interest Rate; Interest Payments. The unpaid principal balance
of the Note shall bear interest from time to time and interest on the Note shall
be payable, as follows: (a) Borrower agrees to pay interest on the Note
calculated on the basis of the actual days elapsed in a year consisting of 365
or, if appropriate, 366 days with respect to the unpaid principal amount of each
Base Rate Portion during the term of the Note until maturity (whether by
acceleration or otherwise), at a varying rate per annum equal to the lesser of
(i) the Highest Lawful Rate, or (ii) the Base Rate. Subject to the provisions of
this Agreement and to 9 prepayment, the principal of the Note representing Base
Rate Portions shall be due and payable as specified in Section 2.4 hereof and
the interest in respect of each Base Rate Portion shall be due and payable
monthly on the 1st day of each month, commencing March 1, 2002. Past due
principal and, to the extent permitted by law, past due interest in respect to
each Base Rate Portion, shall bear interest, payable on demand, at a rate per
annum equal to the Highest Lawful Rate. (b) Borrower agrees to pay interest
calculated on the basis of a year consisting of 360 days with respect to the
unpaid principal amount of each Eurodollar Portion during the term of the Note
until maturity (whether by acceleration or otherwise), at a varying rate per
annum equal to the lesser of (i) the Highest Lawful Rate, or (ii) the applicable
Adjusted Eurodollar Rate during the related Eurodollar Interest Period. Subject
to the provisions of this Agreement with respect to prepayment, the principal of
the Note representing Eurodollar Portions shall be payable as specified in
Section 2.4 hereof and the interest with respect to each Eurodollar Portion
shall be due and payable on the day which the related Eurodollar Interest Period
ends. Past due principal and, to the extent permitted by law, past due interest
in respect to each Eurodollar Portion, shall bear interest, payable on demand,
at a rate per annum equal to the Highest Lawful Rate. 2.6 Capital Adequacy. If
at any time after the date hereof, and from time to time, any law, rule,
regulation or treaty now existing or hereafter promulgated regarding capital
adequacy, or any adoption thereof, ruling thereon, change therein, or
interpretation thereof now existing or hereafter made by any governmental
authority, central bank or comparable agency regarding capital adequacy, or
compliance by Lender with any request, directive, or requirement now existing or
hereafter imposed by any governmental authority, central bank or comparable
agency regarding capital adequacy (whether or not having the force of law),
shall result in Lender incurring a reduction in the rate of return on Lender's
capital as a consequence of Lender's obligations hereunder to a level below that
which Lender otherwise could have achieved in an amount deemed by Lender to be
material (and Lender may, in determining such amount, utilize such assumptions
and allocations of costs and expenses as Lender shall deem reasonable and may
use any reasonable averaging or attribution method), then, Lender may, from time
to time, notify Borrower and deliver to Borrower a certificate setting forth in
reasonable detail the calculation of the amount necessary to compensate Lender
for the reductions incurred. In such event, Borrower agrees that it shall,
within thirty (30) days, either (i) pay such amount to Lender, or (ii)
renegotiate the interest rate on the Note to a rate mutually acceptable to
Borrower and Lender. Failing Borrower's payment of such amount pursuant to
clause (i) above or the renegotiation of the interest rate pursuant to clause
(ii) above, Borrower agrees that it shall, within ninety (90) days thereafter,
pay the Obligation in full and terminate this Agreement. 2.7 Prepayments.
Borrower may prepay any Base Rate Portion, in whole or in part, without penalty
or premium, provided, however, that the Revolving Commitment shall be terminated
if the unpaid principal balance of the Note is at any time reduced to less than
$1,000. No prepayment of any Eurodollar Portion or any part thereof shall be
permitted prior to the last day of the current Interest Period therefor without
the prior consent of Lender; provided, that if Lender determines that it may not
lawfully maintain a Eurodollar Portion to 10 the last day of the current
Interest Period therefor, Borrower shall prepay such Eurodollar Portion on the
date required by Lender. If there is a permitted prepayment of any Eurodollar
Portion prior to the last day of the current Interest Period therefor, whether
by consent or requirement of Lender (including without limitation pursuant to
Section 3.5 or Section 3.6 hereof) or because of acceleration or otherwise,
Borrower shall, within fifteen (15) days of any request by Lender, pay to Lender
any loss or expense which Lender may incur or sustain as a result of any such
prepayment. A statement as to the amount of such loss or expense, prepared in
good faith and in reasonable detail by Lender and submitted by Lender to
Borrower, shall be conclusive and binding absent manifest error in computation.
Calculation of all amounts payable to Lender under this Section 2.7 shall be
made as though Lender shall have actually funded or committed to fund the
relevant Eurodollar Portion through the purchase of an underlying deposit in an
amount equal to the amount of such portion and having a maturity comparable to
the current Interest Period for such Eurodollar Portion; provided, however, that
Lender may fund any Eurodollar Portion in any manner it sees fit and the
foregoing assumption shall be utilized only for the purpose of calculation of
amounts payable under this Section 2.7. 2.8 Manner and Application of Payments.
All payments of principal and interest on the Note shall be made by Borrower to
Lender before 1:30 o'clock p.m. (Midland, Texas time), in lawful money of the
United States of America and in immediately available funds at Lender's
principal banking office in Midland, Texas. In any case where a payment of
principal or interest on the Note, or any commitment or other fee, is due on a
day other than a Business Day, the maturity thereof shall be extended to the
next succeeding Business Day, but interest shall continue to accrue until the
payment is in fact made. All payments and prepayments on the Obligation,
including proceeds from the exercise of any Rights under the Loan Papers or
proceeds of any of the Collateral, shall be applied to the Obligation in the
order deemed appropriate by Lender, but Lender shall always retain the right to
apply same in the following order: (i) to expenses for which Lender shall not
have been reimbursed under the Loan Papers and then to all indemnified amounts
due Lender under the terms of the Loan Papers; (ii) to accrued and unpaid
interest on the Note; (iii) to Base Rate Portions of the Loan; (iv) to
Eurodollar Portions of the Loan; and (v) to the remaining Obligation. Subject to
the foregoing, payments of principal of the Note shall be applied to the
Eurodollar Portions as Borrower shall select; provided, however, that Borrower
shall select Eurodollar Portions to be repaid subject to the terms of Section
2.7 hereof, and in a manner designed to minimize the consequential loss to
Lender, if any, resulting from such payments; and provided further that, if
Borrower shall fail to select the Eurodollar Portions to which such payments are
to be applied, or if an Event of Default has occurred and is continuing at the
time of such payment, then Lender shall be entitled to apply the payment to such
Eurodollar Portions in the manner it shall deem appropriate. 2.9 Rate Elections.
