<PAGE 1>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from to
--------------------------
COMMISSION FILE NUMBER 0-13305
--------------------------
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1971716
(State of other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
One Marienfeld Place, Suite 465,
Midland, Texas 79701
(Address of principal executive offices) (Zip Code)
(915) 684-3727
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes 'X' No
At June 30, 1996 14,860,358 shares of common stock, par value $.01, were
outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE 2>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Reference is made to the succeeding pages for the following financial
statements:
- Balance Sheets as of December 31, 1995 and June 30, 1996
- Statements of Operations for the three months ended June 30,
1995 and 1996 and six months ended June 30, 1995 and 1996
- Statements of Cash Flows for the six months ended June 30,
1995 and 1996
- Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
/a/ Exhibits
10.1 Loan Agreement, dated July 1, 1996, between Parallel
Petroleum Corporation and Bank One, Texas, N.A.
27. Financial Data Schedule
/b/ Reports on Form 8-K
No reports were filed on Form 8-K during the quarterly period ended
June 30, 1996.
<PAGE 3>
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30, 1996
ASSETS 1995 (Unaudited)
- ------ ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 558,748 $ 729,356
Accounts receivable:
Oil and gas 648,000 1,972,000
Other, net of allowance for doubtful accounts
of $28,130 in 1995 and 1996 115,318 213,634
Affiliate 2,932 23,017
----------- -----------
766,250 2,208,651
Prepaid expenses and other 16,293 15,627
Undeveloped leases held for sale 60,413 60,413
Deferred income taxes 114,240 210,460
----------- -----------
Total current assets 1,515,944 3,224,507
----------- -----------
Property and equipment, at cost:
Oil and gas properties, full cost method 30,879,615 37,113,229
Other 315,983 352,840
----------- -----------
31,195,598 37,466,069
Less accumulated depreciation and depletion 8,837,838 10,269,635
----------- -----------
22,357,760 27,196,434
----------- -----------
Other assets net of accumulated amortization of $24,500
in 1995 and $32,876 in 1996 40,994 44,869
----------- -----------
$23,914,698 $30,465,810
=========== ===========
</TABLE>
<PAGE 4>
<TABLE>
<CAPTION>
December 31, June 30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 (Unaudited)
- ------------------------------------ ------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 856,088 $ 1,481,059
Affiliate 20,557 59,937
----------- -----------
Total current liabilities 876,645 1,540,996
----------- -----------
Long-term debt 11,674,625 15,068,621
Deferred income taxes 528,015 1,435,235
Stockholders' equity:
Preferred stock - par value of $.10 per share, authorized
40,000,000 shares, none issued -- --
Common stock - par value of $.01 per share, authorized
100,000,000 shares, issued and outstanding 14,854,108
in 1995 and 14,860,358 in 1996 148,540 148,603
Additional paid-in surplus 11,662,897 11,673,772
Accumulated (deficit) gain (976,024) 598,583
----------- -----------
Total stockholders' equity 10,835,413 12,420,958
----------- -----------
Contingencies
----------- -----------
$23,914,698 $30,465,810
=========== ===========
</TABLE>
The balance sheet as of December 31, 1995 has been derived from the Company's
audited financial statements.
The accompanying notes are an integral part of these financial statements.
<PAGE 5>
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1995 and 1996
Six Months Ended June 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Oil and gas revenues $1,148,799 $3,381,316 $2,316,078 $5,719,240
---------- ---------- ---------- ----------
Cost and expenses:
Lease Operating expense 368,937 645,727 705,435 1,098,690
General and administrative 56,841 66,687 94,230 130,316
Public reporting, auditing and legal 46,141 81,711 89,191 126,747
Depreciation, depletion and amortization 363,554 778,399 728,858 1,431,797
---------- --------- ---------- ----------
835,473 1,572,524 1,617,714 2,787,550
---------- ---------- ---------- ----------
Operating income 313,326 1,808,792 698,364 2,931,690
---------- ---------- ---------- ----------
Other income (expense), net:
Interest income -- 382 -- 475
Other income 12,515 30,151 24,259 47,486
Interest expense (257,928) (311,516) (518,280) (593,674)
Other expense (1,056) (185) (1,169) (370)
---------- ---------- ---------- ----------
Total other expense, net (246,469) (281,168) (495,190) (546,083)
---------- ---------- ---------- ----------
Income before income taxes 66,857 1,527,624 203,174 2,385,607
Income tax expense - deferred 21,900 519,000 67,900 811,000
---------- ---------- ---------- ----------
Net income $ 44,957 $1,008,624 $ 135,274 $1,574,607
========== ========== ========== ==========
Net income per common share $ .003 $ .065 $ .009 $ .102
========== ========== ========== ==========
Weighted average common share and common
stock equivalents outstanding 15,358,478 15,532,674 15,264,671 15,484,731
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE 6>
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 135,274 $1,574,607
Adjustments to reconcile net income to net cash
provided (used in) by operating activities:
Depreciation, depletion and amortization 728,858 1,431,797
Income taxes 67,900 811,000
Other, net 170,357 (3,875)
Changes in assets and liabilities:
Increase in accounts receivable (35,803) (1,442,401)
(Increase) decrease in prepaid expenses and other (45,543) 666
(Decrease) increase in accounts payable and accrued
liabilities (1,398,696) 664,351
---------- ----------
Net cash provided (used in) by operating activities (377,653) 3,036,145
---------- ----------
Cash flows from investing activities:
Additions of property and equipment (1,646,920) (6,270,471)
Proceeds from disposition of property and equipment 1,200,671 --
Acquisition of undeveloped leases held for sale (46,015) --
---------- ----------
Net cash used in investing activities (492,264) (6,270,471)
---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 1,050,000 3,393,996
Payment of long-term debt (1,610,375) --
Proceeds from exercise of options 36,694 10,938
Stock offering costs (289,899) --
Proceeds from common stock issuance 1,610,375 --
---------- ----------
Net cash provided by financing activities 796,795 3,404,934
---------- ----------
Net increase (decrease) in cash and cash equivalents (73,122) 170,608
Beginning cash and cash equivalents 598,465 558,748
---------- ----------
Ending cash and cash equivalents $ 525,343 729,356
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE 7>
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. OPINION OF MANAGEMENT
The financial information included herein is unaudited; however, such
information includes all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of the results of operations for the interim periods.
NOTE 2. LONG TERM DEBT
On July 1, 1996, the Company entered into a loan agreement with Bank One,
Texas, National Association to refinance the outstanding indebtedness under
its loan agreement with its former bank lender, and to provide funds for
working capital. The loan agreement provides for a revolving credit facility
(the "Credit Facility") maturing in July, 2001. The Company may borrow up to
the lesser of $30 million or the "borrowing base" in effect from time to time.
