Document:

exv10w1

 

EXHIBIT 10.1

$25,000,000

CREDIT AGREEMENT

dated

December 30, 2004

BETWEEN

TOREADOR EXPLORATION & PRODUCTION INC.

AND

TOREADOR ACQUISITION CORPORATION,

as Borrowers

AND

TEXAS CAPITAL BANK, N.A.,

as Lender

Reducing Revolving Credit Facility

Standby Letter of Credit Facility

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	ARTICLE I DEFINITIONS
	 	 	1	 
	1.1. Definitions
	 	 	1	 
	1.2. Accounting Terms and Determinations; Changes in Accounting
	 	 	15	 
	1.3. References
	 	 	15	 
	ARTICLE II COMMITMENT TO LEND AND ISSUE LETTERS OF CREDIT
	 	 	16	 
	2.1. Commitment
	 	 	16	 
	2.2. Method of Borrowing and Obtaining Letters of Credit
	 	 	17	 
	2.3. Note
	 	 	17	 
	2.4. Certain Payments and Prepayments of Principal
	 	 	17	 
	2.5. Interest
	 	 	18	 
	2.6. Unused Available Commitment Fees; Engineering Fees;
Facility Fees; Letter of Credit Fees; Authorized Payments by
the Lender
	 	 	18	 
	2.7. Termination of Commitment; Maturity of Note
	 	 	19	 
	2.8. Determination of Borrowing Base; Automatic Reductions
in Borrowing Base; Borrowing Base Deficiency; Notice of
Redeterminations; Requests for Reductions in Borrowing Base
	 	 	19	 
	2.9. Request for Extension of Maturity
	 	 	21	 
	ARTICLE III GENERAL PROVISIONS
	 	 	21	 
	3.1. General Provisions as to Payments and Loans
	 	 	21	 
	3.2. Computation of Interest
	 	 	21	 
	3.3. Default Interest
	 	 	21	 
	3.4. Prepayments Permitted
	 	 	21	 
	3.5. Limitation Period
	 	 	22	 
	3.6. Joint and Several Obligations and Duties
	 	 	22	 
	ARTICLE IV COLLATERAL
	 	 	22	 
	4.1. Security
	 	 	22	 
	4.2. Grant of Security Interests
	 	 	22	 
	4.3. Notification of Account Debtors and Other Obligors
	 	 	23	 
	4.4. Financing Statement
	 	 	23	 
	ARTICLE V CONDITIONS PRECEDENT TO ADVANCES AND LETTERS OF CREDIT
	 	 	23	 
	5.1. All Advances and Letters of Credit
	 	 	23	 
	5.2. Initial Advance
	 	 	23	 
	5.3. Conditions Precedent for the Benefit of the Lender
	 	 	25	 
	ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BORROWERS
	 	 	25	 
	6.1. Existence and Power
	 	 	25	 
	6.2. Authorization; Contravention
	 	 	26	 
	6.3. Binding Effect
	 	 	26	 
	6.4. Subsidiaries; Ownership
	 	 	26	 

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	6.5. Disclosure
	 	 	26	 
	6.6. Financial Information
	 	 	27	 
	6.7. Litigation
	 	 	27	 
	6.8. ERISA Plans
	 	 	27	 
	6.9. Taxes and Filing of Tax Returns
	 	 	28	 
	6.10. Title to Properties; Liens; Environmental Liability
	 	 	28	 
	6.11. Business; Compliance
	 	 	29	 
	6.12. Licenses, Permits, Etc
	 	 	29	 
	6.13. Compliance with Law
	 	 	29	 
	6.14. Governmental Consent
	 	 	29	 
	6.15. Investment Company Act
	 	 	29	 
	6.16. Public Utility Holding Company Act; State Utility
	 	 	29	 
	6.17. Refunds; Certain Contracts
	 	 	29	 
	6.18. No Default
	 	 	30	 
	ARTICLE VII COVENANTS
	 	 	30	 
	7.1. Use of Proceeds and Letters of Credit
	 	 	30	 
	7.2. Financial Statements; Reserve and Other Reports;
Certain Required Notices from Borrowers; Additional
Information
	 	 	30	 
	7.3. Inspection of Properties and Books
	 	 	33	 
	7.4. Maintenance of Security; Insurance; Operating Accounts; Transfer Orders
	 	 	33	 
	7.5. Payment of Taxes and Claims
	 	 	34	 
	7.6. Payment of Debt; Additional Debt; Payment of Accounts
	 	 	34	 
	7.7. Negative Pledge
	 	 	34	 
	7.8. Loans and Advances to Others; Investments; Restricted Payments; Subsidiaries
	 	 	35	 
	7.9. Consolidation, Merger, Maintenance, Change of Control;
Disposition of Property; Restrictive Agreements; Hedging
Agreements; Modification of Organizational Documents;
Issuance of Equity Interests
	 	 	35	 
	7.10. Primary Business; Location of Borrower’s Office;
Ownership of Assets
	 	 	36	 
	7.11. Operation of Properties and Equipment; Compliance
with and Maintenance of Contracts; Duties as Nonoperator
	 	 	36	 
	7.12. Transactions with Affiliates
	 	 	37	 
	7.13. Plans
	 	 	37	 
	7.14. Compliance with Laws and Documents
	 	 	37	 
	7.15. Certain Financial Covenants
	 	 	38	 
	7.16. Tax Shelter
	 	 	38	 
	7.17. Additional Documents; Quantity of Documents; Title
Data; Additional Information
	 	 	39	 
	7.18. ENVIRONMENTAL INDEMNIFICATION
	 	 	39	 
	7.19. Exceptions to Covenants
	 	 	40	 
	7.20. Title Data
	 	 	40	 
	ARTICLE VIII DEFAULTS; REMEDIES
	 	 	40	 
	8.1. Events of Default; Acceleration of Maturity
	 	 	40	 

ii 

 

	 	 	 	 	 
	8.2. Suits for Enforcement
	 	 	42	 
	8.3. Remedies Cumulative
	 	 	43	 
	8.4. Remedies Not Waived
	 	 	43	 
	ARTICLE IX MISCELLANEOUS
	 	 	43	 
	9.1. Amendments and Waivers
	 	 	43	 
	9.2. Highest Lawful Interest Rate
	 	 	43	 
	9.3. INDEMNITY
	 	 	44	 
	9.4. Expenses
	 	 	45	 
	9.5. Taxes
	 	 	46	 
	9.6. Notices
	 	 	46	 
	9.7. Rights of Set-Off
	 	 	46	 
	9.8. Survival
	 	 	47	 
	9.9. Successors and Assigns: Rights of Other Holders
	 	 	47	 
	9.10. Applicable Law; Venue; Waiver of Jury Trial
	 	 	47	 
	9.11. [RESERVED]
	 	 	48	 
	9.12. Headings
	 	 	48	 
	9.13. Counterparts
	 	 	48	 
	9.14. Invalid Provisions, Severability
	 	 	48	 
	9.15. Revolving Loan
	 	 	49	 
	9.16. Communications Via Internet
	 	 	49	 
	9.17. USA Patriot Act Notice
	 	 	49	 
	9.18. EXCULPATION PROVISIONS
	 	 	49	 
	9.19. Preclusion of Oral Agreements
	 	 	50	 

FORM OF PROMISSORY NOTE

FORM OF NOTICE OF BORROWING

FORM OF COMPLIANCE CERTIFICATE

EXHIBIT 6.7 LITIGATION

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CREDIT AGREEMENT

     THIS CREDIT AGREEMENT is entered into as of December 30, 2004, by and
between Toreador Exploration & Production Inc., a Texas corporation, and
Toreador Acquisition Corporation, a Delaware corporation, and Texas Capital
Bank, N.A., a national banking association. Certain terms used herein are
defined in Section 1.1.

RECITALS:

     A. The Borrowers desire to borrow funds from the Lender; and

     B. The Borrower desires to acquire Oil and Gas Properties, finance its
drilling operations and to provide for additional credit facilities;

NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

     1.1. Definitions. The following terms, as used herein, have the following
meanings:

     “Acceptable Commodity Hedging Agreements” means Commodity Hedging
Agreements,

     (a) meeting all the following criteria:

          (i) The quantity of gaseous and liquid hydrocarbons owned by the Borrowers
subject to Commodity Hedging Agreements, at the time of entering into such
Commodity Hedging Agreements, shall not be greater than (x) for gaseous
hydrocarbons, 75% of the monthly production of gaseous hydrocarbons from the
Oil and Gas Properties of the Borrower used in determining the Borrowing Base
and not the subject of Commodity Hedging Agreements under clause (b) below and
(y) for liquid hydrocarbons, 75% of the monthly production of liquid
hydrocarbons from the Oil and Gas Properties of the Borrower used in
determining the Borrowing Base and not the subject of Commodity Hedging
Agreements under clause (b) below; in either case, as forecast in the Lender’s
most recent engineering evaluation delivered to the Borrowers, without the
prior written approval of the Lender;

          (ii) The “strike prices” under any Commodity Hedging Agreements, at the
time of entering into such Commodity Hedging Agreements, shall not be less than
the lowest prices utilized in the Lender’s most recent sensitivity case
evaluation of the Oil and Gas Properties of the Borrowers used in determining
the Borrowing Base, as reported to the Borrowers, except that under certain
downside conditions such lower strike price as the Lender may approve in
writing following a written request by the Borrowers may be used;

          (iii) The Lender must have given its written consent to the counterparties
under the Commodity Hedging Agreements;

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          (iv) The Commodity Hedging Agreement shall not contain any anti-assignment
provisions restricting any Borrower or if such Commodity Hedging Agreement
contains anti-assignment provisions which cannot be removed, such provisions
shall be modified to read substantially as follows: “The interest and
obligations arising from this agreement are non-transferable and
non-assignable, except that [company name] may assign and grant a security
interest in its rights and interests hereunder to Texas Capital Bank, N.A.
(“Lender”) as security for [company
name]’s present and future obligations to
the Lender. Until [hedge provider] is notified in writing by the Lender to pay
to the Lender amounts due [company name] hereunder, [hedge provider] may
continue to make such payments to [company name].”; and

          (v) The Lender shall have received first and prior perfected security
interests pursuant to security agreements in form and substance reasonably
satisfactory to the Lender in the Borrower’s right, title and interest in and
to the Commodity Hedging Agreements of the Borrower; or

     (b) in the form of minimum price guarantees or “floors”, limited to 100%
of the monthly production from the Oil and Gas Properties of the Borrowers, on
a collective basis, not subject to Commodity Hedging Agreements under clause
(a) above and otherwise satisfying the requirements of subclauses (ii), (iii),
(iv) and (v) of clause (a) of this definition.

     “Acceptable Hedging Agreements” means Acceptable Commodity Hedging
Agreements and Acceptable Rate Management Transactions.

     “Acceptable Rate Management Transactions” means any Rate Management
Transaction meeting all of the following criteria:

          (i) The terms thereof are reasonably satisfactory to the Lender; and

          (ii) The Persons with whom such Transactions are effected are satisfactory
to the Lender.

     “Advance” See Loan.

     “Affiliate” means, with respect to a Person, (a) any Person owning,
Controlling or holding with power to vote 10% or more of the outstanding voting
interests of the referenced Person, (b) any Person 10% or more of whose
outstanding voting interests are directly or indirectly owned, Controlled or
held with power to vote by the referenced Person, (c) any Person directly or
indirectly Controlling, Controlled by or under common Control with the
referenced Person, (d) any relative within the third degree of kindred of the
referenced Person, or (e) any officer, director, limited liability company
manager, trustee, beneficiary, or general partner of the referenced Person or
of any Person referred to in clauses (a), (b), (c) or (d) of this definition.
The term “Affiliate” shall include Affiliates of Affiliates (and so on).

     “Agreement” or “Credit Agreement” means this Credit Agreement, as the same
may hereafter be modified or amended from time to time.

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     “Available Commitment” means, at any time, an amount equal to the lesser
of the Commitment Amount or the Borrowing Base.

     “Borrower” means each of Toreador Exploration and Toreador Acquisition,
and “Borrowers” means both of Toreador Exploration and Toreador Acquisition.

     “Borrowing Base” means the amount most recently determined and designated
by the Lender as the Borrowing Base in accordance with Section 2.8.1, but in no
event in excess of the Commitment Amount, as such Borrowing Base is reduced in
accordance with Section 2.8.2. The Borrowing Base under Section 2.8.1 is
deemed to be $3,300,000 as of the Closing Date.

     “Borrowing Base Deficiency” means, as of the date of determination of a
new Borrowing Base under Section 2.8.1, the amount, if any, by which the sum of
the outstanding principal balance of the Note plus the Letter of Credit
Exposure exceeds the Borrowing Base.

     “Business Day” means any day (other than Saturdays and Sundays) on which
the Lender is open for general banking business in Dallas, Texas.

     “Capitalized Lease” of a Person means any lease of Property by such Person
as lessee which would be capitalized on a balance sheet of such Person.

     “Capitalized Lease Obligations” of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person.

     “Change of Control Event” means the failure of Toreador Resources to own
the entirety of every class of Equity Interests of each Borrower and to Control
each Borrower.

     “Closing” means the consummation of the transactions contemplated herein.

     “Closing Date” means the date of this Agreement.

     “Collateral” means the Property pledged to the Lender as security for the
Note and the other Obligations.

     “Collateral Value” means, with respect to any Oil and Gas Property, the
positive dollar amount which such Oil and Gas Property contributed to the most
recently determined Borrowing Base.

     “Commitment” means the commitment of the Lender to make Advances and issue
letters of credit not exceeding in the aggregate at any time outstanding the
Available Commitment.

     “Commitment Amount” means the amount of $25,000,000.

     “Commodity Hedging Agreements” means any swap agreement, cap, collar,
exchange transaction, forward agreement, or other exchange or protection
agreement relating to

3

 

hydrocarbons or any option with respect to any such transaction, including
derivative financial instruments.

     “Compliance Certificate” means a certificate, substantially in the form
attached hereto entitled “Form of Compliance Certificate”, executed by a
Responsible Representative and furnished to the Lender from time to time in
accordance with Section 7.2.1.

     “Control,” “Controlling” and “Controlled by” mean the ability (directly or
indirectly through one or more intermediaries) to direct or cause the direction
of the management or affairs of a Person, whether through the ownership of
voting interests, by contract or otherwise.

     “Controlled Group” means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower or any of its Subsidiaries, are treated as a
single employer under Section 414(b) or (c) of the Internal Revenue Code of
1986, as amended.

     “Debt” of any Person means at any date, without duplication:

          (i) all obligations of such Person for money borrowed, including (a) the
obligations of such Person for money borrowed by a partnership of which such
Person is a general partner, (b) obligations, whether or not assumed, which are
secured in whole or in part by the Property of such Person or payable out of
the proceeds or production from Property of such Person, and (c) any
obligations of such Person in respect of letters of credit and repurchase
agreements;

          (ii) all obligations of such Person evidenced by notes, debentures, bonds
or similar instruments;

          (iii) all obligations of such Person to pay the deferred purchase price of
Property or services (except trade accounts arising in the ordinary course of
business if interest is not paid or accrued thereon);

          (iv) all Capitalized Lease Obligations of such Person;

          (v) all liabilities which in accordance with GAAP would be included in
determining total liabilities as shown on the liability side of a balance
sheet;

          (vi) all obligations of such Person under Hedging Agreements; and

          (vii) all Guarantees by such Person of Debt of another Person.

     “Default” means the occurrence of an Event of Default or any event which
with notice, lapse of time or both would, unless cured or waived, become an
Event of Default.

     “Default Rate” means a per annum interest rate equal to five percent
(5.0%) plus the Floating Rate from time to time in effect, but in no event
exceeding the Highest Lawful Rate.

     “Dollars” and “$” means dollars in lawful currency of the United States of
America.

4

 

     “Environmental Complaint” means any written complaint, order, directive,
claim, citation, notice of environmental report or investigation, or other
notice by any Governmental Authority or any other Person with respect to (a)
air emissions, (b) spills, releases, or discharges to soils, any improvements
located thereon, surface water, groundwater, or the sewer, septic, waste
treatment, storage, or disposal systems servicing any Property of the Borrower,
(c) solid or liquid waste disposal, (d) the use, generation, storage,
transportation, or disposal of any Hazardous Substance, or (e) other
environmental, health, or safety matters affecting any Property of the Borrower
or the business conducted thereon.

     “Environmental Laws” mean (a) the following federal laws as they may be
cited, referenced, and amended from time to time: the Clean Air Act, the Clean
Water Act, the Safe Drinking Water Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Endangered Species Act, the
Resource Conservation and Recovery Act, the Hazardous Materials Transportation
Act, the Superfund Amendments and Reauthorization Act, and the Toxic Substances
Control Act; (b) any and all equivalent environmental statutes of any state in
which Property of the Borrower is situated, as they may be amended from time to
time; (c) any rules or regulations promulgated under or adopted pursuant to the
above federal and state laws; and (d) any other equivalent federal, state, or
local statute or any requirement, rule, regulation, code, ordinance, or order
adopted pursuant thereto, including those relating to the generation,
transportation, treatment, storage, recycling, disposal, handling, or Release
of Hazardous Substances.

     “Environmental Liability” means any claim, demand, obligation, cause of
action, accusation, allegation, order, violation, damage, injury, judgment,
penalty or fine, cost of enforcement, cost of remedial action or any other cost
or expense whatsoever, including reasonable attorneys’ fees and disbursements,
resulting from the violation or alleged violation of any Environmental Law or
the imposition of any Environmental Lien.

     “Environmental Lien” means a Lien in favor of a Tribunal or other Person
(i) for any liability under an Environmental Law or (ii) for damages arising
from or costs incurred by such Tribunal or other Person in response to a
release or threatened release of hazardous or toxic waste, substance or
constituent into the environment.

     “Equity Interests” means, with respect to any Person, ownership and other
equity interests in such Person and rights to convert into ownership or other
equity interests in such Person or to otherwise acquire ownership or other
equity interests in such Person.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all presently effective and future
regulations issued pursuant thereto.

     “ERISA Affiliate” the Borrower, all of its Subsidiaries and any other
member of the Controlled Group.

     “Event of Default” has the meaning stated in Section 8.1 hereof.

     “Final Maturity Date” or “Final Maturity” means January 1, 2010, or such
earlier date on which the payment of the Note is accelerated.

5

 

     “Floating Rate” means for any day a per annum interest rate equal to the
sum of the TCB Rate from time to time in effect minus one-half of one percent
(-1/2 of 1.00%).

     “Funded Debt” of any Person means at any date, Debt referred to in clauses
(i) through (iv) of the definition of “Debt” and all Guarantees by such Person
of Debt of another Person.

     “GAAP” means those generally accepted accounting principles and practices
which are recognized as such by the American Institute of Certified Public
Accountants acting through its Accounting Principles Board or by the Financial
Accounting Standards Board or through other appropriate boards or committees
thereof. Any accounting principle or practice required to be changed by the
Accounting Principles Board or Financial Accounting Standards Board (or other
appropriate board or committee of such Boards) in order to continue as a
generally accepted accounting principle or practice may be so changed. In the
event of a change in GAAP, the Loan Documents shall continue to be construed in
accordance with GAAP as in existence on the date hereof.

     “Governmental Authority” means any nation, country, commonwealth,
territory, government, state, county, parish, municipality, or other political
subdivision and any entity exercising executive, legislative, judicial,
regulatory, or administrative functions of or pertaining to government.