Borrower may from time to time designate all or any portions of the Revolving
Loan (including any yet to be made Advances which are to be made prior to or at
the beginning of the designated Interest Period but excluding any portions of
the Revolving Loan which are required to be repaid prior to the end of the
designated Interest Period) as a "Tranche", which term refers to a set of
Eurodollar Portions with identical Interest Periods. Lender shall not be
required to give effect to such election during the continuance of an Event 11
of Default, and Borrower may make such an election with respect to already
existing Eurodollar Portions only if such election will take effect at or after
the termination of the Interest Period applicable thereto. Each election by
Borrower of a Tranche shall: (a) Be made in writing in the form and substance of
Exhibit 2.9 attached hereto, duly completed, herein called a "Rate Election";
(b) Specify the aggregate amount of the Revolving Loan which Borrower desires to
designate as such Tranche, the first day of the Interest Period which is to
apply thereto, and the length of such Interest Period; and (c) Be received by
Lender not later than 10:00 a.m. Midland, Texas time, on the third Business Day
preceding the first day of the specified Interest Period. Each Rate Election
shall be irrevocable. Borrower may make no Rate Election which does not specify
an Interest Period complying with the definition of "Eurodollar Interest Period"
in Section 1.1, and the aggregate amount of the Tranche elected in any Rate
Election must be $1,000,000 or a higher integral multiple of $100,000. Upon the
termination of each Interest Period the portion of the Revolving Loan within the
related Tranche shall, unless the subject of a new Rate Election then taking
effect, automatically become a part of the Base Rate Portion of the Revolving
Loan and become subject to all provisions of the Loan Papers governing such Base
Rate Portion. Borrower shall have no more than two (2) Tranches in effect at any
time. 2.10 Increased Cost of Eurodollar Portion. If any applicable domestic or
foreign law, treaty, rule, directive or regulation (whether now in effect or
hereinafter enacted or promulgated, including Regulation D) or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not having the
force of law): (a) shall change the basis of taxation of payments to Lender of
any principal, interest, or other amounts attributable to any Eurodollar Portion
of the Revolving Loan, or otherwise due under this Agreement in respect of any
Eurodollar Portion of the Revolving Loan (other than taxes imposed on the
overall net income of Lender or any lending office of Lender by any jurisdiction
in which Lender or any such lending office is located); (b) shall change,
impose, modify, apply or deem applicable any reserve, special deposit or similar
requirements in respect of any Eurodollar Portion (excluding those for which
Lender is fully compensated pursuant to adjustments made in the definition of
Adjusted Eurodollar Rate) or against assets of, deposits with or for the account
of, or credit extended by, Lender; or (c) shall impose on Lender or the London
interbank market any other condition affecting any Eurodollar Portion; and the
result of any of the foregoing (a) through (c) is to (1) increase the cost to
Lender of funding or maintaining any Eurodollar Portion, or (2) to reduce the
amount of any sum 12 receivable by Lender in respect of any Eurodollar Portion
by an amount reasonably deemed by Lender to be material; then (i) Lender shall
promptly notify Borrower in writing of the happening of such event, (ii)
Borrower shall thereafter upon demand pay to Lender such additional amount or
amounts as will compensate Lender for such additional cost or reduction, subject
to the provisions of Section 2.12, and (iii) Borrower may elect, by giving to
Lender not less than three (3) Business Days' notice, to convert all (but not
less than all) of any such Eurodollar Portion into a part of the Base Rate
Portion, subject to the provisions of Section 2.12. 2.11 Availability. If (a)
any change in applicable laws, treaties, rules or regulations or in the
interpretation or administration thereof in any jurisdiction whatsoever,
domestic or foreign, shall make it unlawful or impracticable for Lender to fund
or maintain Eurodollar Portions, or shall materially restrict the authority of
Lender to purchase or take offshore deposits of dollars (i.e., "eurodollars"),
or (b) Lender determines that matching deposits appropriate to fund or maintain
any Eurodollar Portion are not available to it, or (c) Lender determines that
the formula for calculating the Adjusted Eurodollar Rate does not fairly reflect
the cost to Lender of making or maintaining loans based on such rate, then, upon
notice by Lender to Borrower, Borrower's right to elect Eurodollar Portions
shall be suspended to the extent and for the duration of such illegality,
impracticability, restriction or condition, and all Eurodollar Portions (or
portions thereof) which are then outstanding or are then the subject of any Rate
Election and which cannot lawfully or practicably be maintained or funded shall
immediately become or remain part of the Base Rate Portions of the Loan, subject
to the provisions of Section 2.12. Borrower agrees to indemnify Lender and hold
it harmless against all costs, expenses, claims, penalties, liabilities and
damages which may result from any such change in law, treaty, rule, regulation,
interpretation or administration. 2.12 Funding Losses. In addition to its other
obligations hereunder, Borrower will indemnify Lender against, and reimburse
Lender on demand for, any loss or expense incurred or sustained by Lender, as a
result of (a) any payment or prepayment (whether authorized or required
hereunder or otherwise) of all or a portion of a Eurodollar Portion on a day
other than the day on which the applicable Interest Period ends, (b) any payment
or prepayment (whether required hereunder or otherwise) of the Revolving Loan
made after the delivery, but before the effective date, of a Rate Election, if
such payment or prepayment prevents such Rate Election from becoming fully
effective, (c) the failure of any Advance to be made or of any Rate Election to
become effective due to any condition precedent to an Advance not being
satisfied, due to the inability of Lender (acting reasonably and in accordance
with Section 2.11) to determine the Adjusted Eurodollar Rate for a Eurodollar
Portion, or due to any other action or inaction of Borrower, or (d) any
conversion (whether authorized or required hereunder or otherwise) of all or any
portion of any Eurodollar Portion into a Base Rate Portion on a day other than
the day on which the applicable Interest Period ends. 2.13 Taxes. All payments
by Borrower of principal of, and interest on, the Revolving Loan, and all other
amounts payable hereunder shall be made free and clear of and without deduction
for any present or future income, excise, stamp or franchise taxes and other
taxes, fees, duties, withholdings or other charges of any nature whatsoever
imposed by any taxing authority, but excluding franchise taxes and taxes imposed
on or measured by Lender's net 13 income or receipts (such non-excluded items
being called "Taxes"). In the event that any withholding or deduction from any
payment to be made by Borrower hereunder is required in respect of any Taxes
pursuant to any applicable law, rule or regulation, then, Borrower will: (a) pay
directly to the relevant authority the full amount required to be so withheld or
deducted; (b) promptly forward to Lender an official receipt or other
documentation satisfactory to Lender evidencing such payment to such authority;
and (c) pay to Lender such additional amount(s) as is necessary to ensure that
the net amount actually received by Lender will equal the full amount such
Lender would have received had no such withholding or deduction been required.
If any Taxes are directly asserted against Lender with respect to any payment
received by Lender hereunder, Lender may pay such Taxes and Borrower will
promptly pay such additional amounts to Lender (including any penalties,
interest or expenses) as is necessary in order that the net amount received by
such person after the payment of such Taxes (including any taxes on such
additional amount) shall equal the amount such person would have received had no
such Taxes been asserted. If Borrower fails to pay any Taxes when due to the
appropriate taxing authority or fail to remit to Lender the required receipts or
other required documentary evidence, Borrower shall indemnify Lender for any
Taxes, interest or penalties that may become payable by Lender as a result of
any such failure. ARTICLE III Borrowing Base and Required Prepayments Under Note
3.1 Borrowing Base. The "Borrowing Base" is initially set at the sum of
$13,000,000.00 but shall be subject to redetermination as further provided in
this Article. 3.2 Redeterminations of Borrowing Base and Monthly Automatic
Borrowing Base Reduction. Lender shall redetermine the Borrowing Base and
Monthly Automatic Borrowing Base Reduction semi-annually, on or about May 1 and
November 1 of each year, beginning May 1, 2002. Lender may require a
redetermination of the Borrowing Base and Monthly Automatic Borrowing Base
Reduction at any time in its sole discretion. In addition, Borrower may request
that Lender redetermine the Borrowing Base and Monthly Automatic Borrowing Base
Reduction at any time, and Lender agrees to respond to each such request within
thirty (30) days after Lender has received from Borrower the requisite
information for such redetermination; provided, however, that Borrower may
request no more than one Borrowing Base and Monthly Automatic Borrowing Base
Reduction redetermination during the six-month period between each scheduled
Borrowing Base redetermination. Promptly following each redetermination of the
Borrowing Base or the Monthly Automatic Borrowing Base Reduction, Lender shall
notify Borrower of any change in the amount of the Borrowing Base or the Monthly
Automatic Borrowing Base Reduction. Until such time as Lender has notified
Borrower in writing of a change in the amount of the Borrowing Base or the
Monthly Automatic Borrowing Base 14 Reduction, the Borrowing Base and Monthly
Automatic Borrowing Base Reduction will remain unchanged. Borrower shall furnish
to Lender, no later than thirty (30) days prior to each redetermination date
hereunder (or within thirty (30) days after receipt of notice from Lender that
it has elected to make a non-scheduled Borrowing Base and Monthly Automatic
Borrowing Base Reduction redetermination), such information as Lender may
request, in form and substance acceptable to Lender, requisite to Lender's
redetermination of the Borrowing Base and Monthly Automatic Borrowing Base
Reduction. 3.3 Standards for Redetermination. All Borrowing Base and Monthly
Automatic Borrowing Base Reduction redeterminations shall be made by Lender in
the exercise of its sole discretion in accordance with its customary practices
and standards for loans in similar amounts to borrowers similarly situated, at
the time and under the circumstances then prevailing. 3.4 Borrowing Base
Redetermination Fee. In addition to the payments provided for in the Note,
Borrower shall pay to Lender at the time Lender provides the notice required by
Section 3.2, an amount equal to one-quarter of one percent (.25%) of the amount
of any increase in the Borrowing Base upon a scheduled or non-scheduled