The borrowing base is redetermined by the bank semi-annually on or about April
1, and October 1 of each year. The Company selects from two borrowing base
amounts established by the bank. One amount is subject to automatic reduction
each month by an amount determined by the bank and the other borrowing base
amount is not subject to automatic monthly reduction. Generally, borrowing
base amounts that are subject to automatic monthly reduction will be greater
than borrowing base amounts that are not subject to monthly reduction. At
July 1, 1996, the borrowing base was $17 million, which is not subject to
automatic monthly reduction. Borrowings under the Credit Facility are secured
by substantially all of the assets of the Company and bear interest, at the
election of the Company, at a rate equal to (i) the bank's base lending rate
or (ii) the bank's eurodollar rate plus a margin of 2.50%. On July 1, 1996,
the interest rate on outstanding borrowings in the principal amount of
approximately $15,069,000 was 8.25%, the bank's base lending rate on such
date. Interest on amounts outstanding under the Credit Facility is due on
the last day of each month for loans bearing interest at the base lending
rate and, in the case of loans bearing interest at the eurodollar rate,
interest payments are due on the last day of each applicable interest period
of one, two or three months, as selected by the Company at the time of
borrowing. Commitment fees of 0.25% per annum on the difference between
the loan commitment amount and the average daily amount of the loan are
due quarterly. The restated loan agreement contains various restrictive
covenants and compliance requirements, including maintenance of certain
financial ratios, limitations on additional indebtedness and restrictions
on the payment of dividends.
NOTE 3. COMMON STOCK OFFERING
On February 7, 1995, the Company completed a private placement of 644,150
shares of common stock at $2.50 per share, of which 50,000 shares were purchased
by certain Directors (or their affiliates) of the Company. Proceeds received,
net of related expenses, were $1,320,476.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(1) MATERIAL CHANGES IN FINANCIAL CONDITION
LIQUIDITY
Working Capital increased $1,044,212 as of June 30, 1996 compared to
December 31, 1995. Current assets exceed current liabilities by $1,683,511
at June 30, 1996 compared to $639,299 at December 31, 1995.
<PAGE 8>
CAPITAL RESOURCES
The Company incurred net costs of $6,270,471 in its oil and gas property
acquisition, development, and enhancement activities for the six months ended
June 30, 1996. Such costs were financed by the utilization of the Company's
cash position and funds provided from its line of credit.
Historically, the Company concentrated most of its drilling activities
onshore in Texas in exploratory prospects. However, starting in 1988 the
Company followed a policy of de-emphasizing exploratory drilling and committing
most of its available funds to the acquisition and enhancement of producing
oil and gas properties and development drilling. Beginning in 1992, the
Company expanded its acquisition and enhancement efforts through the use
of three-dimensional seismic technology. Based on the Company's projected
oil and gas revenues and related expenses, Management believes that its
internally generated cash flow, coupled with proceeds from borrowings under
the Company's lending facility, will be sufficient to fund its current
operations. In addition, the Company continually reviews and considers
alternative methods of financing.
TREND AND PRICES
The Company's revenues, cash flows and borrowing capacity are affected
by changes in oil and gas prices. The markets for oil and gas have historically
been, and will continue to be, volatile. Prices for oil and gas typically
fluctuate in response to relatively minor changes in supply and demand, market
uncertainty, seasonal, political and other factors beyond the control of the
Company. The Company is unable to accurately predict domestic or worldwide
political events or the effects of such other factors on the prices received
by the Company for its gas and oil. The Company historically has not entered
into transactions to hedge against changes in oil and gas prices, but may
elect to enter into hedging transactions in the future to protect against
fluctuations in oil and gas prices.
During 1995, the average sales price received by the Company for its
oil was approximately $17.26 per barrel ("Bbl"), as compared to $15.81 in
1994, while the average sales prices for the Company's gas was approximately
$1.50 per thousand cubic feet ("Mcf") in 1995, as compared to $1.68 per Mcf
in 1994. At June 30, 1996, the price received by the Company for its oil
production ranged from $20.00 to $22.00 per Bbl, while the price received by
the Company, at that same date, for its gas production ranged from $1.60 to
$2.50 per Mcf.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS
Because of the Company's ever-changing reserve base and sources of
production, year to year or quarter to quarter comparisons of the Company's
results of operations can be difficult. This situation is further complicated
by significant changes in product mix (oil vs. gas volumes) and related price
fluctuations for both oil and gas. For these reasons, the following compares
the results of operations on an EBO (equivalent barrel of oil) basis for the
period indicated.
<PAGE 9>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
12-31-95 3-31-96 6-30-96 6-30-95 6-30-96
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Production and Prices:
Oil (Bbls) 30,372 44,713 57,387 36,172 57,387
Natural Gas (Mcf) 478,248 701,895 906,826 346,356 906,826
Equivalent Barrels of Oil (EBO) 110,080 161,695 208,525 93,898 208,525
Oil Price (per Bbl) $17.54 $18.27 $22.77 $17.78 $22.77
Gas Price (per Mcf) $ 1.59 $ 2.17 $ 2.28 $ 1.42 $ 2.28
Price per EBO $11.75 $14.46 $16.21 $12.23 $16.21
Results of Operations per EBO
Oil and gas revenues $11.75 $14.46 $16.21 $12.23 $16.21
Costs and expenses:
Lease operating expense 3.65 2.80 3.10 3.93 3.10
General and administrative .59 .39 .32 .61 .32
Public reporting, auditing
and legal .48 .28 .39 .49 .39
Depreciation and depletion 4.75 4.04 3.73 3.87 3.73
------ ------ ------ ------ ------
9.47 7.51 7.54 8.90 7.54
------ ------ ------ ------ ------
Operating income 2.28 6.95 8.67 3.33 8.67
Other income (expense):
Interest expense (2.39) (1.74) (1.49) (2.75) (1.49)
Other income .08 .11 .15 .12 .15
------ ------ ------ ------ ------
Income before income taxes $ (.03) $ 5.32 $ 7.33 $ .70 $ 7.33
====== ====== ====== ====== ======
Net cash flow before working
capital adjustments $ 4.78 $ 9.36 $11.06 $ 4.57 $11.06
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
6-30-94 6-30-95 6-30-96
------- ------- -------
<S> <C> <C> <C>
Production and Prices:
Oil (Bbls) 91,298 79,388 102,100
Natural Gas (Mcf) 640,861 668,303 1,608,721
Equivalent Barrels of Oil (EBO) 198,108 190,772 370,220
Oil Price (per Bbl) $14.33 $17.11 $20.80
Gas Price (per Mcf) $ 1.74 $ 1.43 $ 2.23
Price per EBO $12.26 $12.14 $15.45
<PAGE 10>
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
6-30-94 6-30-95 6-30-96
------- ------- -------
<S> <C> <C> <C>
Results of Operations per EBO
Oil and gas revenues $12.26 $12.14 $15.45
Costs and expenses:
Lease operating expense 3.37 3.70 2.97
General and administrative .44 .49 .35
Public reporting, auditing
and legal .52 .47 .34
Depreciation and depletion 3.55 3.82 3.87
------ ------ ------
7.88 8.48 7.53
------ ------ ------
Operating income 4.38 3.66 7.92
Other income (expense):
Interest expense (1.37) (2.72) (1.60)
Other income .29 .12 .14
------ ------ ------
Income before income taxes $ 3.30 $ 1.06 $ 6.46
====== ====== ======
Net cash flow before working
capital adjustments $ 6.85 $ 4.88 $10.33
====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1995:
During the three months ended June 30, 1996, the following operational
items changed relative to the corresponding three month period ended June 30,
1995:
Income before taxes increased $1,460,767 (2185%) to $1,527,624 primarily
due to a $2,232,517 (194%) increase in oil and gas revenues offset by a $737,051
(88%) increase total costs and expenses.