     “Guarantee” by any Person means any obligation, contingent or otherwise,
of such Person directly or indirectly guaranteeing or in effect guaranteeing
any Debt of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation (whether arising by virtue of
partnership arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, to make reimbursement in connection
with any letter of credit or to maintain financial statement conditions, by
“comfort letter” or other similar undertaking of support or otherwise) or (ii)
entered into for the purpose of assuring in any other manner the obligee of
such Debt or other obligation of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part). The term “Guarantee”
includes the pledging or other encumbrance of assets by a Person to secure the
obligations of another Person and restrictions or limitations on a Person or
its assets agreed to in connection with the obligations of another Person, but
does not include endorsements for collection or deposit in the ordinary course
of business; and “Guaranteed” by a Person shall mean the act or condition of
providing a Guarantee by such Person or permitting a Guarantee of such Person
to exist.

     “Guarantor” means Toreador Resources Corporation, a Delaware corporation.

     “Guaranty” means the unconditional and unlimited guaranty of the Guarantor
in favor of the Lender guarantying all of the Obligations of the Borrower to
the Lender, in form and substance satisfactory to the Lender and the Guarantor.

     “Hazardous Substances” shall mean flammables, explosives, radioactive
materials, hazardous wastes, asbestos, or any material containing asbestos,
polychlorinated biphenyls

6

 

(PCBs), toxic substances or related materials, petroleum, petroleum
products, associated oil or natural gas exploration, production, and
development wastes, or any substances defined as “hazardous substances,”
“hazardous materials,” “hazardous wastes,” or “toxic substances” under the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, the Superfund Amendments and Reauthorization Act, as amended, the
Hazardous Materials Transportation Act, as amended, the Resource Conservation
and Recovery Act, as amended, the Toxic Substances Control Act, as amended, or
any other Environmental Laws.

     “Hedge Termination Value” means, in respect of any one or more Hedging
Agreements, after taking into account the effect of any legally enforceable
netting agreement relating to such Hedging Agreements, (a) for any date on or
after the date such Hedging Agreements have been closed out and termination
value(s) determined in accordance therewith, such termination value(s) and (b)
for any date prior to the date referenced in clause (a) preceding, the
amount(s) determined as the mark-to-market value(s) for such Hedging
Agreements, as determined by the counterparties to such Hedging Agreements.

     “Hedging Agreement” means a Commodity Hedging Agreement or a Rate
Management Transaction.

     “Highest Lawful Rate” means the maximum non-usurious interest rate, if any
(or, if the context so requires, an amount calculated at such rate), that at
any time or from time to time may be contracted for, taken, reserved, charged,
or received by the Lender under applicable laws of the State of Texas or the
United States of America, whichever authorizes the greater rate, as such laws
are presently in effect or, to the extent allowed by applicable law, as such
laws may hereafter be in effect and which allow a higher maximum non-usurious
interest rate than such laws now allow. To the extent the laws of the State of
Texas are applicable for the purpose of determining the “Highest Lawful Rate”,
such term shall mean the “weekly ceiling” from time to time in effect as
referred to and defined in Chapter 303 of the Finance Code of Texas, as
amended. The determination of the Highest Lawful Rate shall, to the extent
required by applicable law, take into account as interest paid, taken,
received, charged, reserved or contracted for any and all relevant payments or
charges under the Loan Documents.

     “Indemnified Parties” has the meaning given such term in Section 7.18.

     “Insolvency Proceeding” of any Person means any application (whether
voluntary or instituted by another Person) for or the consent to the
appointment of a receiver, trustee, conservator, custodian, or liquidator of
such Person or of all or a substantial part of the Property of such Person, or
the filing of a petition (whether voluntary or instituted by another Person)
commencing a case under Title 11 of the United States Code, seeking
liquidation, reorganization, or rearrangement or taking advantage of any
bankruptcy, insolvency, debtor’s relief, or other similar law of the United
States, the State of Texas, or any other jurisdiction.

     “Investment” in any Person shall mean the acquisition or holding of any
stock, bond, note, or other evidence of Debt, partnership interest or any other
Security (other than current trade and customer accounts) of such Person.

7

 

     “Lender” means Texas Capital Bank, N.A., a national banking association,
and its successors and assigns.

     “Letter of Credit” means any letter of credit issued pursuant to this
Agreement.

     “Letter of Credit Application” shall mean the standard letter of credit
application employed by the Lender from time to time in connection with letters
of credit, completed by any Borrower as the “applicant” thereunder.

     “Letter of Credit Exposure” shall mean, at any time, the aggregate maximum
amount available to be drawn under outstanding Letters of Credit at such time.

     “Letter of Credit Fee” shall mean each fee payable to the Lender by the
Borrowers in connection with the issuance of a Letter of Credit.

     “Letter of Credit Limit” means at any time, the lesser of (a) $2,000,000
or (b) the Borrowing Base in effect at such time.

     “Letter of Credit Reimbursement Obligation” means the obligation of the
Borrowers to provide to the Lender or reimburse the Lender for any amounts
payable, paid, or incurred by the Lender with respect to Letters of Credit.

     “Lien” means, as to any Property of any Person, (a) any mortgage, deed of
trust, lien, pledge, hypothecation, or security interest in, on or of such
Property, or any other charge or encumbrance on any such asset to secure Debt
or liabilities, but excluding any right to netting or setoff, (b) the interest
of a vendor under any conditional sale agreement or title retention agreement
(or any financing lease having substantially the same economic effect as any of
the foregoing) relating to such Property, (c) in the case of Securities, any
purchase option, call or similar right of a third party with respect to such
Securities and (d) the signing or filing of a financing statement which names
the Person as debtor, or the signing of any security agreement authorizing any
other Person as the secured party thereunder to file any financing statement
which names such Person as debtor.

     “Limitation Period” shall mean any period while any amount remains owing
on the Note that interest on such amount, calculated at the applicable interest
rate (plus any fees or other sums payable to the Lender under any Loan Document
and deemed to be interest under applicable law) would exceed the amount of
interest which would accrue at the Highest Lawful Rate.

     “Loan” or “Advance” means a loan or an advance made, deemed made in
connection with the payment by the Lender on any Letter of Credit or to be
made by the Lender to the Borrower pursuant to this Agreement or the aggregate
outstanding amount of all such loans or advances, as the context may require.

     “Loan Documents” or “Loan Papers” shall mean this Agreement, the Note, the
Letter of Credit Applications, the Security Documents, and all other documents
and instruments now or hereafter delivered pursuant to the terms of or in
connection with this Agreement, the Note, the Letter of Credit Applications, or
the Security Documents, and all renewals and extensions of,

8

 

amendments and supplements to, and restatements of, any or all of the
foregoing from time to time in effect (exclusive of term sheets and commitment
letters).

     “Margin Regulations” means Regulations T, U and X of the Board of
Governors of the Federal Reserve System, as in effect from time to time.

     “Material Adverse Effect” shall mean for any Person (i) any materially
adverse effect on the business, operations, properties, results of operations
or condition (financial or otherwise) of such Person, (ii) any material adverse
effect upon the business operations, properties, results of operations or
condition (financial or otherwise) of such Person which increases the risk that
any of the Debt of such Person will not be repaid as and when due, or (iii) any
material adverse effect upon the Collateral or the priority or enforceability
of the Liens securing the Note; if under any of the circumstances described in
clauses (i), (ii) and (iii) preceding, the material adverse effect could
reasonably be anticipated to involve damage, loss or Debt of $100,000 or more.
Any reference in this Agreement to a Material Adverse Effect on a Borrower or
the Borrowers shall be construed as a Material Adverse Effect on the Borrowers
taken as a whole, and any reference in this Agreement to a Material Adverse
Effect on the Guarantor shall be construed as a Material Adverse Effect on the
Guarantor and the Borrowers, taken as a whole.

     “Material Agreement” means, with respect to any Person, any 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
Property of such Person may be subject, which is not cancelable by such Person
upon notice of 90 days or less without (i) liability for further payment in
excess of $100,000 or (ii) forfeiture of Property having an aggregate value in
excess of $100,000.

     “Material Debt” means, for any Person, Debt (other than Loans and Letters
of Credit, but including Hedging Agreements) of such Person in the principal
amount aggregating in excess of $100,000. For purposes of determining Material
Debt, the “principal amount” of the obligations of the Borrowers in respect of
any Hedging Agreement at any time shall be the Hedge Termination Value.

     “Mortgages” mean deeds of trust, mortgages, assignments of production,
security agreements, collateral mortgages, and acts of pledge in form and
substance acceptable to the Lender to be executed by the appropriate Person
pursuant to which the Lender is granted a first and prior Lien on the
Collateral, subject only to Permitted Liens.

     “Multiemployer Plan” means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which more than one employer
is obligated to make contributions and which is subject to Title IV of ERISA.

     “Note” means the promissory note of the Borrowers (and any renewal or
extension thereof) evidencing the obligation of the Borrowers to repay the
Loans, substantially in the form attached hereto entitled “Form of Promissory
Note”, with appropriate insertions.

     “Notice of Borrowing” means the notice referred to in Section 2.2, which
shall be substantially in the form of the attachment hereto entitled “Form of
Notice of Borrowing.”

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     “Obligations” shall mean, without duplication, (i) all Debt evidenced by
the Note, (ii) the Letter of Credit Reimbursement Obligations, (iii) the
undrawn, unexpired amount of all outstanding Letters of Credit, (iv) the
obligation of the Borrowers for the payment of the fees payable hereunder or
under the other Loan Documents, and (v) all other obligations and liabilities
of either of the Borrowers to the Lender, now existing or hereafter incurred,
and to the extent that any of the foregoing includes or refers to the payment
of amounts deemed or constituting interest, only so much thereof as shall have
accrued, been earned and which remains unpaid at each relevant time of
determination.

     “Oil and Gas Properties” shall mean fee, leasehold, or other interests in
or under mineral estates or oil, gas, and other liquid or gaseous hydrocarbon
leases with respect to Properties situated in the United States or offshore
from any State of the United States, including, without limitation, overriding
royalty and royalty interests, leasehold estate interests, net profits
interests, production payment interests, and mineral fee interests, together
with contracts executed in connection therewith and all tenements,
hereditaments, appurtenances and Properties appertaining, belonging, affixed,
or incidental thereto.

     “PBGC” means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

     “Permitted Indebtedness” means (i) the Obligations, (ii) unsecured
accounts payable incurred in the ordinary course of business, which are not
unpaid in excess of 90 days beyond the invoice date therefor or are being
contested in good faith and as to which such reserve as is required by GAAP has
been made and on which interest charges are not paid or accrued, and (iii) if
the Lender has given its prior written consent thereto, Subordinated Debt and
(iv) Debt arising under Acceptable Hedging Agreements.

     “Permitted Investments” means investments in (i) indebtedness, evidenced
by notes maturing not more than 12 months after the date of issue, issued or
guaranteed by the government of the United States of America, (ii) certificates
of deposit maturing not more than 12 months after the date of issue, issued by
the Lender or by commercial banking institutions each of which is a member of
the Federal Reserve System and which has combined capital and surplus and
undivided profits of not less than $50,000,000, (iii) commercial paper,
maturing not more than 270 days after the date of issue, issued by (a) the
Lender (or any parent corporation of the Lender) or (b) a corporation (other
than an Affiliate of the Borrower) with a rating of “P1” (or its then
equivalent) according to Moody’s Investors Service, Inc., “A-1” (or its then
equivalent) according to Standard & Poor’s Corporation or “F-1” (or its then
equivalent) according to Fitch’s Investors Services, Inc., (iv) money market or
other mutual funds substantially all of whose assets comprise securities of the
types described in clauses (i) through (iii) above, or (v) such other
instruments, evidences of indebtedness or investment securities as the Lender
may approve.

     “Permitted Liens” means, with respect to any Property:

          (i) Liens for Taxes, assessments or other governmental charges or levies
which are not delinquent or which are being contested in good faith by
appropriate proceedings and for which adequate reserves have been maintained in
accordance with GAAP;

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          (ii) Liens in connection with workers’ compensation, unemployment
insurance or other social security, old age pension or public liability
obligations which are not delinquent or which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been maintained
in accordance with GAAP;

          (iii) statutory landlord’s liens, operators’, vendors’, carriers’,
warehousemen’s, repairmen’s, mechanics’, suppliers’, workers’, materialmen’s,
construction or other like Liens arising by operation of law in the ordinary
course of business or incident to the exploration, development, operation and
maintenance of Oil and Gas Properties each of which is in respect of
obligations that are not delinquent or which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been maintained
in accordance with GAAP;

          (iv) contractual Liens which arise in the ordinary course of business
under operating agreements, joint venture agreements, oil and gas partnership
agreements, oil and gas leases, farm-out agreements, division orders, contracts
for the sale, transportation or exchange of oil and natural gas, unitization
and pooling declarations and agreements, area of mutual interest agreements,
overriding royalty agreements, marketing agreements, processing agreements, net
profits agreements, development agreements, gas balancing or deferred
production agreements, injection, repressuring and recycling agreements, salt
water or other disposal agreements, seismic or other geophysical permits or
agreements, and other agreements which are usual and customary in the oil and
gas business and are for claims which are not delinquent or which are being
contested in good faith by appropriate proceedings and for which adequate
reserves have been maintained in accordance with GAAP;

          (v) Liens arising solely by virtue of any statutory or common law
provision relating to banker’s liens, rights of set-off or similar rights and
remedies and burdening only deposit accounts or other funds maintained with a
creditor depository institution, provided that no such deposit account is a
dedicated cash collateral account or is subject to restrictions against access
by the depositor in excess of those set forth by regulations promulgated by
bank regulators and no such deposit account serves as collateral to any Person
other than the Lender;

          (vi) easements, restrictions, servitudes, permits, conditions, covenants,
exceptions or reservations in any Property of the Borrower for the purpose of
roads, pipelines, transmission lines, transportation lines, distribution lines
for the removal of gas, oil, coal or other minerals or timber, and other like
purposes, or for the joint or common use of real estate, rights of way,
facilities and equipment, that do not secure any monetary obligations and which
in the aggregate do not materially impair the use of such Property for the
purposes of which such Property is held or materially impair the value of such
Property subject thereto;

          (vii) Liens on cash or securities pledged to secure performance of
tenders, surety and appeal bonds, government contracts, performance and return
of money bonds, bids, trade contracts, leases, statutory obligations,
regulatory obligations and other obligations of a like nature incurred in the
ordinary course of business (excluding, in each case, obligations constituting
Debt);

          (viii) judgment Liens in respect of judgments that do not constitute an
Event of Default;

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          (ix) Liens securing the payment of any Obligations; and

          (x) Liens on Property not constituting Collateral for the Obligations and
not otherwise permitted by the foregoing clauses of this definition; provided
that the aggregate principal or face amount of all Debt secured under this
clause (x) shall not exceed $100,000 at any time;

provided, that Liens described in clauses (i) through (v) above shall remain
Permitted Liens only for so long as no action to enforce such Lien has been
commenced and; provided, further, no intention to subordinate the first
priority Lien granted in favor of the Lender is hereby implied or expressed or
is to be inferred by the permitted existence of such Permitted Liens.

     “Permitted Loans and Investments” means (i) loans by the Borrowers to or
the acquisition of Investments by the Borrowers in any Person not exceeding in
the aggregate outstanding at any time for all such Persons the amount of
$100,000 and not otherwise permitted under this Agreement and (ii) Permitted
Investments.

     “Person” means a corporation, a partnership, a limited partnership, a
limited liability company, an association, a joint venture, an organization, a
business, an individual or a government or political subdivision thereof or any
governmental agency.

     “Personal Property Collateral” with respect to a Person means all of such
Person’s accounts, deposit accounts, equipment, general intangibles, inventory
and investment property (as such terms are defined and used in the UCC) whether
now existing or hereafter acquired or arising; together with (i) all
substitutions and replacements for and products of any of the foregoing; and
(ii) proceeds of any and all of the foregoing.

     “Plan” means any employee benefit plan which is covered by Title IV of
ERISA.

     “Property” means any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.

     “PV9 Value” means the net present value of the oil and gas to be produced
from the Oil and Gas Properties calculated using a discount rate of nine
percent (9.00%) per annum and reserve estimates, prices, production rates and
costs acceptable to the Lender.

     “Rate Management Transaction” shall mean any transaction (including an
agreement with respect thereto) now existing or hereafter entered into by the
Borrower 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 to
any of these transactions) or any combination thereof, whether linked to one or
more interest rates, foreign currencies, commodity prices, equity prices or
other financial measures.

     “Regulation U” means Regulation U of the Board of Governors of the Federal
Reserve System, as in effect from time to time.

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     “Release of Hazardous Substances” means any emission, spill, release,
disposal, or discharge, except in accordance with a valid permit, license,
certificate, or approval of the relevant Governmental Authority, of any
Hazardous Substance into or upon (a) the air, (b) soils or any improvements
located thereon, (c) surface water or groundwater, or (d) the sewer or septic
system, or the waste treatment, storage, or disposal system servicing any
Property of the Borrower, with respect to which the Borrower is legally
obligated to respond under applicable Environmental Laws, by notifying the
relevant Governmental Authority, investigating or undertaking corrective
action.

     “Representative’s Certificate” means a certificate signed by a
Responsible Representative.

     “Requirement of Law” means, as to any Person, the certificate or articles
of incorporation and by-laws or other organizational or governing documents of
such Person, and any applicable law, treaty, ordinance, order, judgment, rule,
decree, regulation, or determination of an arbitrator, court, or other
Governmental Authority, including, without limitation, rules, regulations,
orders, and requirements for permits, licenses, registrations, approvals, or
authorizations, in each case as such now exist or may be hereafter amended and
are applicable to or binding upon such Person or any of its Property or to
which such Person or any of its Property is subject. Unless otherwise
specified, the “Person” referred to in this definition shall be deemed to be
the Borrower.

     “Responsible Representative” means (i) with respect to Toreador
Exploration, G. Thomas Graves, III, President, and Douglas W. Weir, Senior Vice
President and Chief Financial Officer and (ii) with respect to Toreador
Acquisition, Thomas Graves, III, President, and Douglas W. Weir, Senior Vice
President and Chief Financial Officer.

     “Restricted Payment” means any of the following:

          (i) the declaration or payment of any dividend on, or the incurrence of
any liability to make any other payment or distribution in respect of, any
shares of or other ownership interests in the Borrower without the prior
written consent of the Lender except that, if no Default exists and the
declaration and payment of cash dividends or cash distributions will not cause
a Default to exist, the term Restricted Payment shall not include the
declaration and the payment of cash dividends or cash distributions to the
Guarantor;

          (ii) any payment or distribution on account of the purchase, redemption or
other retirement of any Equity Interests in the Borrower, or of any warrant,
option or other right to acquire such Securities or such other ownership
interests, or any other payment or distribution made in respect thereof, either
directly or indirectly; or

          (iii) the repayment by the Borrower of any Debt owed to an Affiliate,
unless such Debt constitutes Subordinated Debt and such repayment is permitted
by the subordination agreement executed by such Affiliate in connection
therewith.

     “Revolving Credit Period” means the period commencing on the Closing Date
and ending on the Final Maturity Date.

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     “Security” means any stock, share, voting trust certificate, limited or
general partnership interest, member interest, bond debenture, note, or other
evidence of indebtedness, secured or unsecured, convertible, subordinated or
otherwise, or in general any instrument commonly known as a “security” or any
certificate of interest, share or participation in temporary or interim
certificates for the purchase or acquisition of, or any right to subscribe to,
purchase or acquire any of the foregoing.

     “Security Documents” or “Security Instruments” means the security
instruments executed and delivered in satisfaction of the condition set forth
in Section 5.2.3, and all other documents and instruments at any time executed
as security for all or any portion of the Obligations, as such instruments may
be amended, restated, or supplemented from time to time.

     “Single Employer Plan” means a Plan maintained by any Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.