Borrowing Base redetermination. The parties acknowledge and agree that the
Borrowing Base redetermination fees payable hereunder are intended as reasonable
compensation to Lender for its efforts in redetermining the Borrowing Base
during the term of the Revolving Commitment and for no other purpose. 3.5
Mandatory Increase in Collateral or Prepayment of Principal of the Note. In the
event that the Obligation shall, at the time of notification of the Borrowing
Base by Lender to Borrower pursuant to Section 3.2, be in excess of the
Revolving Commitment, Borrower shall, at Borrower's option, either (i) within
thirty (30) days thereafter, by instruments satisfactory in form and substance
to Lender, provide Lender with additional collateral with value in amounts
satisfactory to Lender, in its sole discretion, in order to increase the
Borrowing Base by an amount at least equal to such excess, (ii) within thirty
(30) days thereafter, prepay the principal of the Note (together with accrued
interest on the principal amount so prepaid) in an amount at least equal to such
excess, or (iii) within thirty (30) days thereafter, eliminate the Borrowing
Base deficiency through a combination of items (i) and (ii) above. 3.6 Monthly
Automatic Borrowing Base Reduction and Prepayment of Principal of the Note. The
Borrowing Base shall automatically reduce by $300,000 on May 1, 2002, and on the
first day of each month thereafter during the term of the Revolving Commitment
(each a "Monthly Automatic Borrowing Base Reduction"), subject to Lender's
right, in its sole discretion, to redetermine the Monthly Automatic Borrowing
Base Reduction in conjunction with a Borrowing Base redetermination pursuant to
Section 3.2 above. In the event that the Obligation shall be in excess of the
Revolving Commitment on the date of any Monthly Automatic Borrowing Base
Reduction, then on said date Borrower shall prepay the principal of the Note in
an amount equal to such excess, in addition to the payment of accrued interest
on the Note that may be due on such date. The provisions of Section 3.5 above
shall be applicable 15 to scheduled and non-scheduled redeterminations of the
Borrowing Base but shall not apply to a Monthly Automatic Borrowing Base
Reduction. 3.7 Letters of Credit. Unless an Event of Default shall have occurred
and be continuing or outstanding Advances to Borrower exceed the Borrowing Base,
Lender shall (subject to the exceptions hereinafter provided) from time to time
during the term of the Revolving Commitment upon request of Borrower issue
letters of credit for the account of Borrower in such face amounts as Borrower
may designate; provided, however, that: (a) the face amount of all such letters
of credit in the aggregate issued and outstanding during the term of this
Agreement shall not exceed the sum of $500,000; (b) the face amount of all such
letters of credit outstanding and requested shall be considered as Advances
hereunder for Borrowing Base purposes; (c) no such letter of credit shall be for
a term longer than one year, nor shall any such letter of credit have an
expiration date subsequent to the Revolving Maturity Date; (d) payments by
Lender on any such letter of credit shall be considered as Advances made as Base
Rate Portions under the Note; (e) the Collateral shall secure all of the
obligations of Borrower to repay Lender in connection with any amounts paid by
Lender on drafts or demands for payment drawn or made under any such letters of
credit (or under or in connection with any related letter of credit
applications); (f) each such letter of credit shall be used only for the purpose
of securing Borrower's bonding obligations associated with its oil and gas
business; and (g) simultaneously with the issuance of any such letter of credit,
Borrower shall pay to Lender a letter of credit fee in an amount equal to the
greater of $500, or one percent (1%) of the face amount of such letter of credit
(calculated on a per annum basis based on the stated term of such letter of
credit). ARTICLE IV Security and Assignment To secure full and complete payment
and performance of the Obligation, Borrower hereby grants and conveys to and
creates in favor of Lender Bank Liens in, to and on all of the following items
and types of property (referred to collectively herein as the "Collateral"), all
as more particularly described in the Loan Papers: (a) all present and future
interest now owned or hereafter acquired by Borrower in the Mineral Interests
identified in the Deed of Trust, together with all proceeds of production
therefrom; (b) all present and future increases, profits, combinations,
reclassifications, improvements and products of, accessions, attachments, and
other additions to, tools, parts and equipment used in connection with, and
substitutes and replacements for, any of the Collateral; (c) all cash and
noncash proceeds and other Rights arising from or by virtue of, or from the
voluntary or involuntary sale, lease or other disposition of, or collections
with respect to, or insurance proceeds payable with respect to, or proceeds
payable by virtue of warranty or other claims against manufacturers of, or
claims against any other person with respect to, any of the Collateral; 16 (d)
all present and future security for the payment to Borrower for any of the
Collateral; (e) all goods which gave or will give rise to any of the Collateral
or are evidenced, identified or represented therein or thereby; and (f) all
certificates of title, manufacturer's statements of origin, or other documents,
accounts and chattel paper arising from or related to any of the Collateral. All
Bank Liens created in favor of Prior Lender pursuant to the Prior Loan Agreement
are hereby ratified, renewed and extended in favor of Lender, without lapse or
interruption of perfection or priority. ARTICLE V Conditions Precedent 5.1
Renewal and Extension. The obligation of Lender to accept the Note in renewal,
extension and rearrangement of the Prior Note shall be subject to satisfaction
of each of the following conditions precedent: (a) There shall have been
executed, where appropriate, and delivered by Borrower (and/or any other
requisite party thereto) (i) the documents listed on Schedule 5.1 hereto, all of
which shall be in form and substance satisfactory to Lender and its counsel, and
(ii) such other documents or instruments as Lender may reasonably require. (b)
All requirements of notice necessary to perfect each Bank Lien shall have been
accomplished or arrangements made therefor to the satisfaction of Lender and its
counsel. (c) Lender shall have received from Borrower's legal counsel a
favorable legal opinion in form and substance satisfactory to Lender and its
counsel respecting the matters set forth in Section 6.1, 6.2, 6.5, 6.15 and 6.16
hereof. (d) No Material Adverse Change shall have occurred in the financial
condition, assets or business prospects of Borrower since September 30, 2001.
(e) All fees due and payable to Prior Lender and all accrued and unpaid interest
on the Prior Note shall have been paid up to the date hereof. (f) Lender shall
have received an assignment of notes, liens and security interests and the
original of the Prior Note, with appropriate endorsement, from the Prior Lender,
all in form and substance satisfactory to Lender. (g) Lender shall have received
from Borrower satisfactory title information covering not less than eighty
percent (80%) of the engineered value of Borrower's Mineral Interests. 17 (h)
Borrower shall have paid to Lender a facility fee in the amount of $32,500. (i)
Lender shall have received from Borrower a satisfactory environmental report
covering Borrower's Mineral Interests prepared by an independent firm acceptable
to Lender or other environmental assurances acceptable to Lender. (j) Lender
shall have received from Borrower's litigation counsel a satisfactory report
with respect to each litigation matter set forth on Schedule 6.5 attached
hereto. (k) Lender shall have received from Borrower a statement satisfactory to
Lender regarding Borrower's commodity hedging strategy. 5.2 All Advances. The
obligation of Lender to make any Advance hereunder shall be subject to
satisfaction of each of the following conditions precedent: (a) An authorized
individual shall have requested such Advance in accordance with the requirements
of Section 2.2(a) hereof. (b) No Event of Default shall have occurred that has
not been waived in writing by Lender, and there shall exist no condition or
event that, with the giving of notice or lapse of time or both, would constitute
an Event of Default. (c) Borrower shall have observed, performed and complied
with all covenants, agreements, duties and obligations contained in the Loan
Papers. ARTICLE VI Representations and Warranties In order to induce Lender to
enter into this Agreement, Borrower represents and warrants to Lender as of the
date hereof, which representations and warranties shall survive the delivery of
the Note, as follows: 6.1 Existence and Authority. Borrower is (i) a corporation
duly organized, legally existing and in good standing under the laws of the
State of Delaware, and (ii) duly qualified as a foreign corporation and in good
standing in the State of Texas. Except to the extent that the failure to qualify
would not cause or result in a Material Adverse Change, there are no other
states or jurisdictions wherein Borrower's operations, transaction of business
or ownership of property makes such qualification necessary. 6.2 Powers.
Borrower is duly authorized and empowered to create and issue the Note and to
execute and deliver this Agreement, the other Loan Papers and all other
instruments referred to or mentioned herein, and all action (corporate or
otherwise) on Borrower's part requisite for the due creation, issuance and
delivery of the Note and the due 18 execution and delivery of this Agreement and
the other Loan Papers has been duly and effectively taken. This Agreement is,
and the other Loan Papers when duly executed and delivered will be, legal, valid
and binding obligations of Borrower enforceable in accordance with their terms
(subject to any applicable bankruptcy, insolvency or other laws generally
affecting the enforcement of creditors' rights). The Loan Papers do not violate
any provisions of Borrower's articles of incorporation or bylaws or of any
contract, partnership or other agreement, law or regulation to which Borrower is
subject, and the same do not require the consent or approval of any other person
or entity, including without limitation, any regulatory authority or
governmental body of the United States, of any state or of any political
subdivision of the United States or of any State. 6.3 Financial Statements. The
unconsolidated financial statements of Borrower for the three (3) months ended
September 30, 2001, which have been delivered to Lender, are complete and
correct, have been prepared in conformity with GAAP, and fairly present the
financial condition and results of operations of Borrower as of the dates and
for the periods stated. No Material Adverse Change in the financial condition of
Borrower has occurred since September 30, 2001. 6.4 Liabilities. As of the date
hereof, Borrower has no material liabilities, direct or contingent, other than
those set forth in the financial statements of Borrower referred to in Section
6.3 hereof. Borrower knows of no fact, circumstance, act, condition or
development that will or could cause a Material Adverse Change. 6.5 Litigation.