Net cash flow from operations, before working capital adjustments,
increased $1,875,612 (435%) to $2,306,023. Oil and gas revenues increased
$2,232,517 (194%) to $3,381,316 in 1996 compared to $1,148,799 in 1995. The EBO
sold in 1996 increased by 114,627 (122%) to 208,525 compared to 93,898 in 1995.
Costs and expenses increased $737,051 (88%) to $1,572,524 due to the
following:
1. Lease operating expense increased $276,790 (75%) to $645,727
primarily due to the aforementioned 122% increase in EBO's sold. The operating
expense per EBO decreased 21% to $3.10 compared to $3.93 in 1995 because of
increased production on certain recently completed wells that are flowing.
<PAGE 11>
2. General and administrative expense increased $9,846 (17%) to $66,687
in 1996 primarily due to an increase in franchise taxes and in general corporate
legal expense. Such increase represents $.32 per EBO sold in 1996 compared to
$.61 per EBO sold in 1995. General and administrative costs are expected to
remain fairly stable with no material increases expected in any particular
category.
3. Public reporting, auditing and legal expense increased $35,570 (77%)
to $81,711 in 1996 primarily due to increased legal expense and shareholder
communication costs.
4. Depreciation, depletion and amortization expense (DD&A) increased
$414,845 (114%) to $778,399 due to the aforementioned 122% increase in EBO's
sold. The DD&A rate per EBO in 1996 is $3.73 compared to $3.87 in 1995.
Interest expense increased $53,588 (21%) to $311,516 because of the
Company's increased borrowings to finance its oil and gas property acquisitions,
enhancements, development drilling and three dimensional seismic technology
activities.
Income tax expense of $519,000 and $21,900 for the three months ended
June 30, 1996 and 1995, respectively, reflect the net of deferred tax expense
and deferred tax benefits resulting from the tax calculations. For the three
months ended June 30, 1996, the Company had an effective total tax rate of
34%.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995:
During the six months ended June 30, 1996, the following operational
items changed relative to the corresponding six month period ended June 30,
1995.
Income before taxes increased $2,182,433 (1074%) to $2,385,607 primarily
due to a $3,403,162 (147%) increase in oil and gas revenues offset by a
$1,169,836 (72%) increase in total costs and expenses.
Net cash flow from operations, before working capital adjustments,
increased $2,885,372 (309%) to $3,817,404. Oil and gas revenues increased
$3,403,162 (147%) to $5,719,240 in 1996 compared to $2,316,078 in 1995.
The EBO sold in 1996 increased by 179,448 (94%) to 370,220 compared to 190,772
in 1995. The sales price per EBO increased 27% to $15.45 in 1996 compared
to $12.14 in 1995.
Costs and expenses increased $1,169,836 (72%) to $2,787,550 due to the
following:
1. Lease operating expense increased $393,255 (56%) to $1,098,690
primarily due to the aforementioned 94% increase in EBO's sold. The
operating expense per EBO decreased 20% to $2.97 in 1996 compared to $3.70
in 1995 because of increased production on certain recently completed wells
that are flowing.
2. General and administrative expense increased $36,086 (38%) to
$130,316 in 1996 primarily due to an increase in franchise taxes and general
corporate legal expense. Such increase represents $ .35 per EBO sold in 1996
compared to $ .49 per EBO in 1995. General and administrative costs are
expected to remain fairly stable with no material increases expected in any
particular category.
3. Public reporting, auditing and legal expense increased $37,556 (42%)
to $126,747 primarily due to increases in postage expense related to shareholder
communication and legal fees.
<PAGE 12>
4. Depreciation, depletion and amortization expense (DD&A) increased
$702,939 (96%) to $1,431,797 in 1996. The DD&A rate per EBO in 1996 is $3.87
compared to $3.82 in 1995.
Interest expense increased $75,394 (15%) to $593,674 because of the
Company's increased borrowings to finance its producing property acquisition,
enhancements, development drilling and three-dimensional seismic technology
activities. Interest expense decreased 41% per EBO sold in 1996 to $1.60
compared to $2.72 per EBO sold in 1995.
Income tax expense of $811,000 and $67,900 for the six months ended June
30, 1996 and 1995, respectively, reflect the net of deferred tax expense and
deferred tax benefits resulting from the tax calculations. For the six months
ended June 30, 1996, the Company had an effective total tax rate of 34%.
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders was held on May 15, 1996.
At the meeting, the following persons were elected to serve as Directors of
the Company for a term of one year expiring in 1997 and until their respective
successors are duly qualified and elected: (1) Thomas R. Cambridge, (2) Danny
H. Conklin, (3) Ernest R. Duke, (4) Myrle Greathouse, (5) Larry C. Oldham and
(6) Charles R. Pannill.
Set forth below is a tabulation of votes with respect to each nominee for
Director:
<TABLE>
<CAPTION>
NAME VOTES CAST FOR VOTES WITHHELD BROKER NON-VOTE
<S> <C> <C> <C>
Thomas R. Cambridge 11,434,598 16,546 --
Danny H. Conklin 11,434,938 16,206 --
Ernest R. Duke 11,429,128 22,016 --
Myrle Greathouse 11,434,398 16,746 --
Larry C. Oldham 11,434,738 16,406 --
Charles R. Pannill 11,434,048 17,096 --
</TABLE>
In addition to electing Directors, the stockholders of the Company also
voted upon and ratified the appointment of KPMG Peat Marwick LLP to serve as
the Company's inde- pendent public accountants for 1996.