     “Subordinated Debt” means Debt of any Borrower evidenced by promissory
notes which by their terms, and by separate written subordination agreements
among the payee thereof, such Borrower and the Lender, have been subordinated
to the Note and other Obligations on terms satisfactory to the Lender in its
sole discretion.

     “Subsidiary” means for any Person, any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned, collectively, by such
Person and any Subsidiaries of such Person. The term Subsidiary shall include
Subsidiaries of Subsidiaries (and so on).

     “Taxes” means all taxes, assessments, filing or other fees, levies,
imposts, duties, deductions, withholdings, stamp taxes, interest equalization
taxes, capital transaction taxes, foreign exchange taxes or charges, or other
charges of any nature whatsoever from time to time or at any time imposed by
any law or Tribunal.

     “TCB Rate” means, on any day, the greater of (i) the prime rate as
published in The Wall Street Journal’s “Money Rates” table for such day or (ii)
four percent (4.00%). If multiple prime rates are quoted in such table, then
the highest prime rate quoted therein shall be the TCB Rate. In the event that
a prime rate is not published in The Wall Street Journal’s “Money Rates” table
for any reason or The Wall Street Journal is not published that day, the Lender
will choose a substitute TCB Rate, for purposes of calculating the interest
rate applicable hereunder, which is based on comparable information, until such
time as a prime rate is published in The Wall Street Journal’s “Money Rates”
table. In this connection, such prime rate for each Saturday, Sunday or day
for which banks are authorized to be closed in the state of Texas shall be the
most recent prime rate so published if published no more than three days prior
to such date. Each change in the TCB Rate shall become effective without
notice to any Borrower on the effective date of each such change.

     “Toreador Acquisition” means Toreador Acquisition Corporation, a Delaware
corporation.

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     “Toreador Exploration” means Toreador Exploration & Production Inc., a
Texas corporation.

     “Toreador Resources” means Toreador Resources Corporation, a Delaware
corporation.

     “Transferee” means any Person to which the Lender has sold, assigned,
transferred, or granted a participation in any of the Obligations, as
authorized hereunder, and any Person acquiring, by purchase, assignment,
transfer, or participation, from any such purchaser, assignee, transferee, or
participant, any part of such Obligations.

     “Tribunal” means any court, tribunal, governmental body, agency,
arbitration panel, or instrumentality.

     “UCC” shall mean the Uniform Commercial Code as from time to time in
effect in the State of Texas.

     “Unused Available Commitment” means, at any time, an amount (not less than
zero) equal to the remainder, if any, of the (a) Available Commitment in effect
at such time minus (b) the outstanding principal amount of the Note at such
time minus (c) the Letter of Credit Exposure at such time.

     1.2. Accounting Terms and Determinations; Changes in Accounting.

        1.2.1. Unless otherwise specified herein, all accounting terms used herein
shall be interpreted, all accounting determinations hereunder shall be made,
and all financial statements required to be delivered hereunder shall be
prepared in accordance with GAAP, applied on a basis consistent (except for
changes concurred in by the independent public accountants and with respect to
which the Borrowers shall have promptly notified the Lender on becoming aware
thereof) with the most recent financial statements of the Borrowers delivered
to the Lender.

        1.2.2. Neither any Borrower nor the Guarantor shall change its method of
accounting, other than immaterial changes in methods, changes permitted by GAAP
in which such Borrower’s or Guarantor’s independent public accountants concur
and changes required by a change in GAAP, without the prior written consent of
the Lender.

     1.3. References. References in this Agreement to Exhibits, Schedules,
Annexes, Appendixes, Attachments, Articles, Sections or clauses shall be to
exhibits, schedules, annexes, appendixes, attachments, articles, sections or
clauses of this Agreement, unless expressly stated to the contrary. References
in this Agreement to “hereby,” “herein,” “hereinafter,” “hereinabove,”
“hereinbelow,” “hereof,” “hereunder” and words of similar import shall be to
this Agreement in its entirety and not only to the particular Exhibit,
Schedule, Annex, Appendix, Attachment, Article, or Section in which such
reference appears. This Agreement, for convenience only, has been divided into
Articles and Sections; and it is understood that the rights and other legal
relations of the parties hereto shall be determined from this instrument as an
entirety and without regard to the aforesaid division into Articles and
Sections and without regard to headings prefixed to such Articles or Sections.
Whenever the context requires, reference herein made to the single number shall
be understood to include the plural; and

15

 

likewise, the plural shall be understood to include the singular.
Definitions of terms defined in the singular or plural shall be equally
applicable to the plural or singular, as the case may be, unless otherwise
indicated. Words denoting sex shall be construed to include the masculine,
feminine and neuter, when such construction is appropriate; and specific
enumeration shall not exclude the general but shall be construed as cumulative;
the word “or” is not exclusive; the word “including” (in its various forms)
shall mean “including, without limitation”; in the computation of periods of
time, the word “from” means “from and including” and the words “to” and “until”
mean “to but excluding”; and all references to money refer to the legal
currency of the United States of America. The Exhibits, Schedules, Annexes,
Appendixes and Attachments attached to this Agreement and items referenced as
being attached to this Agreement are incorporated herein and shall be
considered a part of this Agreement for all purposes.

ARTICLE II

COMMITMENT TO LEND AND ISSUE LETTERS OF CREDIT

     2.1. Commitment.

        2.1.1. During the Revolving Credit Period and if no Default exists, the
Lender agrees, subject to the other terms and conditions of this Agreement:

          (i) To lend to the Borrowers from time to time amounts not to exceed in
the aggregate at any one time outstanding an amount equal to the Available
Commitment as in effect from time to time.

          (ii) To issue standby letters of credit or renew or extend standby Letters
of Credit for the account of any Borrower from time to time prior to the date
which is 30 days prior to the Final Maturity Date in amounts not to exceed in
the aggregate at any one time outstanding the Letter of Credit Limit, it being
understood that outstanding funding obligations under Letters of Credit shall
reduce the Unused Available Commitment hereunder.

          (iii) Notwithstanding any other provision of this Agreement, under no
circumstances shall the Lender ever be obligated to lend to the Borrowers any
amount or to issue any letter of credit or renew any Letter of Credit on behalf
of the Borrowers which would cause the Lender to violate any lending limits or
restrictions now existing or hereafter imposed on the Lender by any
Governmental Authority, nor shall the Lender have an implied duty to sell or
participate a portion of the Note or other Obligations to any other Person in
order to permit the Lender to lend to the Borrowers additional amounts or to
issue any letter of credit on behalf of the Borrowers.

        2.1.2. The Lender shall not be obligated to lend to the Borrowers, and the
Borrowers shall not be entitled to borrow hereunder, any amount which would
cause the sum of the outstanding principal amount of all Loans made by the
Lender and the undrawn amount of all outstanding Letters of Credit to exceed
the Available Commitment of the Lender then in effect.

        2.1.3. The Lender shall not be obligated to issue a letter of credit
pursuant to Section 2.1.1 or to renew a Letter of Credit, and the Borrowers
shall not be entitled to have a letter of credit issued pursuant to such
Section or to have a Letter of Credit renewed, if the

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issuance of the requested letter of credit or the renewal of an existing
Letter of Credit would cause the Letter of Credit Limit to be exceeded, after
taking into account the mandatory reductions in the Borrowing Base required
during the proposed term of such requested letter of credit or renewal Letter
of Credit.

     2.2. Method of Borrowing and Obtaining Letters of Credit.

        2.2.1. The Borrowers shall give the Lender a Notice of Borrowing prior to
12:00 noon (Dallas time) of the day of the requested Advance under Section 2.1.

        2.2.2. Unless the Lender determines that any applicable condition
specified in Article V or elsewhere herein has not been satisfied, the Lender
will make the funds available to the Borrower at the Lender’s address referred
to in Section 9.6.

        2.2.3. The Borrowers shall give the Lender a request for letter of credit
prior to 12:00 noon (Dallas time) at least three (3) Business Days before each
requested letter of credit under Section 2.1, by completing and delivering a
Notice of Borrowing together with a completed Letter of Credit Application.
The expiry date of such requested letter of credit cannot be later than the
earlier of (a) 365 days from the date of issuance or, if issued in favor of the
Texas Railroad Commission, 15 months following the date of issue, (b) the last
date before which the Borrowing Base is scheduled to reduce to an amount less
than the aggregate undrawn amount of the requested letter of credit and the
outstanding Letters of Credit which, by their terms, might be outstanding on
such reduction date or (c) the date which is 30 days prior to the Final
Maturity Date. Without the prior written consent of the Lender, no letter of
credit hereunder shall be issued in an amount less than $50,000, and there can
be no more than three Letters of Credit outstanding at any time. The Letter of
Credit Application must be completed in a manner and shall use such wording as
is acceptable to the Lender.

        2.2.4. Upon receipt of the Letter of Credit Application, the Lender shall
issue such letter of credit if the conditions of Article V or elsewhere herein
have been satisfied.

        2.2.5. Subject to the terms hereof, in the event that any beneficiary of a
Letter of Credit shall have taken the steps necessary to obligate the Lender to
make a payment under such Letter of Credit, the Borrowers shall be deemed to
have delivered to the Lender an irrevocable Notice of Borrowing under Section
2.2 for an Advance in the amount of such payment amount, regardless of any
limitations set forth herein. The Lender shall pay over the proceeds of such
Advance to itself as reimbursement for amounts paid under such Letter of
Credit.

     2.3. Note. The Loans shall be evidenced by the Note issued by the
Borrowers, payable to the order of the Lender in the Commitment Amount.

     2.4. Certain Payments and Prepayments of Principal.

        2.4.1. If at any time the aggregate principal of the Loans outstanding and
the undrawn amount of the outstanding Letters of Credit exceeds the Borrowing
Base then in effect, the Borrower shall on the day of such occurrence, repay
the principal of the Loans in an amount equal to such excess, except that if
the circumstances described in this Section are the direct

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result of a new determination of the Borrowing Base under Section 2.8.1,
then the provisions of Section 2.8.3 shall apply.

        2.4.2. In the event that a prepayment is required under this Section 2.4,
Section 2.8.3 or Section 7.9.2 and the outstanding Loans are less than the
amount required to be prepaid, the Borrowers shall repay the entire balance of
the Loans and, in accordance with the provisions of the relevant Letter of
Credit Application executed by the Borrowers or otherwise to the reasonable
satisfaction of the Lender, deposit with the Lender as additional collateral
securing the Obligations, an amount of cash, in immediately available funds,
equal to the Letter of Credit Exposure minus the Borrowing Base.

     2.5. Interest.

        2.5.1. The unpaid principal balance of the Note shall bear interest from
the date hereof, payable as it accrues on February 1, 2005, and on the first
day of each month occurring thereafter and at maturity (stated or by
acceleration), at a rate per annum equal to the lesser of the (i) the Floating
Rate or such higher rate as is specified in Section 3.3 or (ii) the Highest
Lawful Rate.

        2.5.2. Each change in the rate of interest charged hereunder shall become
effective automatically and without notice to the Borrowers upon the effective
date of each change in the Floating Rate or the Highest Lawful Rate, as the
case may be.

     2.6. Unused Available Commitment Fees; Engineering Fees; Facility Fees;
Letter of Credit Fees; Authorized Payments by the Lender.

        2.6.1. The Borrowers shall pay to the Lender a commitment fee of one-half
of one percent (1/2 of 1%) per annum, calculated daily on the actual number of
days the Commitment is outstanding on the amount of the Unused Available
Commitment in effect from time to time, such commitment fee to be payable
quarterly in arrears on each January 1, April 1, July 1, and October 1
occurring hereafter and upon termination of the Available Commitment.

        2.6.2. The Borrowers shall pay to the Lender on the Closing Date an
engineering fee in the amount of $3,500 and thereafter shall pay an engineering
fee in the amount of $3,500 if the Lender’s internal engineers perform the
engineering review of the Collateral or the actual fees and expenses of any
third-party engineers retained by the Lender to prepare an engineering report,
payable at the time of the scheduled, discretionary or Borrower requested
determinations of the Borrowing Base referred to in Section 2.8.1 or at the
time of a redetermination of the Borrowing Base required under Section 7.9.2.

        2.6.3. To compensate the Lender for the costs of the extension of credit
hereunder, the Borrowers shall pay to the Lender (i) on the Closing Date, a
facility fee in the amount of $33,000 and (ii) thereafter upon each
determination of an increase in the Borrowing Base pursuant to Section 2.8.1, a
facility fee in the amount of one-half of one percent (1/2 of 1.00%) of the
amount by which the Borrowing Base is increased over that in effect on the date
of such determination.

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        2.6.4. The Borrowers shall pay to the Lender at the time of each issuance
of a letter of credit hereunder and at the time of each renewal or extension of
a Letter of Credit, (i) a letter of credit fee equal to the greater of (a) two
percent (2.00%) per annum of the face amount of such Letter of Credit for the
maximum number of days which such Letter of Credit, by its terms, could remain
outstanding or (b) $750, and (ii) the normal and standard charges of the Lender
for the issuance, delivery and confirmation of such Letter of Credit.

        2.6.5. To compensate the Lender for the cost of processing requests for
waivers of and amendments to the provisions of this Agreement or the other Loan
Documents, the Borrowers shall pay to the Lender at the time of granting such
waiver or entering into such amendment, the amount of $2,500 plus such
additional amounts as the Lender and the Borrowers shall specify or agree in
such waiver or amendment.

        2.6.6. The Lender is irrevocably authorized to make Advances for the
payment of the fees and expenses of the Lender required to be paid by the
Borrowers hereunder. The Lender shall pay over such Advance proceeds to itself
or directly to such other Person entitled to payment hereunder.

     2.7. Termination of Commitment; Maturity of Note.

        2.7.1. The Commitment shall terminate on the Final Maturity Date, unless
terminated earlier in accordance with the terms hereof.

        2.7.2. The Note shall finally mature on the Final Maturity Date unless
accelerated in accordance with the terms hereof, and any unpaid principal of
the Note and accrued, unpaid interest thereon shall be due and payable on such
date.

        2.7.3. The Borrowers shall have the right upon payment in full of the
Obligations and the cancellation of all outstanding Letters of Credit, to
cancel in full (but not in part) the Commitment, with no right of
reinstatement.

     2.8. Determination of Borrowing Base; Automatic Reductions in Borrowing
Base; Borrowing Base Deficiency; Notice of Redeterminations; Requests for
Reductions in Borrowing Base.

        2.8.1. On the basis of the information furnished to the Lender hereunder
and such other reports, appraisals and information as the Lender may reasonably
deem appropriate, the Lender shall have the right to determine a new Borrowing
Base as of June 1, 2005, and each December 1 and June 1 occurring thereafter
prior to the Final Maturity Date or at any time it may elect if a Default has
occurred which is continuing (the “scheduled determinations”), or at such other
or additional times prior to the Final Maturity Date as the Lender in its
reasonable discretion may elect (the “discretionary determinations”), and the
Lender shall determine a new Borrowing Base at such additional times, but no
more often than one (1) time in any 12-month period without the Lender’s
consent, as the Borrowers may request (the “Borrower requested
determinations”). Such determinations, if made, shall be in accordance with
the Lender’s customary practices and standards for loans of a similar nature as
in effect at the time such determinations are made and shall be conclusive, and
any increases in the Borrowing Base shall

19

 

be subject to the Lender’s complete credit approval process. There is no
duty, implied or explicit, on the Lender to ever increase the Borrowing Base.

        2.8.2. The Borrowing Base shall be automatically reduced monthly,
commencing January 1, 2005, and on the first day of each month thereafter until
the Final Maturity Date. Such reduction in the Borrowing Base each month shall
be in the amount of $0.00 unless redetermined as herein permitted. At the time
of each new Borrowing Base determination under Section 2.8.1, the Lender in its
sole discretion may increase or decrease the amount of such monthly reductions
and any decreases in the monthly reductions shall be subject to the Lender’s
complete credit approval process. There is no duty, implied or explicit, on
the Lender to ever decrease the amount of the monthly Borrowing Base reduction
amounts.

        2.8.3. Upon the occurrence of a Borrowing Base Deficiency, the Borrowers
shall, within thirty (30) days following notice by the Lender of the existence
of such Borrowing Base Deficiency, do any one or more of the following in an
aggregate amount at least equal to such Borrowing Base Deficiency: (i) prepay
the outstanding principal of the Note or (ii) cause to be created first and
prior perfected Liens (subject only to Permitted Liens) in favor of the Lender,
by instruments reasonably satisfactory to the Lender, on producing Oil and Gas
Properties (or cash if the circumstances described in Section 2.4.2 are
applicable) which in the reasonable opinion of the Lender would increase the
Borrowing Base by an amount sufficient, in combination with clause (i)
preceding, to eliminate such Borrowing Base Deficiency.

        2.8.4. Upon each redetermination of the Borrowing Base, the Lender will
notify the Borrowers of such determination (which notice may be orally
communicated to the Borrowers and confirmed promptly thereafter in writing if
the Borrowing Base is being decreased or the monthly Borrowing Base reduction
amount is being increased), and the Borrowing Base and the amount by which the
Borrowing Base shall be reduced or increased so communicated to the Borrowers
shall become effective immediately upon such notification (or such other date
as is stated in such notice and regardless of any Notice of Borrowing the
Lender might have received) and shall remain in effect until the next
subsequent redetermination of the Borrowing Base. The Lender may condition any
increase in the Borrowing Base or decrease in the monthly Borrowing Base
reduction amount to the execution and return by the Borrowers of the notice
given under this Section.

        2.8.5. The Borrowers may at any time by written notice to the Lender
request that the Borrowing Base be reduced (with no right of reinstatement) by
an amount specified by the Borrowers in such reduction notice, and the
Borrowing Base shall be deemed so reduced upon receipt by the Lender of such
reduction notice. Further, in the event the Borrowers are advised of any
increase in the Borrowing Base, the Borrowers may decline to utilize the
increased borrowing availability created thereby and by written notice to the
Lender irrevocably refuse to accept all or a portion of such increase, but any
such refusal notice received by the Lender more than three (3) Business Days
following such increase in the Borrowing Base shall be treated as a Borrowing
Base reduction notice under the immediately preceding sentence.

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     2.9. Request for Extension of Maturity.

        2.9.1. Following receipt by the Lender of a written request from the
Borrowers, given by the Borrowers no earlier than six (6) months prior to the
Final Maturity Date, the Lender agrees to consider, in accordance with the
customs and standards of the Lender in effect at such time (or as such customs
and standards may change following such request) for loans of a similar nature
to the Loans and subject to the Lender’s complete approval process, a request
by the Borrowers to extend the Final Maturity Date. The Lender might charge
the Borrowers fees in connection with any such request or extension.

ARTICLE III

GENERAL PROVISIONS

     3.1. General Provisions as to Payments and Loans.

        3.1.1. All payments of principal and interest on the Note and of fees
hereunder shall be made by 2:00 p.m. (Dallas, Texas time) on the date such
payments are due in federal or other funds immediately available at the
principal office of the Lender referred to in Section 9.6 and, if not made by
such time or in immediately available funds, then such payment shall be deemed
made when such funds are available to the Lender for its full and unrestricted
use. Whenever any payment of principal of or interest on the Note or of fees
hereunder shall be due on a day which is not a Business Day, the date for
payment thereof shall be extended to the next succeeding Business Day. If the
date for any payment is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.

        3.1.2. All payments made by the Borrowers on the Note shall be made free
and clear of, and without reduction by reason of, any Taxes.

        3.1.3. All requests for Advances and letters of credit (and renewals and
extensions of Letters of Credit) shall be made on a Business Day.

        3.1.4. All Advances shall be made available to the Borrowers on a Business
Day at the Lender’s address referred to in Section 9.6.