Except as provided in Schedule 6.5 attached hereto, Borrower is not involved in,
nor is aware of the threat of, any material litigation, nor are there any
outstanding or unpaid judgments against Borrower. 6.6 Taxes. All tax returns
required to be filed by Borrower in all jurisdictions have been filed, and all
taxes, assessments, fees and other governmental charges upon Borrower or upon
any of its property, income or franchises, which are due and payable, have been
paid, or adequate reserves determined in conformity with GAAP have been provided
for payment thereof. 6.7 Purpose of Loan. The proceeds of any Advances (a) are
not and will not be used directly or indirectly for the purpose of purchasing or
carrying, or for the purpose of extending credit to others for the purpose of
purchasing or carrying, any "margin stock" as that term is defined in Regulation
U of the Board of Governors of the Federal Reserve System, as amended; and (b)
will be otherwise used for lawful purposes. 6.8 Properties; Liens. (a) With
regard to the Mineral Interests included in the Deed of Trust, (i) Borrower has
good and marketable title to all such Mineral Interests, free and clear of all
Liens except Liens permitted under Section 8.1 hereof, and has full authority to
create Bank Liens thereon; and (ii) all such Mineral Interests are valid,
subsisting and in full force and effect, and 19 all rentals, royalties and other
amounts due and payable in respect thereof have been duly paid. (b) Borrower has
good and marketable title to all of its other respective properties reflected on
the financial statements referred to in Section 6.3 hereof, and, except for the
Liens permitted under Section 8.1, there is no Lien on any asset of Borrower.
(c) Subject to the Liens permitted under Section 8.1 and Liens that neither
materially detract from the marketability of the property nor impair the use of
the property, and except as may be limited or otherwise affected by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, upon execution, delivery and recording, or filing, as appropriate,
the Loan Papers will be effective to create in favor of Lender a legal, valid
and continuing first Lien on the property (real and personal, tangible and
intangible) described therein, prior and superior to all other existing or
future Liens, and, upon the filing of the appropriate notice documents, will be
enforceable as such against creditors and purchasers from Borrower, and no other
filings, recordings or other actions are necessary or desirable in order to
establish, preserve, protect and perfect such Lien in favor of Lender as a valid
and perfected first Lien on such property, except a continuation statement may
be required under the Uniform Commercial Code. (d) None of the Collateral is or
will be subject to a gas balancing arrangement under which a material imbalance
exists with respect to which imbalance Borrower is in an overproduced status and
is required to (i) permit one or more third parties to take a portion of the
production attributable to such Collateral without payment (or without full
payment) therefor, and/or (ii) make payment in cash in order to correct such
imbalance. 6.9 Material Agreements. Except for the Loan Papers, the Material
Agreements described on Schedule 6.9 attached hereto, agreements, documents and
instruments giving rise to Mineral Interests, farmout agreements, gas contracts
and operating and joint operating agreements related to any Mineral Interests,
there are no Material Agreements of Borrower. The performance by Borrower under
any Material Agreement will not cause a Material Adverse Change. Borrower is
not, nor will the execution, delivery and performance of and compliance with the
terms of the Loan Papers cause Borrower to be, in default (nor has any potential
default occurred) under any Material Agreement, any agreement, document or
instrument giving rise to Mineral Interests, farmout agreements, gas contracts
or any operating or joint operating, or unitization agreements related to
Mineral Interests, other than in each case such defaults or potential defaults
which could not, individually or collectively, cause a Material Adverse Change.
A default by Borrower under any operating or joint operating agreement related
to any Mineral Interests it owns will not result in any loss or diminution of
any other Mineral Interests it owns. 6.10 ERISA. All Plans maintained by
Borrower are in compliance with all funding and other requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and none
have been terminated or have accrued any funding deficiency for which Borrower
would be liable under said statute. 20 6.11 Location of Records. The records of
Borrower concerning the Collateral are kept at the following location: 110 North
Marienfeld, Suite 465, Midland, Texas 79701. 6.12 Permits and Franchises, Etc.
Borrower has all rights, licenses, permits, franchises, patents, patent rights,
trademarks, trademark rights and copyrights that are required in order for it to
conduct its business as now conducted without known conflict with the rights of
others. Borrower is not aware of any fact or condition that might cause any of
such rights not to be renewed in due course. 6.13 Subsidiaries. Borrower
presently has no Subsidiary. Borrower owns no stock or other ownership interest
in any other corporation, limited liability company or association, except
Borrower owns a 30.675% membership interest in First Permian, L.L.C., a Delaware
limited liability company. Borrower is not a member of any general or limited
partnership, joint venture or association of any type whatsoever except
associations, joint ventures or other relationships (a) that are established
pursuant to a standard form operating agreement or similar agreement or that are
partnerships for purposes of federal income taxation only, (b) that are not
corporations or partnerships (or subject to the Uniform Partnership Act) under
applicable state law, and (c) whose businesses are limited to the exploration,
development and operation of oil, gas or mineral properties and interests owned
directly by the parties in such associations, joint ventures or relationships.
6.14 Hazardous Wastes and Substances. Borrower and its properties are in
compliance with applicable state and federal environmental laws and regulations
and Borrower is not aware of and has not received any notice of any violation of
any applicable state or federal environmental law or regulation and, except as
previously disclosed in writing to Lender, there has not heretofore been filed
any complaint, nor commenced any administrative procedure, against Borrower or
any of its predecessors, alleging a violation of any environmental law or
regulation. Except in substantial compliance with relevant environmental laws,
Borrower has not installed, used, generated, stored or disposed of any hazardous
waste, toxic substance, asbestos or related material ("Hazardous Materials") on
its properties. For the purposes of this Agreement, Hazardous Materials shall
include, but shall not be limited to, substances defined as "hazardous
substances" or "toxic substances" in the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, 42 U.S.C.ss.9061, et seq.,
Hazardous Materials Transportation Act, 49 U.S.C.ss.1802, et seq., and the
Resource Conservation and Recovery Act, 42 U.S.C.ss.6901, et seq., or as
"hazardous substances," "hazardous waste" or "pollutant or contaminant" in any
other applicable federal, state or local environmental law or regulation. There
do not exist upon any property owned by Borrower any underground storage tanks
or facilities, and to the knowledge of Borrower, none of such property has ever
been used for the treatment, storage, recycling, or disposal of any Hazardous
Materials. 6.15 Public Utility Holding Company Act. Borrower is not a "holding
company," or "subsidiary company" of a "holding company," or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company" or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended. 21 6.16 Investment Company Act. Borrower 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. 6.17 General. There
are no significant material facts or conditions relating to the Loan Papers, any
of the Collateral, or the financial condition or business of Borrower that
could, collectively or individually, cause a Material Adverse Change and that
have not been related, in writing, to Lender as an attachment to this Agreement;
and all writings heretofore or hereafter exhibited or delivered to Lender by or
on behalf of Borrower are and will be genuine and in all respects what they
purport and appear to be. ARTICLE VII Affirmative Covenants As an inducement to
Lender to enter into this Agreement, Borrower covenants and agrees that, from
the date hereof and until termination of this Agreement and payment in full of
the Obligation (except as otherwise provided in this Article), unless otherwise
agreed to by Lender in writing: 7.1 Financial Statements and Other Information.