Set forth below is a tabulation of votes with respect to the proposal to
ratify the appointment of the Company's independent public accountants:
<TABLE>
<CAPTION>
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS BROKER NON-VOTE
<C> <C> <C> <C>
11,423,503 1,560 26,081 --
</TABLE>
<PAGE 13)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan Agreement, dated July 1, 1996, between Parallel Petroleum
Corporation and Bank One, Texas, N.A.
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended June 30,
1996.
<PAGE 15>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PARALLEL PETROLEUM CORPORATION
Date: August 13, 1996 /s/ THOMAS R. CAMBRIDGE
------------------------------
THOMAS R. CAMBRIDGE,
CHIEF EXECUTIVE OFFICER
Date: August 13, 1996 /s/ LARRY C. OLDHAM
------------------------------
LARRY C. OLDHAM,
PRESIDENT AND
PRINCIPAL FINANCIAL OFFICER
<PAGE 15>
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
- ------ ----------------------
*10.1 Loan Agreement, dated July 1, 1996,
between Parallel Petroleum Corporation
and Bank One, Texas, N.A.
*27 Financial Data Schedule
- ---------------------
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 729,356
<SECURITIES> 0
<RECEIVABLES> 2,236,781
<ALLOWANCES> 28,130
<INVENTORY> 60,413
<CURRENT-ASSETS> 3,224,507
<PP&E> 37,466,069
<DEPRECIATION> 10,269,635
<TOTAL-ASSETS> 30,465,810
<CURRENT-LIABILITIES> 1,540,996
<BONDS> 15,068,621
<COMMON> 148,603
0
0
<OTHER-SE> 11,673,772
<TOTAL-LIABILITY-AND-EQUITY> 30,465,810
<SALES> 0
<TOTAL-REVENUES> 5,719,240
<CGS> 0
<TOTAL-COSTS> 2,787,550
<OTHER-EXPENSES> (47,116)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 593,199
<INCOME-PRETAX> 2,385,607
<INCOME-TAX> 811,000
<INCOME-CONTINUING> 1,574,607
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,574,607
<EPS-PRIMARY> .102
<EPS-DILUTED> .102
</TABLE>
<PAGE 1>
EXHIBIT 10.1
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is entered into this 1st day of
July, 1996 by and between PARALLEL PETROLEUM CORPORATION, a Delaware corporation
("Borrower"); and BANK ONE, TEXAS, N.A., a national banking association
("Lender").
Recitals
A. Borrower and NationsBank of Texas, N.A. (the "Prior Lender") entered
into that certain Second Restated Loan Agreement dated June 12, 1996 (the "Prior
Loan Agreement").
B. Contemporaneously with the execution hereof, the Prior Lender has
assigned to Lender all of the Prior Lender's interest in and under the Prior
Loan Agreement and the Prior Note (defined below).
C. Borrower has requested that Lender provide Borrower with a reducing
revolving line of credit facility in an amount of up to $30,000,000, actual
covenants herein contained and other good and valuable consideration, it is
hereby agreed between the parties as follows:
ARTICLE I
Definitions
1.1 Certain Defined Terms. For the purposes of this Agreement, the
following terms shall have the respective meanings assigned to them in this
section or in the section or recital referred to below:
<PAGE 2>
"Adjusted Eurodollar Rate" means, with respect to each particular
Eurodollar Portion and the associated Eurodollar Rate and Reserve Percentage,
the rate per annum calculated by Lender (rounded upwards, if necessary, to
the next higher 1/100th of 1%) determined on a daily basis
pursuant to the following formula:
AER = ER + EM
1.00 - RP
AER = Adjusted Eurodollar Rate
ER = Eurodollar Rate
RP = Reserve Percentage
EM = Eurodollar Margin
The Adjusted Eurodollar Rate shall change as the associated Reserve Percentage
changes.
"Advance" means any disbursement to or on behalf of Borrower under any of
the Loan Papers.
"Agreement": the preamble.
"Bank Liens" means Liens in favor of Lender, securing all or any portion of
the Obligation, including, without limitation, Rights in any of the Collateral
created in favor of Lender, whether by mortgage, pledge, hypothecation,
assignment, transfer or other granting or creation of Liens.
"Base Rate" means the fluctuating per annum rate of interest from time
to time in effect equal to the rate of interest as publicly announced by Lender
as its "Prime Rate." Such rate is set by Lender as a general rate of interest,
taking into account such factors as Lender may deem appropriate, it being
understood that many of Lender's commercial or other loans are priced in
relation to such rate, that it is not necessarily the lowest or best rate
actually charged to any customer and that Lender may make various commercial
or other loans at rates of interest having no relationship to such rate. If
Lender's Prime Rate changes after the date hereof, the Base Rate shall be
automatically increased or decreased, as the case may be, without prior notice
to Borrower from time to time as of the effective time of each change in
Lender's Prime Rate.
"Base Rate Portion" means that portion of the unpaid principal balance
of the Revolving Loan which is not made up of Eurodollar Portions.
"Borrower": the preamble.
"Borrowing Base": Section 3.1.
"Borrowing Base Redetermination Fee": Section 3.4.
"Business Day" means a day on which commercial banks are open for business
with the public in the State of Texas. Any Business Day in any way relating to
Eurodollar Portions (such as the day on which a Eurodollar Interest Period
begins or ends) must also be a day on which, in the judgment of Lender,
significant transactions in Dollars are carried out in the London interbank
market.
<PAGE 3>
"Cash Flow" means Borrower's Net Income for the most recent fiscal
quarter of Borrower, plus depreciation, depletion and other non-cash charges
during such fiscal quarter.
"Claims": Section 7.8.
"Collateral": Article IV.
"Commitment Fee": Section 2.3.
"Current Assets" of any person shall mean, as of any date, the current
assets that would be reflected on a balance sheet of such person prepared as
of such date in conformity with GAAP.
"Current Liabilities" of any person shall mean, as of any date, the
current liabilities that would be reflected on a balance sheet of such person
prepared as of such date in conformity with GAAP.
"Current Ratio" means, as of any date, the ratio of Borrower's Current
Assets (including, for purposes of this calculation, unused availability under
the Revolving Commitment) to its Current Liabilities (excluding, for purposes
of this calculation, current maturities of the Note).
"Debt Service Ratio" means, as of the end of each fiscal quarter of
Borrower, the ratio of Borrower's Cash Flow to the Total Monthly Commitment
Reductions.
"Deed of Trust" means one or more mortgages, deeds of trust, assignments
of production and security agreements and financing statements in favor of
Lender encumbering every interest of Borrower in every oil and gas property
owned by Borrower and selected by Lender to be encumbered as security for the
Obligation, including, without limitation, any such property consisting of
royalty interests, overriding royalty interests and/or reversionary rights
relating to either developed or undeveloped leasehold acreage, it being
specifically recognized that if any such interest selected is in a state
where a mortgage, deed of trust, assignment of production and security
agreement or financing statement is, or may be, ineffective, a document
appropriate for use in that state shall be required.