        3.1.5. All payments and fundings shall be denominated in Dollars.

     3.2. Computation of Interest. Each determination hereunder of interest on
the Note and fees hereunder based on per annum calculations shall be computed
on the basis of a year of 360 days and paid for the actual number of days
elapsed (including the first day but excluding the last day), subject to the
limitations of the Highest Lawful Rate.

     3.3. Default Interest. Unless waived by the Lender, the principal of the
Note shall bear interest at the Default Rate at any time an Event of Default
exists and, to the extent permitted by law, overdue interest on the Note shall
bear interest at the Default Rate.

     3.4. Prepayments Permitted. The principal of the Note and accrued
interest thereon may be prepaid by the Borrower in whole or in part at any time
without premium or penalty.

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     3.5. Limitation Period. Notwithstanding anything herein or in the Note to
the contrary, during any Limitation Period, the interest rate to be charged on
amounts evidenced by the Note shall be the Highest Lawful Rate, and the
obligation, if any, of the Borrowers for the payment of fees or other charges
deemed to be interest under applicable law shall be suspended. During any
period or periods of time following a Limitation Period, to the extent
permitted by applicable laws of the State of Texas or the United States of
America, the interest rate to be charged hereunder shall remain at the Highest
Lawful Rate until such time as there has been paid to the Lender (i) the amount
of interest in excess of that accruing at the Highest Lawful Rate that the
Lender would have received during the Limitation Period had the interest rate
remained at the otherwise applicable rate, and (ii) the amount of all interest
and fees otherwise payable to the Lender but for the effect of such Limitation
Period.

     3.6. Joint and Several Obligations and Duties. The obligations and duties
of the Borrowers hereunder and under the Note shall be the joint and several
obligations of each of Toreador Exploration and Toreador Acquisition, and the
breach by any of Toreador Exploration or Toreador Acquisition of any of the
covenants, agreements, representations and warranties of the Borrowers or of
Toreador Exploration and Toreador Acquisition contained herein or in any of the
other Loan Documents shall be deemed a breach thereof by the Borrowers.

ARTICLE IV

COLLATERAL

     4.1. Security.

        4.1.1. To secure full and complete payment and performance of the
obligations of the Borrowers to the Lender, the Borrowers will cause the
appropriate Person to execute and deliver to the Lender the following documents
and instruments:

          (i) the Mortgages granting the Lender a first and prior Lien on no less
than 75% of the PV9 Value of the Oil and Gas Properties utilized in determining
the Borrowing Base, together with financing statements relating thereto,
subject only to Permitted Liens;

          (ii) the Guaranty of the Guarantor; and

          (iii) a stock pledge agreement from the Guarantor granting to the Lender a
first and prior Lien in the Equity Interests of each of the Borrowers as
security for the Obligations.

        4.1.2. All documents delivered or to be delivered hereunder shall be in
form and substance reasonably satisfactory to the Lender and its counsel and
shall be supported by such legal opinions as the Lender or its counsel may
reasonably request.

        4.1.3. All Liens to be created by delivery of the documents referred to in
this Section shall be first and prior perfected Liens in favor of the Lender,
subject only to Permitted Liens.

     4.2. Grant of Security Interests. Each of the Borrowers, as debtor,
hereby pledges, assigns and grants to the Lender, as secured party, a security
interest (collectively referred to as

22

 

the “Security Interest”) in the Personal Property Collateral of each such
Borrower, as security for the payment and performance of the Obligations and
any other indebtedness or obligations of the Borrowers to the Lender, whether
now existing or hereafter incurred or arising.

     4.3. Notification of Account Debtors and Other Obligors. The Lender may
at any time while a Default exists notify any account debtor or other Person
obligated to pay the amount due that such right to payment has been assigned or
transferred to the Lender for security and shall be paid directly to the
Lender.

     4.4. Financing Statement. Each of the Borrowers authorizes the Lender to
complete and file financing statements in any state to perfect the security
interests granted hereby or by any of the other Loan Documents.

ARTICLE V

CONDITIONS PRECEDENT TO ADVANCES AND LETTERS OF CREDIT

     The obligation of the Lender to make Advances or issue letters of credit
hereunder or renew or extend Letters of Credit shall be subject to the
satisfaction of each of the following conditions:

     5.1. All Advances and Letters of Credit. In the case of each Advance to
be made or letter of credit to be issued hereunder or renewals and extensions
of Letters of Credit (except the initial Advance made hereunder):

        5.1.1. timely receipt by the Lender of a Notice of Borrowing and, if
applicable, a Letter of Credit Application;

        5.1.2. the fact that, immediately before such requested Advance or Letter
of Credit, no Default shall have occurred and be continuing and that the making
of any such Advance will not cause a Default;

        5.1.3. the fact that the representations and warranties of the Borrowers
contained in this Agreement (except the representations set forth in Sections
6.7 and 6.10.1) shall be true on and as of the date of such Advance;

        5.1.4. each request for an Advance hereunder shall be deemed to be a
representation and warranty by the Borrower on the date of such request, as to
the facts specified in Sections 5.1.2 and 5.1.3; and

        5.1.5. the fact that each condition specified in Section 5.2 has been
satisfied or waived in writing by the Lender.

     5.2. Initial Advance. In the case of the initial Advance or Letter of
Credit:

        5.2.1. receipt by the Lender of the following:

23

 

          (i) copies of the Articles or Certificates of Incorporation, and all
amendments thereto, of each Borrower and the Guarantor, accompanied by
certificates that such copies are correct and complete, one issued by the
Secretary of State of the state of incorporation of each such Borrower or the
Guarantor, as applicable, dated a current date, and one executed by an
authorized representative of each of the Borrowers and the Guarantor, as
applicable, dated the Closing Date;

          (ii) copies of the Bylaws, and all amendments thereto, of each of the
Borrowers and the Guarantor, accompanied by certificates that such copies are
correct and complete of an authorized representative of each such Borrower and
the Guarantor, as applicable, dated the Closing Date;

          (iii) certificates of the appropriate Tribunals of each jurisdiction in
which each of the Borrowers or the Guarantor has an executive office or
principal place of business, each of the Borrowers or the Guarantor was formed
or in which any Collateral is located (if any Borrower or the Guarantor is
required to qualify to do business in such state), each dated a current date,
to the effect that each such Borrower or the Guarantor, as applicable, is in
good standing with respect to the payment of franchise and/or other Taxes and,
if required by law, are duly qualified to transact business in such
jurisdictions;

          (iv) certificates of incumbencies and signatures of all officers of each
of the Borrowers and the Guarantor who will be authorized to execute or attest
any of the Loan Documents on behalf of each such Borrower and the Guarantor, as
applicable, executed by an authorized representative of each such Borrower and
the Guarantor, as applicable, dated the Closing Date;

          (v) copies of resolutions approving the Loan Documents and authorizing the
transactions contemplated therein, duly adopted by the Board of Directors (or
authorized body serving a similar function) of each of the Borrowers and the
Guarantor, as applicable accompanied by certificates of an authorized
representative of each such Borrower and the Guarantor, as applicable, that
such copies are true and correct copies of resolutions duly adopted at the
meeting of, or by the unanimous written consent of, the Board of Directors (or
authorized body serving a similar function) of each such Borrower or the
Guarantor, as applicable, and that such resolutions constitute all the
resolutions adopted with respect to such transactions, have not been amended,
modified or revoked in any respect, and are in full force and effect as of the
Closing Date;

        5.2.2. receipt by the Lender of the duly executed Note in the Commitment
Amount, dated the Closing Date;

        5.2.3. receipt by the Lender of the documents described in Section 4.1.1,
each duly executed and delivered by the appropriate Person;

        5.2.4. receipt by the Lender from the Guarantor of the stock certificates
of each Borrower representing the entirety of all Equity Interests issued by
each of the Borrowers together with stock powers related thereto executed in
blank;

24

 

        5.2.5. receipt by the Lender of a certificate of ownership interests in
form and substance satisfactory to the Lender, certifying as to the ownership
interests of each of the Borrowers in its Oil and Gas Properties;

        5.2.6. receipt by the Lender of satisfactory evidence that prior Liens, if
any, on the Collateral (other than Permitted Liens) are being released or
assigned to the Lender concurrently with the Closing;

        5.2.7. receipt by the Lender of the results of searches of the UCC records
of the Secretaries of State of the States of Texas, Oklahoma, Kansas, Arkansas,
New Mexico, Wyoming and Delaware from a source acceptable to the Lender
reflecting no Liens in such records against any of the intended Collateral
other than Permitted Liens or Liens being released or assigned to the Lender
concurrently with the Closing; and

        5.2.8. receipt by the Lender of such additional information and
documentation as the Lender may reasonably require relating to the Loan
Documents and the transactions contemplated hereby and thereby.

     5.3. Conditions Precedent for the Benefit of the Lender. All conditions
precedent to the obligations of the Lender to make any advance or issue any
letter of credit are imposed hereby solely for the benefit of the Lender, and
neither any Borrower, the Guarantor nor any other Person may require
satisfaction of any such condition precedent or be entitled to assume that the
Lender will refuse to make any advance in the absence of strict compliance with
such conditions precedent.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF THE BORROWERS

     The Borrowers and each of them hereby represent and warrant to the Lender
as follows:

     6.1. Existence and Power. Each of the Borrowers:

        6.1.1. is a corporation, duly organized, validly existing and in good
standing under (i) the laws of the State of Texas with respect to Toreador
Exploration & Production Inc. and (ii) the laws of the State of Delaware with
respect to Toreador Acquisition Corporation;

        6.1.2. has all corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted; and

        6.1.3. is duly qualified to transact business as a foreign entity in each
jurisdiction where the nature of its business requires the same, except where
the failure to so qualify could not reasonably be expected to have a Material
Adverse Effect on the Borrowers.

The Guarantor:

        6.1.4. is a corporation, duly organized, validly existing and in good
standing under the laws of the State of Delaware;

25

 

        6.1.5. has all corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted; and

        6.1.6. is duly qualified to transact business as a foreign entity in each
jurisdiction where the nature of its business requires the same, except where
the failure to so qualify could not reasonably be expected to have a Material
Adverse Effect on the Guarantor.

     6.2. Authorization; Contravention. The execution, delivery and
performance by each Person (other than the Lender) purporting to execute this
Agreement or the other Loan Documents are within such Person’s power, have been
duly authorized by all necessary action, require no action by or in respect of,
or filing with, any governmental body, agency or official (except that the
perfection of Liens created by certain of the Security Documents may require
the filing of financing statements, mortgages or similar instruments in the
appropriate recordation offices), and do not contravene, or constitute a
default under, any provision of applicable law or regulation (including the
Margin Regulations) or any agreement creating or governing such Person or any
agreement, judgment, injunction, order, decree or other instrument binding upon
such Person or result in the creation or imposition of any Lien on any Property
of either of the Borrowers, except Permitted Liens and Liens securing the
Obligations.

     6.3. Binding Effect.

        6.3.1. This Agreement constitutes a valid and binding agreement of each of
the Borrowers; the Note, when executed and delivered in accordance with this
Agreement, will constitute the valid and binding obligation of each of the
Borrowers; the Security Documents, when executed and delivered in accordance
with this Agreement, will constitute valid and binding obligations of each
Person purporting to execute the same;

        6.3.2. Each Loan Document is enforceable in accordance with its terms
except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors’ rights generally and (ii)
rights of acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability.

     6.4. Subsidiaries; Ownership.

        6.4.1. Neither Borrower has any Subsidiaries.

        6.4.2. The entirety of each class of Equity Interests in each of the
Borrowers is owned legally and beneficially by Toreador Resources.

     6.5. Disclosure. No document, certificate or statement delivered to the
Lender by or on behalf of any Borrower or the Guarantor in connection with the
transactions contemplated hereby contains any untrue statement of a material
fact. All information heretofore furnished by each of the Borrowers and the
Guarantor to the Lender for purposes of or in connection with this Agreement or
any transaction contemplated hereby is, and all such information hereafter
furnished by each of the Borrowers and the Guarantor to the Lender will be,
true and accurate in every material respect or based on reasonable estimates on
the date as of which such information is stated or certified. Each of the
Borrowers has disclosed to the Lender in writing any and all facts known to
such Borrower (except facts of general public knowledge) which materially and

26

 

adversely affect or may affect (to the extent such Borrower can
now reasonably foresee) the business, operations, prospects or condition,
financial or otherwise, of any Borrower or the ability of any Borrower to
perform its obligations under this Agreement. There is no fact known to any
Borrower (except facts of general public knowledge and industry-wide risks
normally associated with the types of businesses conducted by the Borrowers)
that has not been disclosed to the Lender in writing which could cause a
Material Adverse Effect on the Borrowers.

     6.6. Financial Information.

        6.6.1. The financial information of the Borrowers and the Guarantor
delivered to the Lender in connection with the request for this credit facility
fairly present in all material respects, in conformity with GAAP, the financial
position of the Borrowers and the Guarantor at the respective dates thereof
except that certain information and note disclosures normally included with
annual financial statements may be condensed or omitted provided that the
disclosures made are adequate to make the information presented not misleading.

        6.6.2. Except as disclosed in a writing delivered by the Borrower to the
Lender prior to the execution and delivery of this Agreement, since the dates
referenced in the financial information referred to in Section 6.6.1 above,
there has been no material adverse change in the business, financial position,
results of operations or prospects of the Borrower.

     6.7. Litigation. Except as disclosed in Exhibit 6.7, there is no action,
suit or proceeding pending against, or to the knowledge of any Borrower
threatened against or affecting any Borrower before any Tribunal or arbitrator
in which there is a reasonable possibility of an adverse decision which could
reasonably be expected to have a Material Adverse Effect on the Borrowers, or
which could in any manner draw into question the validity of this Agreement or
any other Loan Documents.

     6.8. ERISA Plans.

        6.8.1. Each of the Borrowers and each of its ERISA Affiliates is in
compliance in all material respects with any applicable provisions of ERISA and
the final regulations and published interpretations thereunder with respect to
all Single Employer Plans and Multiemployer Plans.

        6.8.2. No “Termination Event” under ERISA has occurred or is reasonably
expected to occur with respect to any Single Employer Plan which would
reasonably be expected to have a Material Adverse Effect on the Borrowers.

        6.8.3. The aggregate fair market value of the assets of all Single
Employer Plans was at least equal to the actuarial present value of all vested
nonforfeitable benefits under such Single Employer Plans as of the most recent
valuation date.

        6.8.4. Neither of the Borrowers nor any of its ERISA Affiliates has
incurred any unpaid withdrawal liability, or reasonably expects to incur any
unpaid withdrawal liability, under ERISA to any Multiemployer Plan, which
unpaid withdrawal liability would reasonably be expected to have a Material
Adverse Effect on the Borrowers.

27

 

     6.9. Taxes and Filing of Tax Returns.

        6.9.1. Each of the Borrowers and the Guarantor have, respectively, filed
or properly extended all returns required to have been filed or extended with
respect to Taxes and has paid all Taxes shown to be due and payable by it on
such returns, including interest and penalties, and all other Taxes which are
payable by it, to the extent the same have become due and payable (unless, with
respect to such other Taxes, the criteria set forth in Section 7.5 are being
met). Neither of the Borrowers nor the Guarantor knows of any proposed
assessment of Taxes of a material amount against it and all liabilities for
Taxes of the Borrowers or the Guarantor are adequately provided for.

        6.9.2. Neither of the Borrowers intends to treat the Loans or Letters of
Credit as being a “reportable transaction” (within the meaning of Treasury
Regulation Section 1.6011-4).

     6.10. Title to Properties; Liens; Environmental Liability.

        6.10.1. Each of the Borrowers has good and defensible record title to all
Property purported to be owned by it (except for Permitted Liens). Upon the
recordation of the Security Documents in the appropriate recordation offices,
the Liens covering the Collateral will be valid, enforceable, first and prior,
perfected Liens in favor of the Lender, subject only to Permitted Liens.

        6.10.2. Neither of the Borrowers nor the Guarantor has (i) received notice
or otherwise learned of any Environmental Liability which could individually or
in the aggregate reasonably be expected to have a Material Adverse Effect on
the Borrowers or the Guarantor arising in connection with (a) any
non-compliance with or violation of the requirements of any Environmental Law
or (b) the release or threatened release of any toxic or hazardous waste,
substance or constituent, or other substance into the environment, or (ii)
received notice or otherwise learned of any federal or state investigation
evaluating whether any remedial action is needed to respond to a release or
threatened release of any toxic or hazardous waste, substance or constituent
into the environment for which any Borrower or the Guarantor is or may be
liable which could individually or in the aggregate reasonably be expected to
have a Material Adverse Effect on the Borrowers or the Guarantor.

        6.10.3. To the extent any of the following could reasonably be expected to
have a Material Adverse Effect on the Borrowers:

            (i) Except in accordance with applicable Requirements of Law or the terms
of a valid permit, license, certificate, or approval of the relevant
Governmental Authority, no Release of Hazardous Substances by the Borrowers
from, affecting, or related to any Property of any Borrower or adjacent to any
Property of any Borrower has occurred which could individually or in the
aggregate reasonably be expected to have a Material Adverse Effect on the
Borrowers; and

            (ii) No Environmental Complaints has been received by any Borrower which
could individually or in the aggregate reasonably be expected to have a
Material Adverse Effect on the Borrowers.

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     6.11. Business; Compliance. Each of the Borrowers has performed and
abided by all obligations required to be performed by it to the extent it under
each license, permit, order, authorization, grant, contract, agreement, or
regulation to which it is a party or by which it or any of its Property is
bound except to the extent failure to do so could not reasonably be expected to
have a Material Adverse Effect on the Borrowers.

     6.12. Licenses, Permits, Etc. Each of the Borrowers possesses, such valid
franchises, certificates of convenience and necessity, operating rights,
licenses, permits, consents, authorizations, exemptions and orders of Tribunals
as are necessary to carry on its business as now being conducted and to own its
Properties except to the extent that the failure to do so could not reasonably
be expected to have a Material Adverse Effect on the Borrowers.

     6.13. Compliance with Law. The business and operations of each of the
Borrowers have been and are being conducted in accordance with all applicable
laws, rules and regulations of all Tribunals, other than violations which could
not (either individually or collectively) reasonably be expected to have a
Material Adverse Effect on the Borrowers.

     6.14. Governmental Consent. No consent, approval or authorization of, or
declaration or filing with, any Governmental Authority is required for the
valid execution, delivery and performance of this Agreement or any other Loan
Documents by the Borrowers or the Guarantor.

     6.15. Investment Company Act. Neither of the Borrowers nor the Guarantor
is an “investment company,” or a company “controlled” by an “investment
company,” within the meaning of the Investment Company Act of 1940, as amended.

     6.16. Public Utility Holding Company Act; State Utility.

        6.16.1. Neither of the Borrowers nor the Guarantor is a “holding company,”
or a “subsidiary company” of a “holding company,” or an “affiliate” of a
“holding company,” or of a “subsidiary company” of a “holding company,” as such
terms are defined in the Public Utility Holding Company Act of 1935, as
amended.

        6.16.2. Neither of the Borrowers nor the Guarantor is defined as a
“utility” under the laws of the State of Texas or any other jurisdiction
wherein any Borrower or the Guarantor is required to qualify to do business.

     6.17. Refunds; Certain Contracts.

        6.17.1. No orders of, proceedings pending before, or other requirements
of, the Federal Energy Regulatory Commission, the Texas Railroad Commission, or
any Governmental Authority exist which could result in any Borrower being
required to refund any material portion of the proceeds received or to be
received from the sale of hydrocarbons constituting part of the Collateral.

        6.17.2. Neither of the Borrowers is obligated in any material respect by
virtue of any prepayment made under any contract containing a “take-or-pay” or
“prepayment” provision

29

 

or under any similar agreement to deliver hydrocarbons produced from or
allocated to any of the Collateral at some future date without receiving full
payment therefor within 90 days of delivery.