Borrower will promptly furnish to Lender copies of (i) such information
regarding its business and affairs and financial condition as Lender may
reasonably request, and (ii) without request, the following: (a) as soon as
available and in any event within ninety (90) days after the end of each fiscal
year of Borrower, a consolidated and an unconsolidated balance sheet of Borrower
as of the close of such fiscal year and the related consolidated and
unconsolidated statements of income, cash flows and stockholders' equity of
Borrower for such year, which shall be audited and accompanied by the
unqualified opinion and report thereon issued by Borrower's independent public
accountants; (b) as soon as available and in any event within forty-five (45)
days after the end of each fiscal quarter of Borrower, an unaudited consolidated
and unconsolidated balance sheet of Borrower as of the close of such fiscal
quarter and the related unaudited consolidated and unconsolidated statements of
income, cash flows and stockholders' equity of Borrower for such fiscal quarter;
(c) as soon as available and in any event within forty-five (45) days after the
end of each fiscal quarter of Borrower, a report summarizing production, gross
revenues, expenses, and net revenues from all of Borrower's Mineral Interests
for such quarter on a field by field basis and, if requested by Lender, on a
lease by lease basis; (d) on or before March 31 and September 30 of each year,
an oil and gas reserve evaluation effective as of the immediately preceding
December 31 and June 30, respectively, covering all of Borrower's Mineral
Interests under the defined categories of proved 22 developed producing, proved
developed nonproducing, and proved undeveloped, prepared by independent
petroleum engineers selected by Borrower and satisfactory to Lender; (e) within
forty-five (45) days after the end of each fiscal quarter of Borrower, the
Compliance Certificate in the form of Exhibit 7.1 hereto signed by the President
or Chief Financial Officer of Borrower; (f) as soon as available, copies of all
filings by Borrower with the Securities and Exchange Commission; (g) immediately
upon becoming aware of the existence of, or any material change in the status
of, any litigation which could create a Material Adverse Change if determined
adversely against Borrower, a written communication to Lender of such matter;
(h) immediately upon becoming aware of an Event of Default or the existence of
any condition or event that constitutes, or with notice or lapse of time, or
both, would constitute an Event of Default, a verbal notification to Lender
specifying the nature and period of existence thereof and what action Borrower
is taking or proposes to take with respect thereto and, immediately thereafter,
a written confirmation to Lender of such matters; (i) immediately upon becoming
aware that any person has given notice or taken any other action with respect to
a claimed default under any material indenture, mortgage, deed of trust,
promissory note, loan agreement, note agreement, drilling contract, operating or
joint venture agreement or any other Material Agreement or undertaking to which
Borrower is a party, a verbal notification to Lender specifying the notice given
or action taken by such person and the nature of the claimed default and what
action Borrower is taking or proposes to take with respect thereto and,
immediately thereafter, a written communication to Lender of such matters; and
(j) immediately upon becoming aware of the commencement of any material action
or material proceeding against Borrower or any of its properties by any
governmental agency, including, without limitation, the Internal Revenue
Service, the Environmental Protection Agency, the U.S. Department of Energy or
the Federal Energy Regulatory Commission, a written communication to Lender of
such matter. All financial statements, schedules and other financial information
delivered hereunder shall be prepared in conformity with GAAP and shall be
certified as true and correct by the President or Chief Financial Officer of
Borrower by signature and date thereon. 7.2 Taxes. Borrower will pay and
discharge or cause to be paid and discharged all taxes, assessments and
governmental charges or levies imposed upon it or upon its income and profits or
upon any of its property, real, personal or mixed, or upon any part thereof,
before the same shall become in default, as well as all lawful claims for labor,
materials and supplies or otherwise, which, if not paid, might become a Lien
upon such properties or any part thereof; provided that Borrower shall not be
required to pay and discharge or cause to be paid or discharged any such tax,
assessment, charge, levy or claim contested by it in good faith by 23
appropriate proceedings if Borrower shall have set up adequate reserves
therefor, if required, under GAAP; and provided, further, that the immediately
preceding provision shall not apply to any Lien imposed by the U.S. Government
for failure to pay income, payroll, FICA or similar taxes, and payment with
respect to any such tax, assessment, charge, levy or claim shall be made before
any property of Borrower shall be seized and sold in satisfaction thereof. 7.3
Discharge of Contractual Obligations. Borrower will do and perform every act and
discharge all of the obligations provided to be performed and discharged under
the Loan Papers, and any and all of the instruments or documents referred to or
mentioned herein at the time or times and in the manner required. 7.4 Legal
Status. Borrower will do or cause to be done all things necessary to preserve,
renew and keep in full force and effect its existence, rights, licenses, permits
and franchises and comply with all laws and regulations applicable to it, and,
further, comply with all applicable laws and regulations, whether now in effect
or hereafter enacted or promulgated by any governmental authority having
jurisdiction over any of its assets or properties, noncompliance with which
would cause a Material Adverse Change. 7.5 Maintenance and Evidence of Priority
of Bank Liens. Borrower shall perform such acts and duly authorize, execute,
acknowledge, deliver, file, and record (or cause to be filed and recorded) such
additional assignments, security agreements, deeds of trust, mortgages and other
agreements, documents, instruments and certificates as Lender may reasonably
deem necessary or appropriate in order to perfect and maintain the Bank Liens
and preserve and protect the Rights of Lender in respect of all present and
future Collateral, and cause to be furnished to Lender such opinions of counsel
as Lender may request regarding the priority of Borrower's title to, and the
Bank Liens upon, the assets of Borrower, all of which opinions shall be prepared
by such law firm or firms as may be acceptable to Lender. 7.6 Insurance.
Borrower presently maintains and will continue to maintain such policies of
liability, hazard, damage, business interruption and workmen's compensation
insurance as are customarily carried by companies similarly situated. If
requested by Lender, any such policies of insurance shall show Lender therein as
loss payee. Upon request by Lender, Borrower will furnish Lender with
certificates and policies necessary to give Lender reasonable assurance of the
existence of such coverage. Borrower agrees to notify promptly Lender of any
termination or other material change in Borrower's insurance coverage, and to
provide Lender, upon request, with all information about the renewal of each
policy at least 15 days prior to the expiration thereof. 7.7 Reimbursement of
Fees and Expenses. Borrower agrees to pay, on demand, all reasonable
out-of-pocket fees and expenses incurred by Lender or its designated
representatives in connection with the negotiation, preparation and execution of
this Agreement, all renewals hereof, the other Loan Papers or other transactions
pursuant hereto or to the Loan Papers, as well as all costs of filing and
recordation, all legal and accounting fees, costs associated with Borrowing Base
redeterminations as provided in Section 3.4, all inspection, environmental audit
and similar costs related to the evaluation of the Collateral, all costs
associated with enforcing any of Lender's Rights under the Loan Papers
(including, 24 without limitation, costs of repossessing, storing, transporting,
preserving and insuring any of the Collateral), all court costs associated with
enforcing or defending any Rights against Borrower or any third party
challenging said Rights and any other cost or expense incurred by Lender or its
designated representatives in connection herewith or with the other Loan Papers,
together with interest at the Highest Lawful Rate per annum on each such amount
commencing 10 days after the date notice of such expenditure is given to
Borrower by Lender until the date it is repaid to Lender. 7.8 Indemnification.
Borrower agrees to indemnify Lender, its officers, directors, shareholders,
employees, and affiliates (collectively "Indemnitee"), from and against any and
all liabilities, obligations, claims, losses, damages, penalties, actions,
judgments, suits, remedial actions, costs, expenses or disbursements
(collectively, "Claims") of any kind or nature whatsoever that may be imposed
on, incurred by, or asserted against Indemnitee growing out of or resulting from
(i) the Loan Papers and the transactions and events at any time associated
therewith (including, without limitation, the enforcement of the Loan Papers and
the defense of Indemnitee's actions and inactions in connection with the Loan),
except to the limited extent such Claims are proximately caused by Indemnitee's
gross negligence or willful misconduct; (ii) the presence of any Hazardous
Materials on or under the properties covered by the Deed of Trust; or (iii) any
activity carried on or undertaken on or off the properties covered by the Deed
of Trust, whether prior to or during the term hereof and whether by Borrower or
by any third person, in connection with the treatment, storage, recycling,
removal, handling or disposal of Hazardous Materials at any time located on or
under the properties covered by the Deed of Trust. Indemnitee shall have the
right to defend any such Claims, employing its attorneys therefor. While
Borrower shall also be entitled to employ its own attorneys and to participate
in the defense of any such Claims, Indemnitee shall, if not furnished with
reasonable indemnity, have the right to compromise and adjust all such Claims.
The covenants and conditions of this section shall at all times be construed to
be personal covenants in favor of Indemnitee and shall not run with the lands;
provided, however, that such covenants and indemnity shall remain in full force
and effect notwithstanding the payment in full of the Obligation and the
release, either partially or wholly, of the Bank Liens or any foreclosure
thereunder. All such Claims as may be paid by Indemnitee shall bear interest at
the Highest Lawful Rate per annum until paid by Borrower and shall be part of
the Obligation secured by the Bank Liens. THE PARTIES HERETO INTEND FOR THE
PROVISIONS OF THIS PARAGRAPH TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM
THE CONSEQUENCES OF STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON ANY
INDEMNIFIED PARTY AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE (EXCEPT
GROSS NEGLIGENCE), WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR
CONCURRING CAUSE OF ANY CLAIMS INDEMNIFIED AGAINST IN THIS PARAGRAPH. 7.9 Curing
of Defects. Borrower will promptly cure any material defects in the execution
and delivery of any of the Loan Papers, and in any other instrument or document
referred to or mentioned herein. Borrower will immediately execute and deliver
to Lender, upon request, all such other and further instruments as may be
reasonably required or desired by Lender from time to time in compliance with or
accomplishment of the covenants and agreements of Borrower made in the Loan
Papers. 25 7.10 Inspection and Visitation. Borrower will grant Lender access to
all of its books and records, as well as to all of the Collateral, and allow
inspection and copying of same by Lender or its designated representatives at
any time during normal business hours or such other time as Lender may
reasonably request. 7.11 Notices. Borrower will give prompt written notice to
Lender of any proceedings instituted against it by or in any federal or state
court or before any commission or other regulatory body, federal, state or
local, which, if adversely determined, would cause a Material Adverse Change.
7.12 Bank Lien on Other Assets. If requested by Lender, Borrower shall execute
and deliver to Lender one or more mortgages, deeds of trust, assignments of
production, security agreements, financing statements, pledge agreements, or
other security documents in favor of Lender covering every interest in every
asset or property (including, without limitation, Mineral Interests) owned by
Borrower, whether now owned or hereafter acquired, which shall become part of
the Collateral. Borrower agrees to regularly monitor engineering data covering
all producing Mineral Interests owned by Borrower and to pledge such of the same
to Lender in substantially the form of the Deed of Trust to the extent that
Lender shall at all times be secured by perfected liens and security interests
covering not less than eighty percent (80%) of the engineered value of all
producing Mineral Interests of Borrower as reflected in the most recent
engineering report furnished by Borrower to Lender pursuant to Section 7.1(d)
above. 7.13 Compliance. Borrower will observe and comply with: (a) all laws,
statutes, codes, acts, ordinances, rules, regulations, directions and
requirements of all federal, state, county, municipal and other governments,
departments, commissions, boards, courts, authorities, officials and officers,
domestic and foreign, where the failure to observe or comply would cause a
Material Adverse Change; and (b) all orders, judgments, decrees, injunctions,
certificates, franchises, permits, licenses and authorizations of all federal,
state, county, municipal and other governments, departments, commissions,
boards, courts, authorities, officials and officers, domestic and foreign, where
the failure to observe or comply would cause a Material Adverse Change and
against which it shall maintain such reserves as are appropriate under GAAP.