"Dollars" and "$" mean lawful money of the United States of America.
"ERISA": Section 6.10.
"Eurodollar Interest Period" means, with respect to each particular
Eurodollar Portion, a period of thirty (30), sixty (60) or ninety (90) days,
as specified in the Rate Election applicable thereto, beginning on and
including the date specified in such Rate Election (which must be a Business
Day), and ending thirty (30), sixty (60) or ninety (90) days thereafter,
provided that each Eurodollar Interest Period which would otherwise end on a
day which is not a Business Day shall end on the next succeeding Business Day
(unless such next succeeding Business Day is in the next calendar month, in
which case such Eurodollar Interest Period shall end on the immediately
preceding Business Day). No Eurodollar Interest Period may be elected for any
Eurodollar Portion which would extend past the Revolving Maturity Date.
<PAGE 4>
"Eurodollar Margin" means, with respect to each Eurodollar Portion of
the Revolving Loan, two and one-half percent (2-1/2%).
"Eurodollar Portion" means any portion of the unpaid principal balance
of the Revolving Loan which Borrower designates as such in a Rate Election.
"Eurodollar Rate" means, with respect to each particular Eurodollar
Portion for any Interest Period therefor, the rate of interest per annum at
which deposits in immediately available and freely transferrable funds in
Dollars are offered to Lender (at approximately 10:00 a.m. Dallas, Texas
time three Business Days prior to the first day of each Interest Period)
in the London interbank market for delivery on the first day of such Interest
Period in an amount equal to or comparable to the principal amount of the
Eurodollar Portion to which such Interest Period relates. Each determination
of the Eurodollar Rate by Lender shall, in the absence of error, be conclusive
and binding.
"Event of Default": Section 9.1.
"GAAP" shall mean those generally accepted accounting principles and
practices that are recognized as such by the American Institute of Certified
Public Accountants acting through its Accounting Principles Board or by the
Financial Accounting Standards Board (or any other appropriate board or
committee thereof), applied on a basis consistent with that of prior periods
so as to properly reflect the financial condition, results of operations and
cash flows of a person, except that any accounting principle or practice
required to be changed by the said Accounting Principles Board or Financial
Accounting Standards Board (or any other board or committee thereof) in order
to continue as a generally accepted accounting principle or practice may so
be changed and when so changed shall constitute generally accepted accounting
principles in accordance with the terms hereof.
"Highest Lawful Rate" means the maximum nonusurious rate of interest (or,
if the context so requires, an amount calculated at such rate) that Lender is
allowed to contract for, charge, take, reserve or receive under applicable
law after taking into account, to the extent required by applicable law, any
and all relevant payments or charges under the Loan Papers.
"Interest Period" means, with respect to any Eurodollar Portion, the
related Eurodollar Interest Period.
"Investments": Section 8.4.
"Lender": the preamble.
"Lien" means any lien, mortgage, security interest, charge, or encumbrance
of any kind, including, without limitation, the Rights of a vendor, lessor, or
similar party under any conditional sales agreement or other title retention
agreement or lease substantially equivalent thereto, any production payment,
and any other Right of, or arrangement with, any creditor to have his claim
<PAGE 5>
satisfied out of any property or assets, or the proceeds therefrom, prior to
the general creditors of the owner thereof.
"Loan Papers" means (i) this Agreement, (ii) any and all notes, mortgages,
deeds of trust, security agreements, financing statements, guaranties, and
other agreements, documents, certificates, letters and instruments ever
delivered or executed pursuant to, or in connection with, this Agreement, as
any of the same may hereafter be amended, supplemented or restated (including,
without limitation, the Note and the Deed of Trust), and (iii) any and all
future renewals and extensions or restatements of, or amendments or supplements
to, all or any part of the foregoing.
"Margin Regulations" means, as applicable, Regulations G, U and X of the
Board of Governors of the Federal Reserve System, as from time to time in
effect.
"Material Adverse Change" means any set of circumstances or events that
(i) will or could reasonably be expected to have any adverse effect upon the
validity, performance, or enforceability of any Loan Paper, (ii) is or could
reasonably be expected to be material and adverse to the financial condition
or business operations of Borrower, (iii) will or could reasonably be expected
to impair the ability of Borrower to fulfill its obligations under the terms and
conditions of the Loan Papers, or (iv) will or could reasonably be expected
to cause an Event of Default.
"Material Agreement" of any person means any material written or oral
agreement, contract, commitment, or understanding to which such person is a
party, by which such person is directly or indirectly bound, or to which any
asset of such person may be subject, which is not cancelable by such person
upon 30 days or less notice without liability for further payment other than
nominal penalty.
"Mineral Interests" means Rights, estates, titles, and interests in and to
oil, gas, sulphur, or other mineral (or any combination thereof) leases (and
all extensions, amendments, ratifications, and subleases thereof or thereunder)
and any mineral interests, royalty and overriding royalty interests,
production payment and net profits interests, mineral fee interests, and
rights therein, including, without limitation, any reversionary or carried
interests relating to the foregoing, together with Rights, titles, and interests
created by or arising under the terms of any unitization, communitization, and
pooling agreements or arrangements, and all properties, rights, and interests
covered thereby, whether arising by contract, by order, or by operation of
law, which now or hereafter include all or any part of the foregoing.
"Monthly Commitment Reduction": Section 2.1(b).
"Net Income" means Borrower's net income, determined in accordance with
GAAP.
"Net Worth" means, as of any date, an amount equal to Borrower's
stockholders' equity, as determined in accordance with GAAP.
"Note": Section 2.4(a).
<PAGE 6>
"Obligation" means all present and future indebtedness, obligations and
liabilities, and all renewals and extensions thereof, or any part thereof,
now or hereafter owed to Lender by Borrower, arising from, by virtue of, or
pursuant to any Loan Paper (including, without limitation, amounts owed to
Lender by Borrower on account of any letters of credit issued by Lender for
the account of Borrower), or otherwise, together with all interest accruing
thereon and reasonable costs, expenses, and attorneys' fees incurred in the
enforcement or collection thereof, whether such indebtedness, obligations,
and liabilities are direct, indirect, fixed, contingent, liquidated,
unliquidated, joint, several, or joint and several or were, prior to
acquisition thereof by Lender, owed to some other person.
"Prior Lender": Recital A.
"Prior Loan Agreement": Recital A.
"Prior Note" means that certain promissory note dated June 12, 1996, in
the original principal amount of $25,000,000 executed by Borrower and payable
to the order of Prior Lender.
"Rate Election" has the meaning given it in Section 2.10.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System, as from time to time in effect.