        6.17.3. Neither of the Borrowers has produced gas, in any material amount,
subject to, and neither of the Borrowers nor any of the Collateral is subject
to, balancing rights of third parties or subject to balancing duties under
governmental requirements.

     6.18. No Default. No Default has occurred which is continuing as of the
Closing Date, and the making of the initial Advance will not cause a Default to
exist.

ARTICLE VII

COVENANTS

     During the Revolving Credit Period, and thereafter so long as any
principal of or interest on the Note shall remain unpaid or any Letter of
Credit remains outstanding, the Borrowers will duly perform and observe each
and all of the covenants and agreements hereinafter set forth:

     7.1. Use of Proceeds and Letters of Credit.

        7.1.1. The Borrowers will use the proceeds of the Loans solely to finance
the acquisition of Oil and Gas Properties, to develop its Oil and Gas
Properties and for working capital purposes.

        7.1.2. Letters of Credit shall be used for the support of oil and gas
operations; provided, however, no Letter of Credit may be used in lieu or in
support of stay or appeal bonds.

        7.1.3. The Borrowers will not, directly or indirectly, use any of the
proceeds of the Loans for the purpose of purchasing or carrying any “margin
stock” within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System (12 C. F. R. 221, as amended), or any “security that is
publicly-held” within the meaning of Regulation T of such Board of Governors
(12 C.F.R. 220, as amended), or otherwise take or permit any action which would
involve a violation of such Regulation U, Regulation T or Regulation X (12
C.F.R. 224, as amended) or any other regulation of such Board of Governors.
The Loans are not secured, directly or indirectly, in whole or in part, by
collateral that includes any “margin stock” within the meaning of Regulation U.
No Borrower will engage principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying any
“margin stock” within the meaning of such Regulation U.

     7.2. Financial Statements; Reserve and Other Reports; Certain Required
Notices from Borrowers; Additional Information. The Borrowers will furnish to
the Lender:

        7.2.1. as soon as available and in any event within 90 days after the end
of each fiscal year of the Guarantor, copies of the consolidated and
consolidating statement of assets and liabilities of the Guarantor and its
consolidated subsidiaries as of the end of such fiscal year, and copies of the
related consolidated and consolidating statements of revenues and expenses,
operations, changes in stockholders’ equity and cash flow for such fiscal year,
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable

30

 

detail, prepared in accordance with GAAP; such financial statements to be
audited by a firm of independent certified public accountants selected by the
Guarantor and reasonably acceptable to the Lender and accompanied by the
unqualified opinion of such accountants.

            (ii) on or before the 60th day after the last day of each fiscal quarter,
a copy of (a) the unaudited consolidated and consolidating statement of assets
and liabilities of the Guarantor and its consolidated subsidiaries as at the
close of such quarter and from the beginning of such fiscal year to the end of
such quarter and (b) the related consolidated and consolidating statements of
revenues and expenses, operations, changes in stockholders’ equity and cash
flows for the quarter just ended and for that portion of the year ending on
such date, all in reasonable detail and prepared on a basis consistent with the
financial statements previously delivered by the Borrowers under clauses (i)
and (ii) this Section.

            (iii) as soon as available and in any event within 90 days after the end
of each fiscal year of the Borrowers, copies of the combined statement of
assets and liabilities of the Borrowers as of the end of such fiscal year, and
copies of the related combined statements of revenues and expenses, operations,
changes in stockholders’ equity and cash flow for such fiscal year, setting
forth in each case in comparative form the figures for the previous fiscal
year, all in reasonable detail, prepared in accordance with GAAP.

            (iv) on or before the 60th day after the last day of each fiscal quarter,
a copy of (a) the unaudited combined statement of assets and liabilities of the
Borrowers as at the close of such quarter and from the beginning of such fiscal
year to the end of such quarter and (b) the related combined statements of
revenues and expenses, operations, changes in stockholders’ equity and cash
flows for the quarter just ended and for that portion of the year ending on
such date, all in reasonable detail and prepared on a basis consistent with the
financial statements previously delivered by the Borrowers under clauses (iii)
and (iv) of this Section.

            (v) simultaneously with the delivery of each set of financial statements
pursuant to the preceding clauses of this Section, a Compliance Certificate
stating that such financial statements fairly and accurately reflect in all
material respects the financial condition and results of operation of the
Guarantor or the Borrowers, as applicable, for the periods and as of the dates
set forth therein, and that the signers have reviewed the terms of this
Agreement and have made, or caused to be made under their supervision, a review
of the transactions and financial condition of the Borrowers during the fiscal
period covered by such financial statements, and that such review has not
disclosed the existence during such period, and that the signers do not have
knowledge of the existence as of the date of such certificate, of any condition
or event which constitutes a Default, or, if any such condition or event
existed or exists, specifying the nature and period of existence thereof and
what actions the Borrowers have taken or are taking or propose to take with
respect thereto.

            (vi) within 15 days after each filing thereof by the Guarantor with any
Governmental Authority, complete copies of the federal income tax returns so
filed.

            (vii) within 15 days after each filing thereof by the Guarantor with the
Securities and Exchange Commission, complete copies of each annual report filed
on Form 10-K and each quarterly report filed on Form 10-Q.

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        7.2.2.(i) within 60 days following each month end specified in any request of
the Lender, production reports in form and substance satisfactory to the Lender
in its reasonable judgment and as of the date or for the periods specified in
such request, prepared by the Borrowers, containing data concerning pricing,
quantities of production from the Oil and Gas Properties of each of the
Borrowers, volumes of production sold, purchasers of production, gross
revenues, expenses, production taxes, engineering and geological data, and such
other information with respect thereto as the Lender may reasonably request for
use by the Lender to prepare for the purposes of Section 2.8.1, but for its own
exclusive use, internally generated engineering reports.

        (ii) within 15 days following each request by the Lender, a report setting
forth all accounts receivable and accounts payable of each of the Borrowers as
of the date or dates specified in such request, such report to show the age of
such accounts and such other information as the Lender shall reasonably
request.

        (iii) simultaneously with the delivery of such engineering, production and
other reports under clause (i) above, a Representative’s Certificate certifying
that such engineering, production and other reports are true, accurate and
complete for the periods covered in such reports; provided that to the extent
such reports include projections of future volumes of production and future
costs, it is understood that such estimates are necessarily based upon
professional opinions, and the Borrowers do not warrant that such opinions will
ultimately prove to have been accurate.

        (iv) within 15 days after any material change in insurance coverage by
either of the Borrowers from that previously disclosed to the Lender, a report
describing such change, and, within 30 days after each request by the Lender,
certificates of insurance from the insurance companies insuring the Borrowers,
describing the insurance coverage of the Borrowers.

        7.2.3. within 10 days after any Responsible Representative becomes aware
of the occurrence of any condition or event which constitutes a Default, a
Representative’s Certificate specifying the nature of such condition or event,
the period of existence thereof, what actions the Borrowers have taken or are
taking and propose to take with respect thereto and the date, if any, on which
it is estimated the same will be remedied.

          (ii) if and when any Borrower or the Guarantor (a) gives or is required to
give notice to the PBGC of any “reportable event” (as defined in Section 4043
of ERISA) with respect to any Plan which might constitute grounds for a
termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (b) receives notice of complete or partial
withdrawal liability under Title IV of ERISA, a copy of such notice; or (c)
receives notice from the PBGC under Title IV of ERISA of an intent to terminate
or appoint a trustee to administer any Plan, a copy of such notice.

          (iii) within 10 days after any Borrower’s or the Guarantor’s learning that
it has received notice or otherwise learned of any claim, demand, action,
event, condition, report or investigation indicating any potential or actual
liability of any Borrower or the Guarantor arising

32

 

in connection with (a) the non-compliance with or violation of the
requirements of any Environmental Law, (b) the release or threatened release of
any toxic or hazardous waste, substance or constituent into the environment, or
(c) the existence of any Environmental Lien on any Properties of any Borrower
or the Guarantor, notice thereof.

          (iv) promptly upon any Borrower’s learning of any litigation or other
event or circumstance which could reasonably be expected to have a Material
Adverse Effect on the Borrowers, notice thereof.

          (v) within 10 days after the occurrence thereof, notice of any Change of
Control Event.

          (vi) within 10 days after the delivery of the same to any lender of any
report required to be delivered pursuant to any debt instrument to which the
Guarantor is a party and not otherwise required to be delivered hereunder, a
copy of such report.

          7.2.4. with reasonable promptness, such other information relating
directly or indirectly to the financial condition, business, results of
operations or Properties of the Borrowers or the Guarantor as from time to time
may reasonably be requested by the Lender.

     7.3. Inspection of Properties and Books. Each of the Borrowers will
permit any officer, employee or agent of the Lender to visit and inspect any of
its Properties, to examine its books of account (and to make copies thereof and
take extracts therefrom) and to discuss its affairs, finances and accounts
(including transactions, agreements and other relations with any shareholders)
with, and to be advised as to the same by, its officers and independent public
accountants, all upon reasonable notice and at such reasonable times during
normal business hours and intervals as the Lender may desire and, if a Default
has occurred and is continuing, at the expense of the Borrowers; provided,
however, the Borrowers shall not be required to disclose any information that
is the subject of attorney-client privilege.

     7.4. Maintenance of Security; Insurance; Operating Accounts; Transfer
Orders.

        7.4.1. (i) The Borrowers shall execute and deliver, or cause the appropriate
Person to execute and deliver, to the Lender all mortgages, deeds of trust,
security agreements, financing statements, assignments and such other documents
and instruments (including division and transfer orders), and supplements and
amendments thereto, and take such other actions as the Lender deems necessary
or desirable in order to (a) maintain as valid, enforceable, first-priority,
perfected Liens (subject only to the Permitted Liens), all Liens granted to the
Lender to secure the Note or (b) monitor or control the proceeds from the
Collateral. Each of the Borrowers authorizes the Lender to complete and file,
from time to time, financing statements naming such Borrower as debtor to
perfect Liens granted by such Borrower to the Lender.

            (ii) The Borrowers shall take such action as may be requested from time to
time by the Lender to maintain, or cause to be in effect at all times, first
and prior Liens (subject to Permitted Liens) in favor of the Lender by
instruments executed by the appropriate Person and properly recorded in the
applicable jurisdictions on at least 75% by PV9 Value of the Oil and Gas
Properties included in the most recent determination of the Borrowing Base.

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            (iii) The Borrowers will at all times maintain or cause to be maintained
insurance covering such risks as are customarily carried by businesses
similarly situated.

        7.4.2. Each of the Borrowers will maintain its primary operating accounts
with the Lender, although such requirement shall not be construed as requiring
the Borrowers to maintain deposit balances with the Lender, and will deposit
all revenues of each of the Borrowers in such accounts.

        7.4.3. Each of the Borrowers shall upon request of the Lender, execute
such transfer orders, letters-in-lieu of transfer orders or division orders as
the Lender may from time to time request in respect of the Collateral to effect
a transfer and delivery to the Lender of the proceeds of production
attributable to the Collateral.

     7.5. Payment of Taxes and Claims. Each of the Borrowers will pay (i) all
Taxes imposed upon it or any of its assets or with respect to any of its
franchises, business, income or profits before any material penalty or interest
accrues thereon and (ii) all material claims (including claims for labor,
services, materials and supplies) for sums which have become due and payable
and which have or might become a Lien (other than a Permitted Lien) on any of
its assets; provided, however, that no payment of such Taxes or claims shall be
required if (a) the amount, applicability or validity thereof is currently
being contested in good faith by appropriate proceedings promptly initiated and
diligently conducted, (b) such Borrower shall have set aside on its books
reserves (segregated to the extent required by GAAP) reasonably deemed by it to
be adequate with respect thereto, and (c) if material, such Borrower has
notified the Lender of such circumstances, in detail satisfactory to the
Lender.

     7.6. Payment of Debt; Additional Debt; Payment of Accounts.

        7.6.1. Each of the Borrowers will (i) pay, renew or extend or cause to be
paid, renewed or extended the principal of, and the prepayment charge, if any,
and interest on all Debt heretofore or hereafter incurred or assumed by it when
and as the same shall become due and payable unless such payment is prohibited
by the Loan Documents or would cause a Default hereunder; (ii) faithfully
perform, observe and discharge all unwaived covenants, conditions and
obligations within any applicable periods of grace imposed on it by any
instrument evidencing such Debt or by any indenture or other agreement securing
such Debt or pursuant to which such Debt is issued unless such performance,
observance or discharge would cause a Default hereunder; and (iii) not permit
the occurrence of any act or omission which would constitute a default under
any such instrument, indenture or agreement.

        7.6.2. Neither of the Borrowers will create, incur or suffer to exist any
Funded Debt, except without duplication (i) Debt to the Lender and (ii)
Permitted Indebtedness.

        7.6.3. Each of the Borrowers shall pay all of its trade and other accounts
payable within 90 days after the invoice date therefor, unless such payables
are being contested in good faith by appropriate proceedings.

     7.7. Negative Pledge. Neither of the Borrowers will create, suffer to
exist or otherwise allow any Liens to be on or otherwise to affect any of its
Property whether now owned or hereafter acquired, except Permitted Liens.

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     7.8. Loans and Advances to Others; Investments; Restricted Payments;
Subsidiaries.

        7.8.1. Neither of the Borrowers will make or suffer to exist any loan,
advance or extension of credit to any Person except (i) trade and customer
accounts receivable which are for goods furnished or services rendered in the
ordinary course of business and which are payable in accordance with customary
trade terms and are not past due and (ii) Permitted Loans and Investments, and
(iii) advances to employees of the Borrower for payment of expenses in the
ordinary course of business.

        7.8.2. Neither of the Borrowers will make any capital contribution to or
acquire any Investment in, or to purchase or make a commitment to purchase any
interest in, any Person except as permitted in clauses (i), (ii) and (iii) of
Section 7.8.1.

        7.8.3. Neither of the Borrowers will, directly or indirectly, make any
Restricted Payment without the prior written consent of the Lender except as
specifically permitted in the definition of such defined term.

        7.8.4. Neither of the Borrowers shall form or acquire any Subsidiaries
without the prior written consent of the Lender.

     7.9. Consolidation, Merger, Maintenance, Change of Control; Disposition of
Property; Restrictive Agreements; Hedging Agreements; Modification of
Organizational Documents; Issuance of Equity Interests.

        7.9.1. Neither of the Borrowers nor the Guarantor will (i) consolidate or
merge with or into any other Person without the prior written consent of the
Lender, (ii) sell, lease or otherwise transfer all or substantially all of its
Property to any other Person, (iii) terminate, or fail to maintain, its
existence as a corporation in its state of incorporation represented in Section
6.1.1 or (iv) terminate, or fail to maintain, its good standing and
qualification to transact business in all jurisdictions where the nature of its
business requires the same or (v) permit a Change of Control Event to occur.

        7.9.2. Neither of the Borrowers will sell, encumber, or otherwise transfer
all or any portion of the Collateral, any Property having PV9 Value, or any of
its other Property without the consent of the Lender, except for (i) sales of
oil and gas after severance in the ordinary course of business provided that no
contract for the sale of hydrocarbons shall obligate the Borrower to deliver
hydrocarbons produced from any of the Collateral at some future date without
receiving full payment therefor within 90 days of delivery, (ii) the sale or
other disposition of its personal Property destroyed, worn out, damaged, or
having only salvage value or no longer used or useful in the business of the
Borrower, or (iii) sales of undeveloped leasehold acreage not constituting
Collateral. Any consent by the Lender to the sale of Collateral or other
Property of the Borrower may include a requirement (to be treated as a Borrower
requested determination) that a new Borrowing Base be determined under Section
2.8.1 and that the proceeds of such sale plus such additional amounts as the
Lender deems necessary to avoid the occurrence of a Borrowing Base Deficiency
be applied to the Obligations. In this connection, the Lender will not
unreasonably withhold its consent to sales during any 12-month

35

 

period of Property of the Borrowers, in the aggregate, having PV9 Value of
up to 10% of all Property of the Borrowers utilized in determining the
Borrowing Base.

        7.9.3. Neither of the Borrowers nor the Guarantor will be or become party
to or bound by any agreement (including any undertaking in connection with the
incurrence of Debt or issuance of securities) which imposes any limitation on
the disposition of the Collateral more restrictive than those set forth above
or which in any way would be contravened by each of the Borrower’s performance
of its obligations hereunder or under the other Loan Documents or which
contains any negative pledge on all or any portion of any Borrower’s Property
(except in favor of the Lender).

        7.9.4. (i) The Borrowers will not enter into any Hedging Agreement, other than
Acceptable Hedging Agreements.

            (ii) The Borrowers will not cause or permit any Hedging Agreement now
existing or hereafter entered into by any Borrower to be amended, modified,
terminated or liquidated without the prior written consent of the Lender.

        7.9.5. Neither of the Borrowers will amend its articles of incorporation
or its bylaws in any material respect or in any respect which could be adverse
to the interests of the Lender.

        7.9.6. Neither of the Borrowers will issue any Equity Interests or rights,
options or warrants to purchase any of such Borrower’s Equity Interests.

     7.10. Primary Business; Location of Borrower’s Office; Ownership of
Assets.

        7.10.1. The primary business of each of the Borrowers shall be and remain
the oil and gas exploration, development and production business.

        7.10.2. The location of each of the Borrower’s principal place of business
and executive office shall remain at the address for such Borrower set forth on
the signature page hereof, unless prior to any change in such address such
Borrower provides the Lender with written notice of such pending change.

     7.11. Operation of Properties and Equipment; Compliance with and
Maintenance of Contracts; Duties as Nonoperator.

        7.11.1. (i) Each of the Borrowers shall maintain, develop and operate its Oil
and Gas Properties in a good and workmanlike manner and will observe and comply
in all material respects with all of the terms and provisions, express or
implied, of all oil and gas leases relating to such Properties so long as such
oil and gas leases are capable of producing hydrocarbons in commercial
quantities, to the extent that the failure to so observe and comply could
reasonably be expected to have a Material Adverse Effect on the Borrowers.

            (ii) Each of the Borrowers shall remain as the named operator for each oil
or gas well in which it now or hereafter owns an interest if it is the operator
thereof on the date hereof or becomes the operator thereof subsequent hereto.

36

 

            (iii) Each of the Borrowers shall at all times, maintain, preserve and
keep all operating equipment used or useful with respect to the Oil and Gas
Properties of such Borrower in proper repair, working order and condition, and
make all necessary or appropriate repairs, renewals, replacements, additions
and improvements thereto so that the efficiency of such operating equipment
shall at all times be properly preserved and maintained, provided that no item
of operating equipment need be so repaired, renewed, replaced, added to or
improved, if such Borrower shall in good faith determine that such action is
not necessary or desirable for the continued efficient and profitable operation
of the business of such Borrower.

        7.11.2. Each of the Borrowers shall comply in all material respects with
all agreements applicable to or relating to its Oil and Gas Properties or the
production and sale of hydrocarbons therefrom and all applicable proration and
conservation laws of the jurisdictions in which such Properties are located, to
the extent that the failure to so comply with such laws or agreements could
reasonably be expected to expose such Borrower to any material penalty or
forfeiture.

        7.11.3. With respect to the Oil and Gas Properties referred to in this
Section which are operated by operators other than a Borrower or the Guarantor,
such Borrower shall not be obligated itself to perform any undertakings
contemplated by the covenants and agreements contained in this Section which
are performable only by such operators and are beyond the control of such
Borrower, but such Borrower shall use its best efforts to cause such operators
to perform such undertakings.