7.14 Compliance with Environmental Laws. The Borrower is and will remain in
substantial compliance with all state and federal environmental laws and
regulations and Borrower will not place nor permit to be placed any Hazardous
Materials on any of its properties in violation of applicable state and federal
environmental laws. In the event Borrower should discover any Hazardous
Materials on any of its properties which could result in a breach of the
foregoing covenant, Borrower shall notify Lender within three (3) days after
such discovery. Borrower shall dispose of all material amounts of Hazardous
Materials generated by the Borrower only at facilities and/or with carriers that
maintain valid governmental permits under the Resource Conservation and Recovery
Act, 42 U.S.C. ss.6901. In the event of any notice or filing of any complaint or
commencement of any administrative hearing or procedure against the Borrower
alleging a violation of any environmental law or 26 regulation, Borrower shall
give notice to Lender within five (5) days after Borrower has received notice of
such notice or filing. 7.15 Use of Proceeds. Borrower will use the proceeds of
the Revolving Loan for refinancing the Prior Note, financing oil and gas
acquisitions or capital expenditures, or working capital in Borrower's oil and
gas business. 7.16 Deposit Accounts. Borrower agrees to maintain all of its
significant operating demand deposit accounts with Lender. 7.17 Title Curative.
As soon as practicable but in any event within ninety (90) days after receipt by
Borrower from Lender or its counsel of written notice of material title defects
affecting the Collateral that Lender reasonably requires to be cured, Borrower
shall use its best efforts to provide curative information with respect to such
title defects, in form and substance satisfactory to Lender. ARTICLE VIII
Negative Covenants As an inducement to Lender to enter into this Agreement,
Borrower hereby covenants and agrees that, from the date hereof and until
termination of this Agreement and payment in full of the Obligation (except as
otherwise provided in this Article), unless otherwise agreed to by Lender in
writing: 8.1 Liens. Borrower will not create, assume or suffer to exist any Lien
upon any of its properties or assets now owned or hereafter acquired securing
any indebtedness other than the Obligation or acquire or agree to acquire any
property under any conditional sale agreement or other title retention
agreement, excluding, however, from the operation of this section: (a) deposits
or pledges to secure payments of workmen's compensation, unemployment insurance,
old age pensions or other social security; (b) deposits or pledges to secure
performance of bids, tenders, contracts (other than contracts for the payment of
money), leases, public or statutory obligations, surety or appeal bonds, or
other deposits or pledges for purposes of like general nature in the ordinary
course of business; (c) Liens for taxes, assessments or other governmental
charges or levies that are not delinquent or that are in good faith being
contested or litigated, if such reserve as shall be required by GAAP shall have
been made therefor, provided, that this exception shall not allow any Lien
imposed by the U.S. Government for failure to pay income, payroll, FICA or
similar taxes; (d) mechanics', carriers', workmen's, repairman's or other like
Liens arising in the ordinary course of business securing obligations less than
ninety (90) days from the date 27 of invoice, and on which no suit to foreclose
has been filed, or which are in good faith being contested or litigated, if such
reserve as shall be required by GAAP shall have been made therefor; (e) Liens
created by or resulting from any litigation or legal proceeding that is
currently being contested in good faith by appropriate proceedings, if such
reserve as shall be required by GAAP shall have been made therefor; (f) Liens,
charges and encumbrances incidental to the conduct of its business or the
ownership of its properties or assets, which were not incurred in connection
with the borrowing of money or the obtaining of advances or credit and that do
not materially detract from the value of such property or assets or materially
impair the use thereof in the operation of its business; (g) landlords' Liens
for rental not yet due and payable and which, to the extent the same encumbers
any of the Collateral, are subordinate to the Bank Liens; (h) Liens arising in
the normal course of business under operating agreements covering oil and gas
properties and interests therein, including such Liens as may arise thereunder
because of the default of other parties to the operating agreement; or (i) the
Bank Liens. 8.2 Indebtedness. Borrower will not create, assume, incur or have
outstanding, or in any manner become or be liable directly or indirectly
(whether by way of guaranty or otherwise) in respect of, any indebtedness for
borrowed money or the purchase price of any property (including direct, indirect
and capitalized leases), excluding, however, from the operation of this section:
(a) the Note; (b) accounts payable for services furnished and for the purchase
price of materials and supplies acquired in the ordinary course of its business,
not more than ninety (90) days from the date of invoice; (c) indebtedness of
Borrower in respect of any Derivatives permitted by Section 8.15; and (d) other
indebtedness not to exceed an aggregate amount of $100,000 at any time
outstanding. 8.3 ERISA Compliance. Borrower will not at any time permit any Plan
subject to ERISA maintained by it to (i) engage in any "prohibited transaction"
as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as
amended; (ii) incur any "accumulated funding deficiency" as such term is defined
in Section 302 of ERISA; or (iii) terminate in a manner 28 which could result in
the imposition of a lien on its property pursuant to Section 4068 of ERISA. 8.4
Investments. Borrower will not make or commit to make, any advance, loan,
extension of credit or capital contribution to, or purchase of any stock, bonds,
notes, debentures or other securities of, or make any other investment in any
person, or accept any item in satisfaction of indebtedness (all of the aforesaid
transactions being herein called "Investments"), except: (a) Investments in
accounts, contract rights and chattel paper (as defined in the Uniform
Commercial Code), and notes receivable, arising or acquired in the ordinary
course of business; (b) Investments with maturities of not more than 180 days in
direct obligations of the United States of America, or obligations, the
principal and interest of which are unconditionally guaranteed by the United
States of America; (c) certificates of deposit maintained with Lender; (d)
Borrower's existing Investment in First Permian, L.L.C.; and (e) other
Investments not to exceed $50,000 in the aggregate at any time outstanding. 8.5
Mergers, Consolidations. Borrower will not (i) amend or otherwise modify its
corporate charter or otherwise change its structure in any manner that would
cause a Material Adverse Change; (ii) form any new subsidiary company; or (iii)
consolidate with or merge into, or acquire any party or permit any party to
consolidate with or merge into, or acquire it. 8.6 Dividends and Distributions.
Neither Borrower nor any Subsidiary will declare, pay or make any loans,
advances, dividends or distributions, of any kind, to its stockholders or other
equity owners, or make any other distribution on account of, or purchase,
acquire or redeem or retire any stock or other security issued by it, except
that Borrower may pay cash dividends on its outstanding shares of 6% Convertible
Preferred Stock in accordance with the provisions of Borrower's Certificate of
Designations, Preferences and Rights of Serial Preferred Stock - 6% Convertible
Preferred Stock dated October 19, 1998, provided that no Event of Default exists
at the time of declaration or payment of such dividends and the payment of such
dividends would not cause an Event of Default. 8.7 Transactions with Affiliates.
Borrower will not, directly or indirectly, enter into any transaction
(including, but not limited to, the sale or exchange of property or the
rendering of services) with any of its affiliates, other than in the ordinary
course of business and upon fair and reasonable terms no less favorable than
Borrower could obtain or could become entitled to in an arm's length transaction
with a person that was not an affiliate. 29 8.8 Accounting Method and Fiscal
Year. Borrower will not make any change in its present accounting method unless
such changes are required for conformity with GAAP. 8.9 Nature of Business.
Borrower will not make any substantial change in the nature of its businesses as
now conducted. 8.10 Disposition of Assets. Borrower will not sell, transfer,
lease, exchange, alienate or otherwise dispose of any of its property or assets
except, to the extent not otherwise forbidden under the Deed of Trust: (a)
equipment that is worthless or obsolete or which is replaced by equipment of
equal suitability and value; (b) inventory that is sold in the ordinary course
of business, including, without limitation, as-extracted collateral; and (c)
interests in oil and gas leases, or portions thereof, so long as no well
situated on any such lease or located on any unit containing all or any part
thereof, is capable (or is subject to being made capable through commercially
feasible operations) of producing oil, gas or other hydrocarbons or minerals in
commercial quantities. 8.11 Current Ratio. At all times during the term hereof,
Borrower's Current Ratio shall not be less than 1.00 to 1.00. 8.12 Leases.
Borrower shall not pay or become liable to pay rentals or lease payments on any
lease (excluding oil and gas leases), sublease or similar arrangement in an
amount exceeding $250,000 in the aggregate in any fiscal year. 8.13 Net Worth.