"Reserve Percentage" means, on any day with respect to each particular
Eurodollar Portion in a Tranche, the maximum reserve requirement, as determined
by Lender (including without limitation any basic, supplemental, marginal,
emergency or similar reserves), expressed as a decimal and rounded to the
next higher .01 of 1%, which would then apply to Lender under Regulation D
or successor regulations issued from time to time by the Board of Governors
of the Federal Reserve System with respect to "Eurocurrency liabilities"
(as such term is defined in Regulation D) equal in amount to Lender's
Eurodollar Portion in such Tranche, were Lender to have any such "Eurocurrency
liabilities". If such reserve requirement shall change after the date hereof,
the Reserve Percentage shall be automatically increased or decreased, as the
case may be, from time to time as of the effective time of each such change
in such reserve requirement.
"Revolving Commitment": Section 2.1(a).
"Revolving Loan" means a loan or loans made under the Revolving Commitment
pursuant to Section 2.1(a).
"Revolving Maturity Date" means July 1, 2001.
"Rights" means rights, remedies, powers, privileges and benefits.
"Subsidiary" means any corporation fifty percent (50%) or more of the
Voting Shares of which is owned, directly or indirectly, by Borrower.
"Taxes" has the meaning given it in Section 2.14.
<PAGE 7>
"Total Monthly Commitment Reductions" means the sum of the Monthly
Commitment Reductions during the most recent fiscal quarter of Borrower.
"Tranche" has the meaning given it in Section 2.10.
"Voting Shares" of any corporation shall mean outstanding shares of
capital stock of any class or classes (however designated) having ordinary
voting power for the election of at least a majority of the members of the
Board of Directors (or other governing body) of such corporation, other than
shares having such power only by reason of the happening of a contingency.
1.2 Other Definitional Provisions.
(a) All terms defined in this Agreement shall have the above
described meanings when used in any other Loan Paper or in any certificate,
report or other document made or delivered pursuant to this Agreement, unless
same shall otherwise expressly require.
(b) Terms used herein in the singular shall import the plural and
vice versa.
(c) Terms not specifically defined herein shall have the meanings
accorded them under GAAP, customary oil and gas industry practices or the Texas
Uniform Commercial Code, as appropriate.
(d) The words "hereof," "herein," "hereto," "hereunder" and similar
terms when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement.
ARTICLE II
Revolving Loan
2.1 Revolving Commitment.
(a) Subject to the terms and conditions hereof, during the period
beginning on the date hereof and ending on the Revolving Maturity Date, Lender
agrees to extend to Borrower a revolving line of credit which shall not exceed
at any time outstanding the lesser of (i) $30,000,000, or (ii) the Borrowing
Base from time to time in effect (such lesser amount being referred to herein
as the "Revolving Commitment"). Subject to the foregoing limitations and the
requirements set forth herein and in the Note, Borrower may borrow, repay, and
reborrow hereunder during the period beginning on the date hereof and ending
on the Revolving Maturity Date. Notwithstanding any other provisions of this
Agreement, no Advance shall be required to be made hereunder if any Event of
Default has occurred and is continuing.
(b) The Revolving Commitment shall be reduced as of the first day
of each month by an amount determined by Lender pursuant to Section 3.2 hereof
(the "Monthly Commitment Reduction"). Subject to the terms of Section 3.2
<PAGE 8>
hereof, the Monthly Commitment Reduction shall be $-0- per month from the date
hereof until October 1, 1996, the next scheduled redetermination of the
Borrowing Base.
(c) Borrower may at any time during the Revolving Loan upon at least
one (1) Business Day's notice in writing to Lender reduce (in $100,000 integer
multiples) or terminate the Revolving Commitment. If the Revolving Commitment
is reduced, Lender shall thereafter have no obligation to make any Advance
that would result in the Revolving Loan exceeding the Revolving Commitment as
so reduced; if the Revolving Commitment is terminated, no further Advance
shall be made pursuant to this Agreement. Notwithstanding anything to the
contrary contained herein, (i) once reduced or terminated, the Revolving
Commitment may not be increased or reinstated except upon the mutual written
agreement of Borrower and Lender; and (ii) Borrower shall not reduce the
Revolving Commitment to an amount that is less than the Revolving Loan on
the effective date of such reduction.
2.2 Manner of Borrowing.
(a) Each request by Borrower to Lender for an Advance shall be in
the form of Exhibit 2.2 hereto and shall specify the aggregate amount of such
requested Advance and the requested date of such Advance. Borrower shall
furnish to Lender each request for Advance not later than 10:00 a.m. Midland,
Texas time, (i) one (1) Business Day prior to the requested borrowing date
(which must be a Business Day) in the case of Advances to be made as Base
Rate Portions, and (ii) three (3) days prior to the requested borrowing date
(which must be a Business Day) in the case of Advances to be made as Eurodollar
Portions; provided that, any Advance to be made as a Eurodollar Portion shall
require, in addition, a Rate Election as set forth in Section 2.10. Subject
to Section 2.10, each Advance shall be in the minimum amount of $50,000 or
the unadvanced portion of the Commitment, whichever is less.
(b) Upon fulfillment of all applicable conditions set forth in
Section 5.2 hereof (and assuming the prior satisfaction of all conditions
pursuant to Section 5.1 hereof), Lender shall before 2:00 o'clock p.m. (Midland,
Texas time) on the requested borrowing date, pay or deliver each Advance to or
upon the order of Borrower at the principal banking office of Lender in Midland,
Texas in immediately available funds.
2.3 Commitment Fee. In addition to the payments provided for in the Note,
Borrower shall pay to Lender a revolving credit loan commitment fee at the rate
of one-quarter percent (1/4%) per annum on the difference between the Revolving
Commitment and the average daily amount of the Revolving Loan for each calendar
quarter (or portion thereof) during which the Revolving Commitment is in effect.
Such fee shall be payable on the fifteenth (15th) day following each such
calendar quarter, beginning October 15, 1996. The parties acknowledge and
agree that the commitment fees payable hereunder are bona fide commitment fees
and are intended as reasonable compensation to Lender for committing to make
funds available to Borrower as described herein and for no other purpose.
Upon the effective date of a change in the Revolving Commitment (whether
due to a reduction of the Revolving Commitment pursuant to Section 2.1(b) or
2.1(c), or a change in the Borrowing Base pursuant to Section 3.2), the
commitment fee payable pursuant to this Section 2.3 shall be calculated on
<PAGE 9>
the basis of the amount of the Revolving Commitment, as so changed. Upon
the effective date of a termination of the Revolving Commitment (pursuant to
Section 2.1(c)), Borrower shall have no further liability for such commitment
fee (except for that portion of the quarter prior to termination of the
Revolving Commitment).