        7.11.4. Neither of the Borrowers will amend, alter or change in any
material respect which could reasonably be expected to be adverse to the
interests of such Borrower or the Lender any agreements relating to the
operations or business arrangements of such Borrower or the compression,
gathering, sale or transportation of oil and gas from the Oil and Gas
Properties included in the most recent determination of the Borrowing Base
without the prior written consent of the Lender, which consent shall not be
unreasonably withheld.

     7.12. Transactions with Affiliates. Neither of the Borrowers will engage
in any transaction with an Affiliate unless (i) such transaction is at least as
favorable to such Borrower as could be obtained in an arm’s length transaction
with an unaffiliated third party and (ii) such transaction is not
disadvantageous to the Lender as holder of the Note.

     7.13. Plans. The Borrowers will not assume or otherwise become subject to
an obligation to contribute to or maintain any Plan or Multiemployer Plan or
acquire any Person which has at any time had an obligation to contribute to or
maintain any Plan or Multiemployer Plan.

     7.14. Compliance with Laws and Documents. Neither of the Borrowers will,
directly or indirectly, violate the provisions of any laws, its certificate of
incorporation (or similar organizational documents) or bylaws (or similar
regulatory documents) or any Material Agreement, if such violation, alone or
when combined with all other such violations, could reasonably be expected to
have or does have a Material Adverse Effect on the Borrowers.

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     7.15. Certain Financial Covenants.

        7.15.1. Interest Coverage Ratio. The Borrowers will not permit the ratio
of Cash Flow to Fixed Charges to be less than 3.00 to 1.00, determined as of
the end of each fiscal quarter of the Borrower ending on or after December 31,
2004.

“Cash Flow” for any fiscal quarter of the Borrowers, means EBITDA of the
Borrowers on a combined basis for such quarter. Cash Flow is a
quarter-by-quarter calculation.

“EBITDA” means, for any fiscal quarter of the Borrowers, the pre-tax net
income of the Borrowers for such quarter on a combined basis plus (without
duplication and only to the extent deducted in determining such net income),
interest expense of the Borrowers for such quarter, intangible drilling
expenses, depreciation, non-cash amortization, depletion, write-down of Oil
and Gas Properties and other non-cash expenses of the Borrowers for such
quarter less gains on sales of assets and other non-cash income for such
quarter included in the determination of net income of the Borrowers.
EBITDA is a quarter-by-quarter calculation.

“Fixed Charges” means with respect to any fiscal quarter of the Borrowers,
the actual interest payments on the Funded Debt (including the Note and
Subordinated Debt) of the Borrowers on a combined basis during such quarter.

        7.15.2. Current Ratio. The Borrowers will not permit the ratio of its
Current Assets to its Current Liabilities to be less than 1.25 to 1.00,
determined as of the end of each fiscal quarter of the Borrower ending on or
after December 31, 2004.

“Current Assets” means the current assets of the Borrowers on a combined
basis plus the Unused Available Commitment, but excluding amounts due from
the Guarantor.

“Current Liabilities” means the current liabilities of the Borrowers on a
combined basis, exclusive of the current portion of the Note and the current
portion of Subordinated Debt.

Notwithstanding the foregoing, during such times that the Borrowers are
required to deliver financial information to Lender in accordance with GAAP,
neither Current Assets nor Current Liabilities shall include the amount of
or any liabilities respecting any non-cash items as a result of the
application of Financial Accounting Standards Board Statement Nos. 133, 137,
138 and any subsequent amendments thereto or the fair value of any Hedging
Agreement or any non-hedge derivative contract (whether deemed effective or
non-effective).

     7.16. Tax Shelter. In the event either of the Borrowers determines to
take any action inconsistent with the representation in Section 6.9.2, it will
promptly notify the Lender thereof. Accordingly, if either of the Borrowers so
notifies the Lender, the Borrowers acknowledge that the Lender may treat the
Loans and Letters of Credit as part of a transaction that is subject to
Treasury Regulation Section 301.6112-1, and the Lender will maintain the lists
and other records required by such Treasury Regulation.

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     7.17. Additional Documents; Quantity of Documents; Title Data; Additional
Information.

        7.17.1. Each of the Borrowers shall execute and deliver or cause to be
executed and delivered such other and further instruments or documents as in
the reasonable judgment of the Lender may be required to better effectuate the
transactions contemplated herein and in the other Loan Documents.

        7.17.2. Each of the Borrowers will deliver all certificates, opinions,
reports and documents hereunder in such number of counterparts as the Lender
may reasonably request.

        7.17.3. Promptly, but in any event within 60 days following a written
request therefor from the Lender, the Borrowers shall cause to be delivered to
the Lender title opinions, in form and substance and from attorneys reasonably
acceptable to the Lender, or other confirmation of title acceptable to the
Lender, covering Oil and Gas Properties constituting not less than 75% by PV9
Value of the Oil and Gas Properties utilized in the most recent determination
of the Borrowing Base; and promptly, but in any event within 60 days following
notice from the Lender of any defect, material in the opinion of the Lender, in
the title of the mortgagor under any Mortgage to any Oil and Gas Property
covered thereby, clear such title defect, and in the event any such title
defects are not cured in a timely manner, pay all related costs and fees
incurred by the Lender in attempting to do so.

        7.17.4. Each of the Borrowers shall furnish to the Lender, promptly upon
the request of the Lender, such additional financial or other information
concerning the assets, liabilities, operations, and transactions of such
Borrower as the Lender may from time to time reasonably request.

     7.18. ENVIRONMENTAL INDEMNIFICATION. EACH OF THE BORROWERS SHALL, ON A
CURRENT BASIS, INDEMNIFY, DEFEND AND HOLD THE LENDER AND ITS SHAREHOLDERS,
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, AND AFFILIATES AND
EACH TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY SECURITY DOCUMENT
(COLLECTIVELY, THE “INDEMNIFIED PARTIES”) HARMLESS ON A CURRENT BASIS FROM AND
AGAINST ANY AND ALL CLAIMS, LOSSES, DAMAGES, LIABILITIES, FINES, PENALTIES,
CHARGES, ADMINISTRATIVE AND JUDICIAL PROCEEDINGS AND ORDERS, JUDGMENTS,
REMEDIAL ACTIONS, REQUIREMENTS AND ENFORCEMENT ACTIONS OF ANY KIND, AND ALL
COSTS AND EXPENSES INCURRED IN CONNECTION THEREWITH (INCLUDING, WITHOUT
LIMITATION, REASONABLE ATTORNEYS’ FEES AND EXPENSES), ARISING DIRECTLY OR
INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE PRESENCE OF ANY HAZARDOUS
SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF ANY BORROWER, WHETHER PRIOR TO OR
DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR UNDERTAKEN ON OR OFF ANY
PROPERTY OF ANY BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, AND
WHETHER BY ANY BORROWER OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF ANY BORROWER OR ANY OTHER PERSON AT ANY TIME
OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE

39

 

HANDLING, TREATMENT, REMOVAL, STORAGE, DECONTAMINATION, CLEANUP,
TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR
PRESENT ON OR UNDER SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER
ANY PROPERTY OF ANY BORROWER, OR (D) ANY CONTAMINATION OF ANY PROPERTY OR
NATURAL RESOURCES ARISING IN CONNECTION WITH THE GENERATION, USE, HANDLING,
STORAGE, TRANSPORTATION OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY ANY BORROWER
OR ANY EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF ANY BORROWER WHILE SUCH
PERSONS ARE ACTING WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH ANY BORROWER,
IRRESPECTIVE OF WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN
ACCORDANCE WITH APPLICABLE REQUIREMENTS OF LAW, INCLUDING ANY OF THE FOREGOING
IN THIS SECTION ARISING FROM THE SOLE NEGLIGENCE, COMPARATIVE NEGLIGENCE OR
CONCURRENT NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES OR THE SOLE OR
CONCURRENT STRICT LIABILITY IMPOSED ON ANY OF THE INDEMNIFIED PARTIES, BUT NOT
ANY OF THE FOREGOING IN THIS SECTION ARISING FROM THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT ON THE PART OF THE INDEMNIFIED PARTY SEEKING INDEMNIFICATION
UNDER THIS SECTION; WITH THE FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL
OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT.

     7.19. Exceptions to Covenants. Neither of the Borrowers nor the Guarantor
shall be permitted to take any action which is permitted by any of the
covenants contained in this Agreement if such action is in breach of any other
covenant contained in this Agreement.

     7.20. Title Data. Within 30 days following the Closing Date, the
Borrowers shall deliver to the Lender title opinions or title data, in form and
substance and from attorneys or other Persons reasonably acceptable to the
Lender and its legal counsel, sufficient to confirm title of the Borrowers in
the Collateral and such other documentation and information reasonably required
by the Lender or such counsel to satisfy the Lender and its legal counsel, of
the status of the title of such Collateral.

ARTICLE VIII

DEFAULTS; REMEDIES

     8.1. Events of Default; Acceleration of Maturity. If any one or more of
the following events (each an “Event of Default”) shall have occurred and be
continuing (whatever the reason for such Event of Default and whether it shall
be voluntary or involuntary or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body or otherwise):

        8.1.1. (a) the Borrowers shall fail to pay, when due, any principal of, or
interest on, (i) the Note or (ii) any other Debt of the Borrower to the Lender;
or

                  (b) the Borrowers shall fail to pay when due, any fees or other amounts
payable hereunder and not covered by clause (a) above, if such failure shall
continue

40

 

unremedied for a period of 10 days after written notice thereof is given
to the Borrowers; or

        8.1.2. either of the Borrowers shall fail to observe or perform any
covenant or agreement contained in Sections 7.1, 7.6.2, 7.7, 7.8, 7.9 or 7.15;
or

        8.1.3. either of the Borrowers or any other Person (other than the Lender)
shall fail to observe or perform any covenant or agreement contained in this
Agreement or the other Loan Documents (other than those covered by Sections
8.1.1 or 8.1.2), for a period of thirty (30) days after written notice
specifying such default has been given to the Borrower by the Lender; or

        8.1.4. either of the Borrowers or the Guarantor shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment
for the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take any corporate or other action to authorize any of the
foregoing; or

        8.1.5. an involuntary case or other proceeding shall be commenced against
either of the Borrowers or the Guarantor seeking liquidation, reorganization or
other relief with respect to it or its debts under any bankruptcy, insolvency
or other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed or unstayed for a period of 30 days; or an order for
relief shall be entered against either of the Borrowers or the Guarantor under
the federal bankruptcy laws as now or hereafter in effect which remains
undismissed or unstayed for a period of 30 days; or

        8.1.6. either of the Borrowers or the Guarantor shall fail to pay, when
due, any amount which it shall have become liable to pay to the PBGC or to a
Plan under Title IV of ERISA; or the PBGC shall institute proceedings under
Title IV of ERISA to terminate or to cause a trustee to be appointed to
administer any Plan or a proceeding shall be instituted by a fiduciary of any
Plan against the Borrower to enforce Section 515 of ERISA; or a condition shall
exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any such Plan must be terminated; or

        8.1.7. either of the Borrowers or the Guarantor (i) shall default in the
payment of any of their respective Material Debts (other than the Note) and
such default shall continue beyond any applicable cure period, (ii) shall
default in the performance or observance of any other provision contained in
any agreements or instruments evidencing or governing such Material Debt and
such default is not waived and continues beyond any applicable cure period, or
(iii) any other event or condition occurs which results in the acceleration of
such Material Debt; or

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        8.1.8. either of the Borrowers or the Guarantor shall default in the
payment of any of their respective Debts to the Lender not covered under
Section 8.1.1 and such default is not waived and continues beyond any
applicable cure period; or

        8.1.9. one or more judgments or orders for the payment of money
aggregating in excess of $100,000 shall be rendered against either of the
Borrowers or the Guarantor and such judgment or order (i) shall continue
unsatisfied or unstayed (unless bonded with a supersedeas bond at least equal
to such judgment or order) for a period of 30 days, or (ii) is not fully paid
and satisfied at least ten (10) days prior to the date on which any of its
Property may be lawfully sold to satisfy such judgment or order; or

        8.1.10. any representation, warranty, certification or statement made or
deemed to have been made by or on behalf of either of the Borrowers or the
Guarantor in this Agreement or by either of the Borrowers or any other Person
in any certificate, financial statement or other document delivered pursuant to
this Agreement shall prove to have been incorrect in any respect when made if
such incorrect representation, warranty, certification or statement (i) could
reasonably be expected to have any adverse effect whatsoever upon the validity,
performance or enforceability of any Loan Document, (ii) is or might reasonably
be expected to be material and adverse to the financial condition or business
operations of any Person or to the prospects of any Person, (iii) could
reasonably be expected to impair either of the Borrower’s ability to fulfill
its obligations under the terms and conditions of the Loan Documents, or (iv)
could reasonably be expected to impair the Lender’s ability to receive full and
timely payment of the Note; or

        8.1.11. a default shall occur under any Material Agreement, other than
this Agreement, to which either of the Borrowers is a party or by which any of
its Property is bound and such default continues beyond any applicable period
of grace provided therefor; or

        8.1.12. a Change of Control Event shall occur;

then, and in every such event, the Lender may, at its option, (i) declare the
outstanding principal balance of and accrued interest on the Note to be, and
the same shall thereupon forthwith become, due and payable without presentment,
demand, protest, notice of intent to accelerate, notice of acceleration or
other notice of any kind, all of which are hereby waived by each of the
Borrowers, (ii) proceed to foreclose the Liens securing the Note, and (iii)
take such other actions as are permitted by law; provided that in the case of
any of the Events of Default specified in Sections 8.1.4 and 8.1.5 with respect
to either of the Borrowers, without any notice to the Borrowers or any other
act by the Lender, the Commitment shall terminate and the Note (together with
accrued interest thereon) shall become immediately due and payable without
presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other notice of any kind, all of which are hereby waived by
each of the Borrowers. Upon the occurrence and continuance of an Event of
Default, the Lender may terminate its commitment to lend and issue letters of
credit (or renew or extend Letters of Credit) under this Agreement and the
Commitment shall thereupon terminate.

     8.2. Suits for Enforcement. In case any one or more of the Events of
Default specified in Section 8.1 shall have occurred and be continuing, the
Lender may, at its option, proceed to protect and enforce its rights either by
suit in equity or by action of law, or both, whether for the

42

 

specific performance of any covenant or agreement contained in this
Agreement or in aid of the exercise of any power granted in this Agreement.

     8.3. Remedies Cumulative. No remedy herein conferred upon the Lender is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.

     8.4. Remedies Not Waived. No course of dealing and no delay in exercising
any rights under this Agreement or under the other Loan Documents shall operate
as a waiver of any rights hereunder or thereunder of the Lender.

ARTICLE IX

MISCELLANEOUS

     9.1. Amendments and Waivers.

        9.1.1. Any term, covenant, agreement or condition of this Agreement or
any other Loan Document may be amended, or compliance therewith may be waived
(either generally or in a particular instance and either retroactively or
prospectively) by a written instrument signed by either of the Borrowers and
the Lender. Delivery of an executed counterpart of such written instrument by
telecopy or other electronic means shall be effective delivery of a manually
executed counterpart of such written instrument.

        9.1.2. No failure or delay by the Lender in exercising any right, power or
privilege under this Agreement or any other Loan Document shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law or in equity or in any of
the other Loan Documents.

     9.2. Highest Lawful Interest Rate. The Lender, the Borrowers and any
other parties to the Loan Documents intend to contract in strict compliance
with applicable usury law from time to time in effect. In furtherance thereof
such Persons stipulate and agree that none of the terms and provisions
contained in the Loan Documents shall ever be construed to create a contract to
pay, for the use, forbearance or detention of money, interest in excess of the
maximum amount of interest permitted to be charged by applicable law from time
to time in effect, and the provisions of this Section 9.2 shall control over
all other provisions of the Loan Documents which may be in conflict or apparent
conflict herewith. Regardless of any provision contained in any of the Loan
Documents, the Lender shall never be entitled to receive, collect, or apply as
interest on all or any part of the Loans, any amount in excess of the Highest
Lawful Rate in effect from day to day, and, in the event the Lender ever
receives, collects, or applies as interest any such excess, such amount which
would be deemed excessive interest shall be deemed a partial prepayment of the
principal of the Loans and treated hereunder as such; and, if the entire
principal amount of the Loans owed to the Lender is paid in full, any remaining
excess shall be repaid to the Borrowers. In determining whether the interest
paid or payable, under any specific contingency, exceeds the Highest Lawful
Rate in effect from day to day, the Borrowers and the

43

 

Lender shall, to the maximum extent permitted under applicable law, (i)
characterize any non-principal payment as an expense, fee, or premium rather
than as interest, (ii) exclude voluntary prepayments and the effects thereof,
and (iii) amortize, prorate, allocate, and spread the total amount of interest
throughout the entire contemplated term of the Loans so that the interest rate
is uniform throughout the entire term of the Loans; provided that, if the
interest received by the Lender for the actual period of existence thereof
exceeds the Highest Lawful Rate in effect from day to day, the Lender shall
apply or refund to the Borrowers the amount of such excess as provided in this
Section, and, in such event, the Lender shall not be subject to any penalties
provided by any laws for contracting for, charging, taking, reserving, or
receiving interest in excess of the Highest Lawful Rate in effect from day to
day.

     9.3. INDEMNITY.

        9.3.1. WHETHER OR NOT ANY LOANS ARE EVER FUNDED OR ANY LETTER OF CREDIT IS
EVER ISSUED HEREUNDER, AND IN ADDITION TO ANY OTHER INDEMNIFICATIONS CONTAINED
HEREIN OR IN ANY OF THE OTHER LOAN DOCUMENTS, EACH OF THE BORROWERS AGREES TO
INDEMNIFY AND DEFEND AND HOLD HARMLESS ON A CURRENT BASIS THE INDEMNIFIED
PARTIES, FROM AND AGAINST ANY AND ALL LIABILITIES, LOSSES, DAMAGES, COSTS,
INTEREST, CHARGES, COUNSEL FEES AND OTHER EXPENSES AND PENALTIES OF ANY KIND
WHICH ANY OF THE INDEMNIFIED PARTIES MAY SUSTAIN OR INCUR IN CONNECTION WITH
ANY INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING (WHETHER OR NOT THE
LENDER SHALL BE DESIGNATED A PARTY THERETO) OR OTHERWISE BY REASON OF OR
ARISING OUT OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS AND/OR THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY
OR THEREBY. THE INDEMNIFICATION PROVISIONS IN THIS SECTION SHALL BE
ENFORCEABLE REGARDLESS OF WHETHER THE LIABILITY IS BASED ON PAST, PRESENT OR
FUTURE ACTS, CLAIMS OR LEGAL REQUIREMENTS (INCLUDING ANY PAST, PRESENT OR
FUTURE BULK SALES LAW, ENVIRONMENTAL LAW, FRAUDULENT TRANSFER ACT, OCCUPATIONAL
SAFETY AND HEALTH LAW, OR PRODUCTS LIABILITY, SECURITIES OR OTHER LEGAL
REQUIREMENT), AND REGARDLESS OF WHETHER ANY PERSON (INCLUDING THE PERSON FROM
WHOM INDEMNIFICATION IS SOUGHT) ALLEGES OR PROVES THE SOLE, CONCURRENT,
CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OF THE PERSON SEEKING INDEMNIFICATION OR
OF ANY OTHER INDEMNIFIED PARTY, OR THE SOLE OR CONCURRENT STRICT LIABILITY
IMPOSED ON THE PERSON SEEKING INDEMNIFICATION OR ON ANY OTHER INDEMNIFIED
PARTY, BUT NOT ANY OF THE FOREGOING IN THIS SECTION ARISING FROM THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE INDEMNIFIED PARTY SEEKING
INDEMNIFICATION UNDER THIS SECTION; WITH THE FOREGOING INDEMNITY SURVIVING
SATISFACTION OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT.