At all times during the term hereof, Borrower's Net Worth shall not be less than
(a) $30,000,000, plus (b) seventy-five percent (75%) of the net proceeds of any
equity offering by the Borrower on or after the date of this Agreement, plus (c)
fifty percent (50%) of Borrower's Adjusted Net Income for each fiscal quarter,
if positive, and zero percent (0%) if negative, determined on a cumulative
basis, for the period beginning October 1, 2001, and ending on the last day of
the most recent fiscal quarter as of the time in question. As used in this
Section 8.13, Borrower's Adjusted Net Income means for any period, Borrower's
Net Income for such period, provided there shall be excluded from such Net
Income (to the extent otherwise included therein) the cumulative effect of a
change in accounting principles and the after-tax net effect of any
non-recurring non-cash charges, including, without limitation, any charges under
Financial Accounting Standard Board Statement No. 121, as amended, supplemented
or modified from time to time. 8.14 Debt Service Ratio. At all times during the
term hereof, Borrower's Debt Service Ratio shall not be less than 1.10 to 1.00.
8.15 Derivatives. Borrower shall not enter into any Derivatives, other than oil
and/or gas price Derivatives which are related to bona fide hedging activities
and as to which (i) the 30 aggregate notional amounts of such Derivatives during
any calculation period do not exceed seventy-five percent (75%) of Borrower's
estimated production from proved producing reserves existing as of the date of
the execution thereof based upon the then most current reserve evaluation
required pursuant to Section 7.1(d) above, (ii) such Derivatives do not contain
terms or provisions which could require margin calls, (iii) the counterparty to
any such Derivatives have a minimum rating of "A-" by Standard Poors'
Corporation or "A3" by Moody's Investors Service, Inc., (iv) such Derivatives
are for a term of eighteen (18) months or less, and (v) such Derivatives have
the economic effect of assuring the receipt by Borrower of a price equal to or
greater than that under Lender's then current pricing policy. 8.16 Employee
Agreements. Borrower will not amend or modify the Incentive Award Agreements or
Change of Control Agreements described on Schedule 6.9 attached hereto (the
"Employee Agreements") and will not enter into any additional agreements of a
similar nature with any person. Notwithstanding the other provisions of this
Agreement, Borrower shall have the right to make payments pursuant to the terms
of the Employee Agreements, provided that no Event of Default exists at the time
of any such payments and such payments would not cause an Event of Default under
this Agreement. ARTICLE IX Default and Remedies 9.1 Events of Default. If any
one or more of the following shall occur and shall not have been remedied in the
period, if any, provided, an "Event of Default" shall be deemed to have occurred
hereunder and with respect to all of the Obligation, unless waived in writing by
Lender: (a) default shall occur in the payment when due of the Obligation or any
part thereof including, without limitation, any principal or interest due on the
Note or any commitment or other fee due hereunder; (b) any representation,
warranty or statement made by Borrower herein, in any of the other Loan Papers
or in any certificate furnished to Lender hereunder shall be breached or shall
prove to be untrue or misleading in any material respect at the time when made;
(c) default shall occur in the performance or observance of any covenant,
agreement, duty or obligation of Borrower contained herein or in any of the
other Loan Papers; provided, that breach of the covenant contained in Section
8.11, Section 8.13 or Section 8.14 hereof shall not constitute an Event of
Default unless the same shall continue for a period of thirty (30) days; (d)
Borrower shall (i) apply for or consent to the appointment of a receiver,
trustee or liquidator of it or of all or a substantial part of its assets; (ii)
be unable, or admit in writing its inability, to pay its debts as they become
due; (iii) make a general assignment for the benefit of creditors; (iv) be
adjudicated a bankrupt or insolvent or file a voluntary petition in 31
bankruptcy; (v) file a petition or an answer seeking reorganization or an
arrangement with creditors or to take advantage of any bankruptcy or insolvency
law; (vi) file an answer admitting the material allegations of, or consent to,
or default in answering, a petition filed against it in any bankruptcy,
reorganization or insolvency proceedings; or (vii) take any action (corporate or
otherwise) for the purpose of effecting any of the foregoing; (e) an order,
judgment or decree shall be entered by any court of competent jurisdiction
approving a petition seeking reorganization of Borrower or appointing a
receiver, trustee or liquidator of Borrower or of all or a substantial part of
its assets, and such order, judgment or decree shall continue unstayed in effect
for any period of thirty (30) consecutive days; (f) any Lien for failure to pay
income, payroll, FICA or similar taxes shall be filed by the U.S. Government or
any agent or instrumentality thereof against Borrower or any of its assets; (g)
there shall occur any acceleration, notice of default, filing of suit or notice
of breach by any other party to any Material Agreement to which Borrower is a
party wherein the amount involved or claimed exceeds $100,000, following the
passage of any grace period provided for thereunder; (h) default shall occur in
the payment of any indebtedness of Borrower aggregating $100,000 or more under
any note, loan agreement or credit agreement and such default shall continue for
more than the period of grace, if any, specified therein, or any such
indebtedness shall become due before its stated maturity by acceleration of the
maturity thereof or shall become due by its terms and shall not be promptly paid
or extended; (i) any final judgment or judgments for the payment of money in the
amount of $100,000 or more, in the aggregate, shall be rendered against Borrower
and shall not be satisfied or discharged at least thirty (30) days prior to the
date on which any of its assets could be lawfully sold to satisfy such judgment
or judgments; (j) the good faith belief by Lender that the prospect of payment
or performance of the Obligation is materially impaired, or that the value of
the Collateral has, or will be, materially decreased; (k) a Material Adverse
Change has occurred with respect to Borrower; (l) a majority of the individuals
comprising the current Board of Directors of Borrower shall resign, be declared
incompetent or otherwise be removed (voluntarily or involuntarily) or cease to
serve as members of the Board of Directors of Borrower; or (m) the occurrence or
existence of any default, event of default or other similar condition or event
(however described) with respect to any Rate Management Transaction. 32 9.2
Remedies. Upon the occurrence of any Event of Default, Lender shall have no
further obligation to advance funds hereunder or under the Note, and Lender may
declare the principal of, and all interest then accrued on, the Note and all
other parts of the Obligation to be immediately due and payable, whereupon the
same shall forthwith become due and payable without further presentment, demand,
protest, notice of acceleration or the intent to accelerate, or other notice of
any kind, all of which Borrower hereby expressly waives, anything contained
herein, in the Note or in any of the other Loan Papers to the contrary
notwithstanding; provided that any default under subsections (d) or (e) of
Section 9.1 shall result in the principal of, and all interest then accrued on,
the Note and all other parts of the Obligation becoming immediately due and
payable in full without the necessity of any act by Lender. Further, Lender may,
in its discretion, but shall not be required to, exercise such Rights as are
provided it in any of the Loan Papers or at law or in equity. Nothing contained
in this Article shall be construed to limit or amend in any way the Events of
Default enumerated in the Loan Papers or any other document executed in
connection with the transactions contemplated herein. Further, in such event,
Lender shall have all other Rights afforded to it with respect to Borrower or
any of the Collateral under any of the Loan Papers or under any applicable law
or in equity. ARTICLE X Miscellaneous 10.1 Survival of Representations and
Warranties. All representations and warranties of Borrower herein, and all
covenants, agreements, duties and obligations of Borrower herein not fully
performed on or before the date of this Agreement, shall survive such date. 10.2
Communications. Unless specifically provided otherwise, whenever any Loan Paper
requires or permits any consent, approval, notice, request, or demand from one
party to another, such communication must be in writing to be effective and
shall be deemed to have been given on the day actually delivered or, if mailed,
on the third day (or if such third day is not a Business Day, then on the next
succeeding Business Day) after it is enclosed in an envelope, addressed to the
party to be notified at the address stated below, properly stamped, sealed, and
deposited in the appropriate official postal service. Until changed by notice
pursuant hereto, the address for each party for purposes hereof is as follows:
BORROWER: PARALLEL PETROLEUM CORPORATION 110 North Marienfeld, Suite 465
Midland, Texas 79701 LENDER: FIRST AMERICAN BANK, SSB 1004 N. Big Spring, Suite
121 Midland County Midland, Texas 79701 Attention: Frank K. Stowers 33 10.3
Non-Waiver. (a) The acceptance by Lender at any time and from time to time of
part payment on the Obligation shall not operate as a waiver of any Event of
Default then existing. (b) No waiver by Lender of any Event of Default shall
operate as a waiver of any other then existing or subsequent Event of Default.