2.4 Note.
(a) The Advances made by Lender under the Revolving Loan shall be
evidenced by a promissory note (the "Note"), which shall be (i) dated as of
the date hereof, (ii) in the principal amount of $30,000,000, and (iii) in
the form of Exhibit 2.4 hereto with blanks appropriately completed in conformity
herewith. Notwithstanding the principal amount of the Note as stated on the
face thereof, the amount of principal actually owing on the Note at any given
time shall be the aggregate of all Advances theretofore made to Borrower under
the Revolving Loan, less all payments of principal theretofore actually received
by Lender and applied to the Note.
(b) It is expressly agreed that the Note is given, to the extent of
$15,068,621.09, in renewal and rearrangement, but not in extinguishment or
novation, of the unpaid principal balance of the Prior Note.
2.5 Principal Payments. The principal of the Note shall be due and
payable on the Revolving Maturity Date, unless earlier due in whole or in part
pursuant to the mandatory prepayment requirements of Section 3.5 or the other
terms hereof.
2.6 Interest Rate; Interest Payments. The unpaid principal balance of
the Note shall bear interest from time to time and interest on the Note shall
be payable, as follows:
(a) Borrower agrees to pay interest on the Note calculated on the
basis of the actual days elapsed in a year consisting of 365 or, if appropriate,
366 days with respect to the unpaid principal amount of each Base Rate Portion
during the term of the Note until maturity (whether by acceleration or
otherwise), at a varying rate per annum equal to the lesser of (i) the Highest
Lawful Rate, or (ii) the Base Rate. Subject to the provisions of this Agreement
and to prepayment, the principal of the Note representing Base Rate Portions
shall be due and payable as specified in Section 2.5 hereof and the interest
in respect of each Base Rate Portion shall be due and payable monthly on the
1st day of each month, commencing August 1, 1996. Past due principal and, to
the extent permitted by law, past due interest in respect to each Base Rate
Portion, shall bear interest, payable on demand, at a rate per annum equal to
the Highest Lawful Rate.
(b) Borrower agrees to pay interest calculated on the basis of a
year consisting of 360 days with respect to the unpaid principal amount of
each Eurodollar Portion during the term of the Note until maturity (whether
by acceleration or otherwise), at a varying rate per annum equal to the
lesser of (i) the Highest Lawful Rate, or (ii) the applicable Adjusted
Eurodollar Rate during the related Eurodollar Interest Period. Subject to
the provisions of this Agreement with respect to prepayment, the principal
<PAGE 10>
of the Note representing Eurodollar Portions shall be payable as specified
in Section 2.5 hereof and the interest with respect to each Eurodollar Portion
shall be due and payable on the day which the related Eurodollar Interest
Period ends. Past due principal and, to the extent permitted by law, past
due interest in respect to each Eurodollar Portion, shall bear interest, payable
on demand, at a rate per annum equal to the Highest Lawful Rate.
2.7 Capital Adequacy. If at any time after the date hereof, and from
time to time, any law, rule, regulation or treaty now existing or hereafter
promulgated regarding capital adequacy, or any adoption thereof, ruling thereon,
change therein, or interpretation thereof now existing or hereafter made by any
governmental authority, central bank or comparable agency regarding capital
adequacy, or compliance by Lender with any request, directive, or requirement
now existing or hereafter imposed by any governmental authority, central bank
or comparable agency regarding capital adequacy (whether or not having the force
of law), shall result in Lender incurring a reduction in the rate of return on
Lender's capital as a consequence of Lender's obligations hereunder to a level
below that which Lender otherwise could have achieved in an amount deemed by
Lender to be material (and Lender may, in determining such amount, utilize such
assumptions and allocations of costs and expenses as Lender shall deem
reasonable and may use any reasonable averaging or attribution method), then,
Lender may, from time to time, notify Borrower and deliver to Borrower a
certificate setting forth in reasonable detail the calculation of the amount
necessary to compensate Lender for the reductions incurred. In such event,
Borrower agrees that it shall, within thirty (30) days, either (i) pay such
amount to Lender, or (ii) renegotiate the interest rate on the Note to a rate
mutually acceptable to Borrower and Lender. Failing Borrower's payment of
such amount pursuant to clause (i) above or the renegotiation of the interest
rate pursuant to clause (ii) above, Borrower agrees that it shall, within
ninety (90) days thereafter, pay the Obligation in full and terminate this
Agreement.
2.8 Prepayments. Borrower may prepay any Base Rate Portion, in whole
or in part, without penalty or premium, provided, however, that the Revolving
Commitment shall be terminated if the unpaid principal balance of the Note is
at any time reduced to less than $1,000. No prepayment of any Eurodollar
Portion or any part thereof shall be permitted prior to the last day of the
current Interest Period therefor without the prior consent of Lender; provided,
that if Lender determines that it may not lawfully maintain a Eurodollar Portion
to the last day of the current Interest Period therefor, Borrower shall prepay
such Eurodollar Portion on the date required by Lender. If there is a permitted
prepayment of any Eurodollar Portion prior to the last day of the current
Interest Period therefor, whether by consent or requirement of Lender (including
pursuant to Section 3.5 hereof) or because of acceleration or otherwise,
Borrower shall, within fifteen (15) days of any request by Lender, pay to
Lender any loss or expense which Lender may incur or sustain as a result of
any such prepayment. A statement as to the amount of such loss or expense,
prepared in good faith and in reasonable detail by Lender and submitted by
Lender to Borrower, shall be conclusive and binding absent manifest error in
computation. Calculation of all amounts payable to Lender under this Section
2.8 shall be made as though Lender shall have actually funded or committed to
fund the relevant Eurodollar Portion through the purchase of an underlying
deposit in an amount equal to the amount of such portion and having a maturity
comparable to the current Interest Period for such Eurodollar Portion;
provided, however, that Lender may fund any Eurodollar Portion in any manner
it sees fit and the foregoing assumption shall be utilized only for the purpose
of calculation of amounts payable under this Section 2.8.
2.9 Manner and Application of Payments. All payments of principal and
interest on the Note shall be made by Borrower to Lender before 1:30 o'clock
<PAGE 11>
p.m. (Midland, Texas time), in lawful money of the United States of America
and in immediately available funds at Lender's principal banking office in
Midland, Texas. In any case where a payment of principal or interest on the
Note, or any commitment or other fee, is due on a day other than a Business
Day, the maturity thereof shall be extended to the next succeeding Business
Day, but interest shall continue to accrue until the payment is in fact made.