44

 

        9.3.2. Any amount to be paid under Section 9.3 to the Lender shall be a
demand obligation owing by the Borrowers and if not paid within ten (10) days
of demand shall bear interest from the date of expenditure by the Lender until
paid at a per annum rate equal to the lesser of (i) the Default Rate or (ii)
the Highest Lawful Rate. The obligations of the Borrowers under this Section
9.3 shall survive payment of the Note and the assignment of any right
hereunder.

     9.4. Expenses.

        9.4.1. Whether or not any one or more of the Loans are ever funded, the
Borrowers shall pay (i) all reasonable out-of-pocket expenses of the Lender,
including fees and disbursements of counsel for the Lender in connection with
the preparation of this Agreement and the other Loan Documents (including the
furnishing of any written or oral opinions or advice incident to this
transaction) and, if appropriate, the recordation of the Loan Documents, any
waiver or consent hereunder or any amendment hereof or any Default or alleged
Default hereunder, and (ii) if an Event of Default occurs, all reasonable
out-of-pocket expenses incurred by the Lender, including fees and disbursements
of counsel in connection with such Event of Default and collection and other
enforcement proceedings resulting therefrom, fees of auditors, consultants,
engineers and other Persons incurred in connection therewith (including the
supervision, maintenance or disposition of the Collateral) and investigative
expenses incurred by the Lender in connection therewith, which amounts shall be
deemed compensatory in nature and liquidated as to amount upon notice to the
Borrowers by the Lender and which amounts shall include, but not be limited to
(a) all court costs, (b) reasonable attorneys’ fees, (c) reasonable fees and
expenses of auditors and accountants incurred to protect the interests of the
Lender, (d) fees and expenses incurred in connection with the participation by
the Lender as a member of the creditors’ committee in a case commenced under
any Insolvency Proceeding, (e) fees and expenses incurred in connection with
lifting the automatic stay prescribed in §362 Title 11 of the United States
Code, and (f) fees and expenses incurred in connection with any action pursuant
to §1129 Title 11 of the United States Code all reasonably incurred by the
Lender in connection with the collection of any sums due under the Loan
Documents, together with interest at the per annum interest rate equal to the
Floating Rate, calculated on a basis of a calendar year of 365 or 366 days, as
the case may be, counting the actual number of days elapsed, on each such
amount from the date of notification that the same was expended, advanced, or
incurred by the Lender until the date it is repaid to the Lender, with the
obligations under Section 9.4 surviving the non-assumption of this Agreement in
a case commenced under any Insolvency Proceeding and being binding upon each of
the Borrowers and/or a trustee, receiver, custodian, or liquidator of such
Borrower appointed in any such case.

        9.4.2. THE BORROWERS SHALL INDEMNIFY THE LENDER AGAINST ANY TRANSFER
TAXES, DOCUMENTARY TAXES, ASSESSMENTS OR CHARGES MADE BY ANY GOVERNMENTAL
AUTHORITY BY REASON OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE
OTHER LOAN DOCUMENTS.

        9.4.3. Any amount to be paid under Section 9.4 to the Lender shall be a
demand obligation owing by the Borrowers and if not paid within ten days of
demand shall bear interest from the date of expenditure by the Lender until
paid at a per annum rate equal to the lessor of

45

 

the Default Rate or the Highest Lawful Rate. The obligations of the
Borrowers under Section 9.4 shall survive payment of the Note and the
assignment of any right hereunder.

     9.5. Taxes. The Borrowers will, to the extent they may lawfully do so,
pay all Taxes (including interest and penalties but expressly excluding federal
or state income taxes) which may be payable in respect of the execution and
delivery of this Agreement or the other Loan Documents, or in respect of any
amendment of or waiver under or with respect to the foregoing, and will save
the Lender harmless on a current basis against any loss or liability resulting
from nonpayment or delay in payment of any such Taxes (as limited above). The
obligations of the Borrower under this Section shall survive the payment of the
Note and the assignment of any right hereunder.

     9.6. Notices. Except as specifically provided otherwise herein, all
notices, requests and other communications to any party hereunder shall be in
writing (including by telecopy or similar writing) and shall be given to such
party at its address and to the attention of the Person set forth on the
signature pages hereof (or in the case of notices to the Borrowers, to the
attention of any officer, or other Person holding a similar position, of such
Borrower) or such other address or telecopy number or Person as such party may
hereafter specify for such purpose by notice to the other party. Each such
notice, request or other communication shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopier number specified
in this Section and the receipt thereof is acknowledged (the receipt thereof
shall be deemed to have been acknowledged upon the sending Person’s receipt of
its facsimile machine’s confirmation of successful transmission; provided that
if the day on which such facsimile is received is not a Business Day or is
after 4:00 p.m. on a Business Day, then the receipt of such facsimile shall be
deemed to have been acknowledged on the next following Business Day), (ii) if
given by mail, 72 hours after such communication is deposited in the mail
postage prepaid (certified, return receipt requested) addressed as aforesaid or
(iii) if given by any other means, when delivered at the address specified in
this Section or, in the case of either Borrower, when otherwise delivered to
such Borrower or any officer of such Borrower, provided that notice to the
Lender under Section 2.2 shall not be effective until received, and provided
further that, oral notices to the Borrowers of decreases in the Borrowing Base
shall be effective when communicated to either Borrower.

     9.7. Rights of Set-Off.

        9.7.1. Upon the occurrence and during the continuance of any Event of
Default, the Lender is hereby authorized at any time and from time to time, to
the fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by the Lender to or for the credit or the
account of either of the Borrowers or the Guarantor against the obligations of
the Borrowers to the Lender, irrespective of whether or not the Lender shall
have made any demand under this Agreement or any other Loan Document and
although such obligations may be unmatured. The Lender agrees promptly to
notify the Borrowers and the Guarantor, if applicable, after any such set-off
and application made by the Lender, provided that the failure to give such
notice shall not affect the validity of such set-off and application. The
rights of the Lender under this Section are in addition to other rights and
remedies (including other rights of set-off) which the Lender may have.

46

 

          9.7.2. Each of the Borrowers agrees, to the fullest extent it may
effectively do so under applicable law, that any holder of a participation in
the Loans may exercise rights of set-off or counterclaim and other rights with
respect to such participation as fully as if such holder of a participation
were a direct creditor of such Borrower in the amount of such participation.

     9.8. Survival. All representations, warranties and covenants made by or
on behalf of either of the Borrowers in this Agreement or the other Loan
Documents herein or in any certificate or other instrument delivered by it or
in its behalf under the Loan Documents shall be considered to have been relied
upon by the Lender and shall survive the delivery to the Lender of such Loan
Documents or the extension of the Loans (or any part thereof), regardless of
any investigation made by or on behalf of the Lender.

     9.9. Successors and Assigns: Rights of Other Holders.

          9.9.1. This Agreement shall be binding on the parties hereto and their
respective successors and inure to the benefit of and be enforceable by the
Lender, its legal representatives, successors and assigns. With respect to the
Borrowers, this Agreement and the other Loan Documents and the rights of the
Borrowers hereunder and thereunder shall not be assignable in any respect.

          9.9.2. The Lender may at any time sell, transfer, assign, or grant
participations in the Obligations or any portion thereof with or without the
consent of the Borrowers; and the Lender may forward to each Transferee and
prospective Transferee all documents and information relating to such
Obligations, whether furnished by the Borrowers or otherwise obtained, as the
Lender determines necessary or desirable. The Borrowers agree that each
Transferee, regardless of the nature of any transfer to it, may exercise all
rights (including rights of set-off) with respect to the portion of the
Obligations held by it as fully as if such Transferee were the direct holder
thereof, subject to any agreements between such Transferee and the transferor
to such Transferee.

     9.10. Applicable Law; Venue; Waiver of Jury Trial.

          9.10.1. THIS AGREEMENT HAS BEEN NEGOTIATED, IS BEING EXECUTED AND
DELIVERED, AND WILL BE PERFORMED IN WHOLE OR IN PART, IN THE STATE OF TEXAS,
AND 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 THE LOAN DOCUMENTS, EXCEPT TO THE EXTENT THE LAWS OF ANY
JURISDICTION WHERE COLLATERAL IS LOCATED REQUIRE APPLICATION OF SUCH LAWS WITH
RESPECT TO SUCH COLLATERAL.

          9.10.2. EACH OF THE BORROWERS HEREBY IRREVOCABLY SUBMITS TO THE
NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXAS STATE COURT
SITTING IN DALLAS, DALLAS COUNTY, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO
ANY LOAN DOCUMENTS AND EACH OF THE BORROWERS HEREBY

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IRREVOCABLY AGREES
THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR
HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT
IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN
SHALL LIMIT THE RIGHT OF THE LENDER TO BRING PROCEEDINGS AGAINST EITHER OF THE
BORROWERS IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY
EITHER OF THE BORROWERS AGAINST THE LENDER OR ANY AFFILIATE OF THE LENDER
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A
FEDERAL OR STATE COURT IN DALLAS, DALLAS COUNTY, TEXAS.

          9.10.3. EACH OF THE BORROWERS AND THE LENDER HEREBY KNOWINGLY,
VOLUNTARILY, INTENTIONALLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM, OR OTHER
LITIGATION THAT RELATES TO OR ARISES OUT OF ANY OF THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT OR THE ACTS OR OMISSIONS OF THE LENDER IN THE ENFORCEMENT OF ANY
OF THE TERMS OR PROVISIONS OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR
OTHERWISE WITH RESPECT THERETO. THE PROVISIONS OF THIS SECTION ARE A MATERIAL
INDUCEMENT FOR THE LENDER ENTERING INTO THIS AGREEMENT.

     9.11. [RESERVED].

     9.12. Headings. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof and
words such as “hereunder” or “ herein” shall refer to the entirety of this
Agreement unless specifically indicated otherwise.

     9.13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of which together
shall constitute one and the same instrument. This Agreement shall become
effective at such time as the counterparts hereof which, when taken together,
bear the signature of the Borrowers and the Lender, shall be delivered to the
Lender. Delivery of an executed counterpart of a signature page of this
Agreement by telecopy or other electronic means shall be effective as a
delivery of a manually executed counterpart of this Agreement.

     9.14. Invalid Provisions, Severability. If any provision of this
Agreement or the other Loan Documents is held to be illegal, invalid, or
unenforceable under present or future laws effective during the term hereof or
thereof, such provision shall be fully severable, this Agreement and the other
Loan Documents shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part thereof, and the remaining
provisions hereof and thereof shall remain in full force and effect and shall
not be affected by the illegal, invalid, or unenforceable provision or by its
severance therefrom. Furthermore, in lieu of
such illegal, invalid or unenforceable provision there shall be added
automatically as a part of

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this Agreement or the other Loan Documents a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.

     9.15. Revolving Loan. Pursuant to Section 346.004 of the Finance Code of
Texas, the Borrower agrees that Chapter 346 of such Finance Code shall not
govern or in any manner apply to the Loans.

     9.16. Communications Via Internet. Each of the Borrowers and the
Guarantor (by its execution of a Guaranty), hereby authorizes the Lender and
its counsel to communicate and transfer documents and other information
(including confidential information) concerning this transaction or the
Borrowers and the Guarantor and the business affairs of the Borrowers and the
Guarantor via the Internet or other electronic communication without regard to
the lack of security of such communications.

     9.17. USA Patriot Act Notice. The Lender hereby notifies the Borrowers
that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L.
107-56 (signed into law October 26, 2001)) (the “Act”), it is required to
obtain, verify and record information that identifies the borrower, which
information includes the name and address of the borrower and other information
that will allow such Lender to identify the borrower in accordance with the
Act.

     9.18. EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO SPECIFICALLY
AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS; THAT IT HAS IN FACT READ THIS AGREEMENT
AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS,
CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY
INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING
ITS EXECUTION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND HAS RECEIVED
THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY
INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF
ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS
THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY
PROVISION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS ON THE BASIS THAT THE
PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT
“CONSPICUOUS.”

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

49

 

     9.19. Preclusion of Oral Agreements. THIS WRITTEN LOAN AGREEMENT REPRESENTS 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.

     In witness whereof, the undersigned have executed this Agreement as of the
day and year first above written.

	 	 	 
	

	 	BORROWERS:
	 
	 	 
	

	 	TOREADOR EXPLORATION & PRODUCTION INC.
	 
	 	 
	4809 Cole Avenue, Suite 108

	 	By:  /s/ Douglas W. Weir

	Dallas, Texas 75205

	 	Name: Douglas W. Weir
	Attention: Douglas W. Weir

	 	Title: Senior Vice President and Chief Financial Officer
	Facsimile: 214/559-3945
	 	 
	 
	 	 
	

	 	TOREADOR ACQUISITION CORPORATION
	 
	 	 
	

	 	By:  /s/ Douglas W. Weir
	4809 Cole Avenue, Suite 108

	 	

	Dallas, Texas 75205

	 	Name: Douglas W. Weir
	Attention: Douglas W. Weir

	 	Title: Senior Vice President and Chief Financial Officer
	Facsimile: 214/559-3945
	 	 
	 
	 	 
	

	 	LENDER:
	 
	 	 
	

	 	TEXAS CAPITAL BANK, N.A.
	 
	 	 
	
	 	 
	2100 McKinney Avenue, Suite 900

	 	By:  /s/ Chris D. Cowan
	Dallas, Texas 75201

	 	

	Attention: Energy Group

	 	Name: Chris D. Cowan
	Facsimile: 214/932-6704

	 	Title: Senior Vice President

50

 

FORM OF PROMISSORY NOTE

					
	 	 	 	 	 
	$25,000,000
	 	Dallas, Texas
	 	December 30, 2004

     FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned (“Borrowers”)
jointly and severally promise to pay to the order of TEXAS CAPITAL BANK, N.A.
(“Lender”), at its banking quarters in Dallas, Dallas County, Texas, the amount
of $25,000,000, or so much thereof as may be advanced against this Note and
remain unpaid pursuant to the Credit Agreement dated of even date herewith by
and between Borrowers and Lender (as amended, restated, or supplemented from
time to time, the “Credit Agreement”), together with interest at the rates and
calculated as provided in the Credit Agreement.

     Reference is hereby made to the Credit Agreement for matters governed
thereby, including, without limitation, certain events which will entitle the
holder hereof to accelerate the maturity of all amounts due hereunder.
Capitalized terms used but not defined in this Note shall have the meanings
assigned to such terms in the Credit Agreement.

     This Note is issued pursuant to and shall be governed by the Credit
Agreement and the holder of the Note shall be entitled to the benefits of the
Credit Agreement. This Note shall finally mature on the Final Maturity Date.

     Without being limited thereto or thereby, this Note is secured by the
Security Documents.

     Each of the Borrowers, and each surety, endorser, guarantor, and other
party ever liable for payment of any sums of money payable on this Note,
jointly and severally waive presentment and demand for payment, protest, notice
of protest and nonpayment, and notice of the intention to accelerate, and agree
that their liability on this Note shall not be affected by any renewal or
extension in the time of payment hereof, by any indulgences, or by any release
or change in any security for the payment of this Note, and hereby consent to
any and all renewals, extensions, indulgences, releases, or changes, regardless
of the number of such renewals, extensions, indulgences, releases, or changes.

     THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF
TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW;
PROVIDED, HOWEVER, THAT CHAPTER 346 OF THE FINANCE CODE OF TEXAS (WHICH
REGULATES CERTAIN CREDIT LOAN ACCOUNTS AND TRIPARTY ACCOUNTS) SHALL NOT APPLY
TO THIS NOTE.

	 	 	 	 	 
	 	 	Toreador Exploration & Production Inc.
	 
	 	 	 	 
	

	 	By:	 	 
	

	 	 	 	
 
	 	 	Printed Name: Douglas W. Weir
	 	 	Title: Senior Vice President and Chief Financial Officer
	 
	 	 	 	 
	 	 	Toreador Acquisition Corporation
	 
	 	 	 	 
	 	 	By:
	

	 	 	 	
 
	 	 	Printed Name: Douglas W. Weir
	 	 	Title: Senior Vice President and Chief Financial Officer

1

 

FORM OF NOTICE OF BORROWING

Texas Capital Bank, N.A.

2100 McKinney Avenue, Suite 900

Dallas, Texas 75201

Attention: Energy Group

	 	Re:	 	Credit Agreement dated December 30, 2004, by and between Texas
Capital Bank, N.A. and Toreador Exploration & Production Inc. and
Toreador Acquisition Corporation (the “Borrowers”) (as amended,
restated, or supplemented from time to time, the “Credit Agreement”)

Ladies and Gentlemen:

     Pursuant to the Credit Agreement, the Borrower hereby makes the requests
indicated below:

	 	 	 	 	 	 	 
	o

	 	 	1.	 	 	Advance
	 
	 	 	 	 	 	 
	

	 	 	(a	)	 	Amount of Advance requested: $                   
	 
	 	 	 	 	 	 
	

	 	 	(b	)	 	Requested funding date:                    , 200[    ]
	 
	 	 	 	 	 	 
	

	 	 	(c	)	 	Request funding into Texas Capital Bank Account Number:                    
	 
	 	 	 	 	 	 
	o

	 	 	2.	 	 	Included herewith is a completed Letter of Credit Application.

     The undersigned certifies that [s]he is a Responsible Representative, has
obtained all consents necessary, and as such [s]he is authorized to execute
this request on behalf of the Borrower. The undersigned further certifies,
represents, and warrants on behalf of the Borrower that the Borrower is
entitled to receive the requested borrowing or letter of credit under the terms
and conditions of the Credit Agreement.

     Each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Credit Agreement.

	 	 	 	 	 
	 	 	Very truly yours,
	 	 	Toreador Exploration & Production Inc.
	 
	 	 	 	 
	

	 	By:	 	 
	

	 	 	 	
 
	 	 	Printed Name: Douglas W. Weir
	 	 	Title: Senior Vice President and Chief Financial Officer
	 
	 	 	 	 
	 	 	Toreador Acquisition Corporation
	 
	 	 	 	 
	

	 	By:	 	 
	

	 	 	 	
 
	 	 	Printed Name: Douglas W. Weir
	 	 	Title: Senior Vice President and Chief Financial Officer

1

 

FORM OF COMPLIANCE CERTIFICATE

                   , 200    

Texas Capital Bank, N.A.

2100 McKinney Avenue, Suite 900

Dallas, Texas 75201

Attention: Energy Group

	 	 	 	 	 
	

	 	Re:
	 	Credit Agreement dated December 30, 2004, by and between Texas
Capital Bank, N.A. and Toreador Exploration & Production Inc. and
Toreador Acquisition Corporation (the “Borrowers”) (as amended,
restated, or supplemented from time to time, the “Credit Agreement”)

Ladies and Gentlemen:

     Pursuant to applicable requirements of the Credit Agreement, the
undersigned, as a Responsible Representative of the Borrower, hereby certifies
to you the following information as true and correct as of the date hereof or
for the period indicated, as the case may be:

	 	 	[1. To the best of the knowledge of the undersigned, no Default exists as
of the date hereof or has occurred since the date of our previous
certification to you, if any.]
	 
	 	 	[1. To the best of the knowledge of the undersigned, the following
Defaults exist as of the date hereof or have occurred since the date of
our previous certification to you, if any, and the actions set forth below
are being taken to remedy such circumstances:]

	 	2.	 	The compliance of the Borrower with certain financial covenants of the
Credit Agreement, as of the close of business on                    (the
“Determination Date”), is evidenced by the following:

	 	 	 	 	 	 	 
	

	 	(a)
	 	Section 7.15.1: Interest Coverage Ratio.	 	 
	 