(c) No delay or omission by Lender in exercising any Right shall impair such
Right or operate as a waiver thereof, nor shall any single or partial exercise
of any such Right preclude other or further exercise thereof, or the exercise of
any other Right under the Loan Papers or otherwise. (d) No notice or demand
given by Lender in any case shall operate as a waiver of Lender's right to take
other action in the same, similar or other instances without such notice or
demand. (e) No Advance hereunder shall operate as a waiver by Lender of (i) the
representations, warranties and covenants of Borrower under the Loan Papers;
(ii) any Event of Default; or (iii) any of the conditions to Lender's
obligation, if any, to make further Advances. 10.4 Strict Compliance. If any
action or failure to act by Borrower violates any covenant of Borrower contained
herein or in any other Loan Paper, then such violation shall not be excused by
the fact that such action or failure to act would otherwise be permitted by any
covenant (or exception to any covenant) other than the covenant violated. 10.5
Cumulative Rights. The Rights of Lender under the Loan Papers are in addition to
all other Rights provided by law, whether or not the Obligation is due and
payable and whether or not Lender has instituted any suit for collection or
other action in connection with the Loan Papers. 10.6 GOVERNING LAW. THIS
AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO
BE PERFORMED, IN THE STATE OF TEXAS. THE SUBSTANTIVE LAWS OF SUCH STATE AND THE
APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA SHALL GOVERN THE
VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND THE
OTHER LOAN PAPERS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW, PROVIDED,
HOWEVER, THAT THE RIGHTS PROVIDED IN THE LOAN PAPERS WITH REFERENCE TO
PROPERTIES SITUATED IN OTHER STATES MAY BE GOVERNED BY THE LAWS OF SUCH OTHER
STATES. 10.7 CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS; JURISDICTION; AND
WAIVER OF JURY TRIAL. ANY SUIT, ACTION OR PROCEEDING AGAINST BORROWER ARISING
OUT OF OR RELATING TO ANY OF THE LOAN PAPERS OR ANY JUDGMENT ENTERED BY ANY
COURT IN RESPECT THEREOF, MAY BE BROUGHT OR ENFORCED IN THE COURTS OF THE STATE
OF TEXAS, COUNTY OF MIDLAND, OR IN THE UNITED STATES 34 COURTS LOCATED IN THE
STATE OF TEXAS, COUNTY OF MIDLAND, OR IN THE UNITED STATES COURTS LOCATED IN THE
STATE OF TEXAS, AS LENDER IN ITS SOLE DISCRETION MAY ELECT, AND BORROWER HEREBY
SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY
SUCH SUIT, ACTION OR PROCEEDING. BORROWER HEREBY IRREVOCABLY CONSENTS TO SERVICE
OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN ANY OF SAID COURTS BY THE
MAILING THEREOF BY LENDER BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO
BORROWER, AT ITS ADDRESS SET FORTH HEREIN. BORROWER HEREBY IRREVOCABLY WAIVES
ANY OBJECTIONS THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY
SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY OF THE OTHER LOAN
PAPERS BROUGHT IN ANY OF SAID COURTS AND HEREBY FURTHER IRREVOCABLY WAIVES ANY
CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. THE BORROWER HEREBY 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 RELATED TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY. 10.8 Usury Savings Clause. Nothing contained
in this Agreement, the Note, any other Loan Paper or in any other Agreement or
undertaking relating hereto or to the Obligation shall be construed to obligate
Borrower, under any circumstances whatsoever, to pay interest at a rate in
excess of the Highest Lawful Rate. All sums paid hereunder or under the Note
that are deemed to be interest shall be spread and prorated over the entire
period for which the Note is outstanding. In the event that any sums received
hereunder from Borrower are at any time under applicable law deemed or held to
provide a rate of interest in excess of the Highest Lawful Rate, the effective
rate of interest on the Obligation shall be deemed reduced to and shall be the
Highest Lawful Rate, and Borrower and any other parties hereby agree to accept
as their sole remedy under such circumstances either the return of any sums of
interest that may have been collected in excess of the Highest Lawful Rate or
the application of these sums as a credit against the unpaid principal amount of
the Note, whichever remedy may be elected by Lender. In addition, in the event
that the maturity of the Note is accelerated by reason of the election by Lender
hereunder, then earned interest may never include more than the amount
calculated pursuant to the Highest Lawful Rate, and if unearned interest is
provided for in the Note or the other Loan Papers, Borrower and any other
parties liable on said documents hereby agree to accept as their sole remedy
under such circumstances either (a) the cancellation of said unearned interest,
or (b) if theretofore paid, either the return to Borrower or the crediting of
said unearned interest on the principal amount due under the Note or other
documents, whichever action may be elected by Lender. To the extent the Highest
Lawful Rate is determined by reference to the laws of the State of Texas, same
shall be the weekly ceiling provided for in Chapter 303 of the Texas Finance
Code, as amended, provided that Lender may, by notice to Borrower, elect such
other reference as is allowed by said statutes. 10.9 Enforceability. If one or
more of the provisions contained in the Loan Papers shall, for any reason, be
held to be invalid, illegal or unenforceable in any respect, such in validity,
illegality, or unenforceability shall not affect any other provision of the Loan
Papers or any other instrument referred to herein. 35 10.10 Binding Effect. The
Loan Papers shall be binding upon and inure to the benefit of Borrower and
Lender and their respective successors and assigns; provided, however, that
Borrower shall not assign any Rights, duties or obligations under the Loan
Papers without the prior written consent of Lender. 10.11 No Third Party
Beneficiary. (a) The parties do not intend the benefits of the Loan Papers to
inure to any third party, nor shall the Loan Papers be construed to make or
render Lender liable to any third party, including, without limitation, any
materialman, supplier, contractor, subcontractor, purchaser, lessor or lessee
having a claim against Borrower. Notwithstanding anything contained in the Loan
Papers, or any conduct or course of conduct by any or all of the parties hereto,
whether before or after signing this Agreement or any other Loan Paper, no Loan
Paper shall be construed as creating any right, claim or cause of action against
Lender in favor of any third party, including, without limitation, any
materialman, supplier, contractor, subcontractor, purchaser, lessor or lessee
having a claim against Borrower. (b) All conditions to the obligation of Lender
to make Advances hereunder are imposed solely and exclusively for the benefit of
Lender, and no other person shall have standing to require satisfaction of such
conditions in accordance with their terms or be entitled to assume that Lender
will make or refuse to make Advances in the absence of strict compliance
therewith, and any or all of such conditions may be freely waived in whole or in
part by Lender at any time if Lender, in its sole and absolute discretion, deems
it advisable to do so. 10.12 Delegation by Lender. Lender may perform any of its
duties or exercise any of its Rights by or through its officers, directors,
employees, attorneys, agents or other representatives. 10.13 Setoff. Borrower
hereby grants to Lender (and to each participant to whom Lender has conveyed or
may hereafter convey a participation in the Note) the right of setoff to secure
payment of the Obligation upon any and all moneys, securities or other property
of Borrower and the proceeds therefrom, now or hereafter held or received by or
in transit to, Lender or any such participant or any agent of Lender or such
participant, from or for the account of Borrower, whether for safekeeping,
custody, pledge, transmission, collection or otherwise, and also upon any and
all deposits (general or specific) and credits of Borrower and any and all
claims of Borrower against Lender or any such participant at any time existing.
Notwithstanding the foregoing, nothing contained herein shall grant to Lender
the right of setoff against an account if Lender has actual knowledge that any
person other than Borrower or any Subsidiary of Borrower has an ownership
interest in such account. 10.14 Additional Documents. It is contemplated that
there may be certain supplementary and/or corrective mortgages, deeds of trust,
security agreements and similar items prepared by Lender to be executed by
Borrower subsequent hereto, as well as certain other corrective and additional
documentation not executed concurrently with this Agreement because of the
unavailability of information such as property and collateral descriptions at
the 36 time of the execution hereof. Borrower hereby agrees to cooperate with
Lender and provide such information in connection therewith as Lender may
reasonably request, and to execute and deliver such other and further
documentation as Lender shall reasonably request so as to provide Lender with a
Bank Lien on the Collateral. 10.15 Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original,
but all of which taken together shall constitute one and the same instrument.
10.16 Amendments. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by Borrower and Lender. 10.17 Headings. All headings used herein
are for convenience and reference purposes only and shall not affect the
substance of this Agreement. 10.18 Conflicts. In the event that there exists any
conflict or inconsistency between the terms hereof and the terms of any other
Loan Paper, the terms hereof shall govern and control, provided that the fact
that any representation, warranty or covenant contained in any other Loan Paper
is not contained herein shall not be, or be deemed to be, a conflict or
inconsistency. 10.19 Entirety. This Agreement and the other Loan Papers embody
the entire agreement among the parties and supersede and supplant all prior
agreements and understandings with respect to the matters contained herein.
10.20 Participations. Lender may at any time, or from time to time, sell or
agree to sell to one or more other persons a participation in all or any part of
the Obligation, in which event each such other participant shall be entitled to
the rights and benefits under this Agreement and the other Loan Papers. It is
understood and agreed that Lender may provide to participants and prospective
participants financial information and reports and data concerning Borrower and
Borrower's properties and operations as have been provided to Lender pursuant to
this Agreement. 10.21 Notice of Final Agreement. THIS WRITTEN AGREEMENT AND THE
OTHER LOAN PAPERS 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. 37 EXECUTED as of the date first above written. PARALLEL PETROLEUM
CORPORATION, a Delaware corporation By: /s/ Larry C. Oldham Larry C. Oldham
President FIRST AMERICAN BANK, SSB By: /s/ Frank K. Stowers Frank K. Stowers
Senior Vice President 38