	 	 	 	 	 	 
	

	 	 	 	Required
	 	Actual
	 
	 	 	 	 	 	 
	

	 	 	 	Not less than 3.00 to 1.00
	 	                    to 1.00
	 
	 	 	 	 	 	 
	

	 	(b)
	 	Section 7.15.2: Current Ratio.	 	 
	 
	 	 	 	 	 	 
	

	 	 	 	Required
	 	Actual
	 
	 	 	 	 	 	 
	

	 	 	 	Not less than 1.25 to 1.00
	 	                    to 1.00
	 
	 	 	 	 	 	 
	

	 	(c)
	 	Section 7.9.4: Hedging Agreements.	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	The Hedging Agreements of the Borrower and its positions thereunder
as of the Determination Date are summarized on Schedule One attached
hereto.

1

 

	 	3.	 	The financial statements being delivered to the Lender
concurrently herewith pursuant to the Credit Agreement fairly and
accurately reflect the financial condition and results of operation
of the Borrowers for the periods and as of the dates set forth
therein, and the undersigned has reviewed the terms of the Credit
Agreement and the other Loan Documents, and has made, or caused to be
made under my supervision, a review of the transactions and financial
condition of the Borrowers during the fiscal period covered by such
financial statements.
	 
	 	4.	 	The circled answers to the following statements are each true
and correct as of the Determination Date:
	 
	 	(a)	 	The annual statement of assets and liabilities of the Guarantor
as of its most recent fiscal year-end and the related financial
statements have been delivered to the Lender pursuant to Section
7.2.1(i). YES    NO
	 
	 	(b)	 	The quarterly statement of assets and liabilities of the
Guarantor as of the last day of its most recently ended fiscal
quarter and the related financial statements have been delivered to
the Lender pursuant to Section 7.2.1(ii).
YES    NO
	 
	 	(c)	 	The annual statement of assets and liabilities of the Borrowers
as of its most recent fiscal year-end and the related financial
statements have been delivered to the Lender pursuant to Section
7.2.1(iii). YES    NO
	 
	 	(d)	 	The quarterly statement of assets and liabilities of the
Borrowers as of the last day of its most recently ended fiscal
quarter and the related financial statements have been delivered to
the Lender pursuant to Section 7.2.1(iv).
YES    NO
	 
	 	(e)	 	The federal income tax return for the year most recently ended
for each Person indicated below has been properly filed with the
appropriate Governmental Authority and a copy thereof has been
delivered to the Lender pursuant to Section 7.2.1(vi),
	 
	 	(i)	 	of the Guarantor. YES    NO
	 
	 	5.	 	The most recent oil and gas production report delivered by the
Borrower to the Lender under Section 7.2.2 of the Credit Agreement is
in compliance with the provisions of such Section and is true and
correct in all material respects as of the date thereof and for the
time periods covered thereby.

     Each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Credit Agreement.

	 	 	 	 	 
	 	Very truly yours,

                    of Toreador Exploration & Production Inc. 

and Toreador Acquisition Corporation

 	 
	 	 	 
	 	 	 
	 	 	 

2

 

	 	 	 	 	 

Schedule One

Hedging Agreements

1

 

EXHIBIT 6.7

LITIGATION

None

1exv10w2

 

EXHIBIT 10.2

GUARANTY

(Toreador Resources Corporation)

     This GUARANTY (herein so called) dated December 30, 2004, is by Toreador
Resources Corporation, a Delaware corporation, (herein referred to as the
“Guarantor”). The capitalized terms used herein shall have the meanings
assigned to them in the Credit Agreement (hereinafter defined), unless they are
otherwise defined herein.

W I T N E S S E T H :

     WHEREAS, Toreador Exploration & Production Inc., a Texas corporation, and
Toreador Acquisition Corporation, a Delaware corporation, (collectively, the
“Borrowers” and individually a “Borrower”) are arranging financing with Texas
Capital Bank, N.A., (the “Lender”); and

     WHEREAS, the Borrowers and the Lender are entering into the Credit
Agreement dated December 30, 2004, (such agreement, as the same may have been
or be from time to time supplemented or amended, or the terms thereof waived or
modified being the “Credit Agreement”) which sets forth, inter alia, the terms
and conditions pursuant to which the Lender will extend credit to the Borrowers
(which credit is evidenced by the Note issued by the Borrowers to the Lender
pursuant to the Credit Agreement); and

     WHEREAS, it is a condition precedent to the obligation of the Lender to
advance amounts to the Borrowers that the Borrowers cause the Guarantor to
execute and deliver to the Lender this Guaranty; and

     WHEREAS, the board of directors of the Guarantor has determined that this
Guaranty may reasonably be expected to benefit, directly or indirectly, the
Guarantor;

     NOW, THEREFORE, in order to induce the Lender to enter into the Credit
Agreement, in consideration of the premises and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the Guarantor
agrees as follows:

     1. The Guarantor, as primary obligor and not as surety, hereby irrevocably
and unconditionally guarantees, independently of the Borrowers, to the Lender
the due and punctual payment when due by any Borrower of all amounts now or
hereafter owed by any Borrower to the Lender including, without limitation, the
Obligations and all other amounts payable under the Credit Agreement, the Note
and the other Loan Documents to which any Borrower is a party, whether
principal, interest or other amounts, including, without limitation, attorneys’
fees and costs of collection. The obligations of the Borrowers guaranteed
hereby and described in the preceding sentence are hereinafter referred to as
the “Payment Obligations”. The Guarantor, as primary obligor and not merely as
surety, also hereby irrevocably and unconditionally guarantees, independently
of the Borrowers, to the Lender the complete observance, fulfillment and
performance by the Borrowers of all the terms and conditions of the Credit
Agreement and all other Loan Documents to which any Borrower is or will be a
party. The obligations of the Borrowers guaranteed

1

 

hereby and described in the immediately preceding sentence are hereinafter
referred to as the “Performance Obligations”.

     2. The Guarantor hereby agrees that in the event that any Borrower fails
to pay any Payment Obligations or any Borrower fails to perform any Performance
Obligations for any reason (including, without limitation, the liquidation,
dissolution, receivership, insolvency, bankruptcy, assignment for the benefit
of creditors, reorganization, arrangement, composition or readjustment of, or
other similar proceedings affecting the status, existence, assets or
obligations of any Borrower, or the disaffirmance by any Borrower in any such
proceeding of any Loan Document to which any Borrower is a party), the
Guarantor will pay such Payment Obligations and perform such Performance
Obligations within five (5) days (the “Due Date”) following the date on which
written demand is made by the Lender.

     3. The obligations of the Guarantor hereunder shall not be affected by (i)
the genuineness, validity, regularity or enforceability of any Borrower’s
obligations under the Credit Agreement, the Note or any other Loan Document or
any other document to which any Borrower is a party, or (ii) any amendment,
waiver or other modification of the Credit Agreement, the Note or any other
Loan Document or other document given or executed with or without the consent
of the Guarantor, or (iii) any priority or preference to which any other
obligations of any Borrower may be entitled over any Borrower’s obligations
under the Credit Agreement, the Note or any other Loan Document or other
document to which any Borrower is a party, or (iv) the release of any
collateral or guaranty now or hereafter securing the Payment Obligations or the
Performance Obligations, or (v) to the fullest extent permitted by applicable
law, any other circumstance which might otherwise constitute a legal or
equitable defense to or discharge of the obligations of a surety or guarantor.
This Guaranty shall continue to be effective or be automatically reinstated, as
the case may be, if, for any reason, any payment by or on behalf of any
Borrower shall be rescinded or must otherwise be restored, whether as a result
of proceedings in bankruptcy or reorganization of any Borrower or otherwise,
and the Guarantor guarantees, absolutely, irrevocably and unconditionally that
all payments made by or on behalf of any Borrower in respect of its obligations
under the Credit Agreement, the Note and the other Loan Documents will, when
made, be final.

     4. This Guaranty is a continuing guaranty and shall constitute a guaranty
of payment and not of collection. The Guarantor specifically agrees that it
shall not be necessary or required, and that the Guarantor shall not be
entitled to require, that the Lender (i) file suit or proceed to obtain or
assert a claim for personal judgment against any Borrower for the Payment
Obligations or the Performance Obligations, or ( ii) make any effort at a
collection or enforcement of the Payment Obligations or the Performance
Obligations from any Borrower, or (iii) foreclose against or seek to realize by
suit or other process from any collateral pledged as security for the Payment
Obligations or the Performance Obligations, or (iv) file suit or proceed to
obtain or assert a claim for personal judgment against any other Person liable
for the Payment Obligations or the Performance Obligations, or (v) make any
effort at collection or enforcement of the Payment Obligations or the
Performance Obligations from any such other Person, or (vi) exercise or assert
any other right or remedy to which the Lender is or may be entitled in
connection with the Payment Obligations or the Performance Obligations or any
security or other guaranty therefor, or (vii) assert or file any claim against
the assets of any Borrower or any other guarantor or other Person liable for
the Payment Obligations or the Performance Obligations, or any part thereof,
before or as a condition of enforcing

2

 

the liability of the Guarantor under this Guaranty or requiring payment of
said Payment Obligations or the performance of the Performance Obligations by
the Guarantor hereunder, or at any time thereafter.

     5. The Guarantor waives notice of the acceptance of this Guaranty and of
the performance or nonperformance by any Borrower, demand for payment or
performance from any Borrower, or any other Person and notice of nonpayment or
failure to perform on the part of any Borrower and all demands whatsoever,
other than the demand for payment hereunder provided for in paragraph 2 hereof.
To the extent allowed by applicable law, the Guarantor expressly waives and
relinquishes all rights and remedies now or hereafter accorded by applicable
law to guarantors and sureties, including, without limitation, any defense,
right of offset or setoff, or other claim which Guarantor may have against any
Borrower or the Lender or which any Borrower may have against the Lender or the
holder of the Note.

     6. No amendment of or supplement to this Guaranty, or waiver or
modification of or consent under the terms hereof, shall be effective unless
evidenced by an instrument in writing signed by the Guarantor and the Lender.

     7. All payments hereunder shall be made in the currency of the United
States of America and at the place and in the manner as provided in the Credit
Agreement and the Note for payments by the Borrowers.

     8. The Guarantor hereby subordinates any and all claims it may have
against any Borrower, including without limitation, all indebtedness of any
Borrower to the Guarantor and any and all claims arising in respect of payments
made by the Guarantor pursuant to this Guaranty, whether now existing or
hereafter arising, to any and all claims by the Lender for amounts owing from
any Borrower to the Lender under the Credit Agreement and the Note. The
Guarantor further agrees that following any Event of Default all payments in
respect of any indebtedness of any Borrower to the Guarantor shall be suspended
and deferred, and the Guarantor shall not call, demand or enforce any right to
receive such payments, shall thereafter hold any amounts or property received
by the Guarantor in respect of any indebtedness of any Borrower in trust for
the benefit of the Lender and shall forthwith deliver to any Borrower any such
amounts or property, for application to the Obligations. The Guarantor will
deliver such further documents as the Lender may from time to time request
evidencing such subordination.

     9. Irrespective of any payment or performance by the Guarantor pursuant to
this Guaranty, the Guarantor will not be subrogated in place of and to the
claims and demands of the Lender or any other Person to whom payment has been
made, nor will the Guarantor have any right to participate in any Lien or
security now or hereafter held by or on behalf of the Lender until payment in
full of all amounts guaranteed hereby and performance of all obligations
undertaken herein.

     10. Any notices or other communications required or permitted to be given
herein must be (i) given in writing and personally delivered or mailed by
prepaid certified or registered mail, or (ii) made by facsimile delivered or
transmitted, to the party to whom such notice of communication is directed, to
the address of such party as follows: (A) Guarantor: Toreador Resources
Corporation, 4809 Cole Avenue, Suite 108, Dallas, Texas 75205; (B) Lender:
Texas Capital Bank, N.A., 2100

3

 

McKinney Avenue, Suite 900, Dallas, Texas 75201 (Attention: Energy
Group), with a copy to Jackson Walker L.L.P., 901 Main Street, Suite 6000,
Dallas, Texas 75202 (Facsimile No. 214-953-5822) (Attention: Frank P.
McEachern). Any notice to be mailed or personally delivered may be mailed or
delivered to the principal offices of the party to whom such notice is
addressed. Any such notice or other communication shall be deemed to have been
given (whether actually received or not) on the day it is mailed or personally
delivered as aforesaid or, if transmitted by facsimile, on the day that such
notice is transmitted as aforesaid. Any party may change its address for
purposes of this Agreement by giving notice of such change to the other parties
pursuant to this paragraph.

     11. The Guarantor waives any and all rights and remedies of suretyship,
including, without limitation, those it may have or be able to assert by reason
of the provisions of Chapter 34 of the Texas Business and Commerce Code. The
Guarantor waives any defense arising by reason of any disability, lack of
corporate authority or power, or other defense of any Borrower or any other
guarantor of all or any part of the Obligations. The Guarantor expressly
waives all notices of any kind, presentment for payment, demand for payment,
protest, notice of protest, notice of intent to accelerate maturity, notice of
acceleration of maturity, dishonor, diligence, notice of any amendment of any
Loan Document, notice of any adverse change in the financial condition of any
Borrower, notice of any adjustment, indulgence, forbearance, or compromise that
might be granted or given by the Lender to any Borrower, and notice of
acceptance of this Guaranty, acceptance on the part of the Lender being
conclusively presumed by its request for this Guaranty and the delivery of this
Guaranty to the Lender.

     12. This Guaranty is unconditional and unlimited, except that the
Guarantor shall be liable under this Agreement with respect to the Payment
Obligations only for amounts aggregating up to the largest amount that would
not render his or its guaranty obligation hereunder subject to avoidance under
Section 548 of the United States Bankruptcy Code or any comparable provisions
of any state law applicable to this Guaranty.

     13. In the event any part of the Payment Obligations are now or hereafter
secured by an interest in real property in Texas (“Real Property”), and such
interest is foreclosed upon pursuant to a judicial or nonjudicial foreclosure
sale, Guarantor agrees as follows: Notwithstanding the provisions of Section
51.003, 51.004, and 51.005 of the Texas Property Code (as the same may be
amended from time to time), and to the extent permitted by law, the Guarantor
agrees that Lender shall be entitled to seek a deficiency judgment from
Guarantor and any other party obligated on the Payment Obligations equal to the
difference between the amount owing on the Payment Obligations and the amount
for which the Real Property was sold pursuant to judicial or nonjudicial
foreclosure sale. The Guarantor expressly recognizes that this section
constitutes a waiver of the above-cited provisions of the Texas Property Code
which would otherwise permit the Guarantor and other Persons against whom
recovery of deficiencies is sought or guarantors independently (even absent the
initiation of deficiency proceedings against them) to present competent
evidence of the fair market value of the Real Property as of the date of the
foreclosure sale and offset against any deficiency the amount by which the
foreclosure sale price is determined to be less than such fair market value.
The Guarantor further recognizes and agrees that this waiver creates an
irrebuttable presumption that the foreclosure sale price is equal to the fair
market value of the Real Property for purposes of calculating deficiencies owed
by any Borrower, the Guarantor, and others against whom recovery of a
deficiency is sought. Alternatively, in the event this waiver is determined by
a court of

4

 

competent jurisdiction to be unenforceable, the following shall be the
basis for the finder of fact’s determination of the fair market value of the
Real Property as of the date of the foreclosure sale in proceedings governed by
sections 51.003, 51.004, and 51.005 of the Texas Property Code (as amended from
time to time): (a) The Real Property shall be valued in an “as is” condition
as of the date of the foreclosure sale, without any assumption or expectation
that the Real Property will be repaired or improved in any manner before a
resale of the Real Property after foreclosure; (b) The valuation shall be
based upon an assumption that the foreclosure purchaser desires a prompt resale
of the Real Property for cash promptly (but no later than twelve months)
following the foreclosure sale; (c) All reasonable closing costs customarily
borne by the seller in a commercial real estate transaction or oil and gas
property transaction should be deducted from the gross fair market value of the
Real Property, including, without limitation, brokerage commissions, title
insurance, title opinions, a survey of the Real Property, tax prorations,
attorney’s fees, and marketing costs; (d) The gross fair market value of the
Real Property shall be further discounted to account for any estimated holding
costs associated with maintaining the Real Property pending sale, including,
without limitation utilities expenses, property management fees, taxes and
assessments (to the extent not accounted for in clause (c) above), and other
maintenance expenses; and (e) Any expert opinion, title opinions, testimony
given or considered in connection with a determination of the fair market value
of the Real Property must be given by persons who have at least five years
experience in appraising property similar to the Real Property and who have
conducted and prepared a complete written appraisal of the Real Property taking
into consideration the factors set forth above.

     14. If this Guaranty is placed in the hands of an attorney for collection
or is enforced by suit or through probate or bankruptcy court or through any
other judicial proceedings, the Guarantor shall pay to the Lender an amount
equal to the reasonable attorneys’ fees and collection costs incurred by the
Lender in the collection or enforcement of this Guaranty.

     15. The Guarantor agrees to maintain its existence in Delaware and good
standing in the state of Texas.

     16. The Guarantor represents and warrants to the Lender that the
representations and warranties applicable to the Guarantor in the Credit
Agreement are true and correct and agrees to comply with and be bound by the
covenants and agreements in the Credit Agreement concerning the Guarantor.

     17. JURISDICTION AND VENUE. THE GUARANTOR HEREBY IRREVOCABLY SUBMITS TO
THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXAS STATE
COURT SITTING IN DALLAS, DALLAS COUNTY, TEXAS IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE GUARANTOR HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY
BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION
IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM.
NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE LENDER TO BRING PROCEEDINGS
AGAINST THE GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION. ANY

5

 

JUDICIAL PROCEEDING BY THE GUARANTOR AGAINST THE LENDER OR ANY AFFILIATE
OF THE LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING
OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY
IN A COURT IN DALLAS, DALLAS COUNTY, TEXAS.

     18. WAIVER OF RIGHTS TO JURY TRIAL. THE GUARANTOR, BY SIGNING BELOW, AND
THE LENDER, BY ITS REQUEST FOR THIS GUARANTY, HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY
JURY IN ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM, OR OTHER LITIGATION THAT
RELATES TO OR ARISES OUT OF ANY OF THIS GUARANTY OR ANY OTHER LOAN DOCUMENT OR
THE ACTS OR OMISSIONS OF THE LENDER IN THE ENFORCEMENT OF ANY OF THE TERMS OR
PROVISIONS OF THIS GUARANTY OR ANY OTHER LOAN DOCUMENT OR OTHERWISE WITH
RESPECT THERETO. THE PROVISIONS OF THIS SECTION ARE A MATERIAL INDUCEMENT FOR
THE LENDER’S ENTERING INTO THE CREDIT AGREEMENT.

     19. This Guaranty (i) may be executed in several counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument and (ii) shall be binding upon the heirs, personal
representatives successors and assigns of the Guarantor and shall inure to the
benefit of, and shall be enforceable by, any party entitled to the benefits of
this Guaranty, and their respective successors and assigns. The Guarantor may
not assign his or its obligations hereunder.

     20. This Guaranty shall be governed by and construed in accordance with
the internal laws of the State of Texas.

     21. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES
HERETO WITH RESPECT TO THE SUBJECT HEREOF. FURTHERMORE, IN THIS REGARD, THIS
AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE
FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH
PARTIES.

     THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.

     IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly
executed by its duly authorized officer as of the date first hereinabove set
forth.

	 	 	 	 	 
	 	

TOREADOR RESOURCES CORPORATION

 	 
	 	By:  	/s/ Douglas W. Weir 
	 	 	
	 
	 	 	Douglas W. Weir, Senior Vice President and 	 
	 	 	Chief Financial Officer 	 
	 

6

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