All payments and prepayments on the Obligation, including proceeds from the
exercise of any Rights under the Loan Papers or proceeds of any of the
Collateral, shall be applied to the Obligation in the order deemed appropriate
by Lender, but Lender shall always retain the right to apply same in the
following order: (i) to expenses for which Lender shall not have been reimbursed
under the Loan Papers and then to all indemnified amounts due Lender under
the terms of the Loan Papers; (ii) to accrued and unpaid interest on the Note;
(iii) to Base Rate Portions of the Loan; (iv) to Eurodollar Portions of the
Loan; and (v) to the remaining Obligation. Subject to the foregoing, payments
of principal of the Note shall be applied to the Eurodollar Portions as
Borrower shall select; provided, however, that Borrower shall select Eurodollar
Portions to be repaid subject to the terms of Section 2.8 hereof, and in a
manner designed to minimize the consequential loss to Lender, if any, resulting
from such payments; and provided further that, if Borrower shall fail to select
the Eurodollar Portions to which such payments are to be applied, or if an
Event of Default has occurred and is continuing at the time of such payment,
then Lender shall be entitled to apply the payment to such Eurodollar Portions
in the manner it shall deem appropriate.
2.10 Rate Elections. Borrower may from time to time designate all or any
portions of the Revolving Loan (including any yet to be made Advances which are
to be made prior to or at the beginning of the designated Interest Period but
excluding any portions of the Revolving Loan which are required to be repaid
prior to the end of the designated Interest Period) as a "Tranche", which term
refers to a set of Eurodollar Portions with identical Interest Periods. Lender
shall not be required to give effect to such election during the continuance
of an Event of Default, and Borrower may make such an election with respect
to already existing Eurodollar Portions only if such election will take effect
at or after the termination of the Interest Period applicable thereto. Each
election by Borrower of a Tranche shall:
(a) Be made in writing in the form and substance of Exhibit 2.10
attached hereto, duly completed, herein called a "Rate Election";
(b) Specify the aggregate amount of the Revolving Loan which Borrower
desires to designate as such Tranche, the first day of the Interest Period which
is to apply thereto, and the length of such Interest Period; and
(c) Be received by Lender not later than 10:00 a.m. Midland, Texas
time, on the third Business Day preceding the first day of the specified
Interest Period.
Each Rate Election shall be irrevocable. Borrower may make no Rate
Election which does not specify an Interest Period complying with the definition
of "Eurodollar Interest Period" in Section 1.1, and the aggregate amount of
the Tranche elected in any Rate Election must be $1,000,000 or a higher
integral multiple of $100,000. Upon the termination of each Interest Period
the portion of the Revolving Loan within the related Tranche shall, unless
the subject of a new Rate Election then taking effect, automatically become a
part of the Base Rate Portion of the Revolving Loan and become subject to all
provisions of the Loan Papers governing such Base Rate Portion. Borrower
shall have no more than four (4) Tranches in effect at any time.
<PAGE 12>
2.11 Increased Cost of Eurodollar Portion. If any applicable domestic or
foreign law, treaty, rule, directive or regulation (whether now in effect or
hereinafter enacted or promulgated, including Regulation D) or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not having the
force of law):
(a) shall change the basis of taxation of payments to Lender of any
principal, interest, or other amounts attributable to any Eurodollar Portion of
the Revolving Loan, or otherwise due under this Agreement in respect of any
Eurodollar Portion of the Revolving Loan (other than taxes imposed on the
overall net income of Lender or any lending office of Lender by any jurisdiction
in which Lender or any such lending office is located);
(b) shall change, impose, modify, apply or deem applicable any
reserve, special deposit or similar requirements in respect of any Eurodollar
Portion (excluding those for which Lender is fully compensated pursuant to
adjustments made in the definition of Adjusted Eurodollar Rate) or against
assets of, deposits with or for the account of, or credit extended by, Lender;
or
(c) shall impose on Lender or the London interbank market any other
condition affecting any Eurodollar Portion;
and the result of any of the foregoing (a) through (c) is to (1) increase the
cost to Lender of funding or maintaining any Eurodollar Portion, or (2) to
reduce the amount of any sum receivable by Lender in respect of any Eurodollar
Portion by an amount reasonably deemed by Lender to be material; then (i)
Lender shall promptly notify Borrower in writing of the happening of such
event, (ii) Borrower shall thereafter upon demand pay to Lender such additional
amount or amounts as will compensate Lender for such additional cost or
reduction, subject to the provisions of Section 2.13, and (iii) Borrower may
elect, by giving to Lender not less than three (3) Business Days' notice, to
convert all (but not less than all) of any such Eurodollar Portion into a
part of the Base Rate Portion, subject to the provisions of Section 2.13.
2.12 Availability. If (a) any change in applicable laws, treaties, rules
or regulations or in the interpretation or administration thereof in any
jurisdiction whatsoever, domestic or foreign, shall make it unlawful or
impracticable for Lender to fund or maintain Eurodollar Portions, or shall
materially restrict the authority of Lender to purchase or take offshore
deposits of dollars (i.e., "eurodollars"), or (b) Lender determines that
matching deposits appropriate to fund or maintain any Eurodollar Portion
are not available to it, or (c) Lender determines that the formula for
calculating the Adjusted Eurodollar Rate does not fairly reflect the cost to
Lender of making or maintaining loans based on such rate, then, upon notice
by Lender to Borrower, Borrower's right to elect Eurodollar Portions shall be
suspended to the extent and for the duration of such illegality,
impracticability, restriction or condition, and all Eurodollar Portions
(or portions thereof) which are then outstanding or are then the subject of
any Rate Election and which cannot lawfully or practicably be maintained or
funded shall immediately become or remain part of the Base Rate Portions of
<PAGE 13>
the Loan, subject to the provisions of Section 2.13. Borrower agrees to
indemnify Lender and hold it harmless against all costs, expenses, claims,
penalties, liabilities and damages which may result from any such change in
law, treaty, rule, regulation, interpretation or administration.
2.13 Funding Losses. In addition to its other obligations hereunder,
Borrower will indemnify Lender against, and reimburse Lender on demand for,
any loss or expense incurred or sustained by Lender, as a result of (a) any
payment or prepayment (whether authorized or required hereunder or otherwise)
of all or a portion of a Eurodollar Portion on a day other than the day on
which the applicable Interest Period ends, (b) any payment or prepayment
(whether required hereunder or otherwise) of the Revolving Loan made after
the delivery, but before the effective date, of a Rate Election, if such
payment or prepayment prevents such Rate Election from becoming fully effective,
(c) the failure of any Advance to be made or of any Rate Election to become
effective due to any condition precedent to an Advance not being satisfied,
due to the inability of Lender (acting reasonably and in accordance with
Section 2.12) to determine the Adjusted Eurodollar Rate for a Eurodollar
Portion, or due to any other action or inaction of Borrower, or (d) any
conversion (whether authorized or required hereunder or otherwise) of all
or any portion of any Eurodollar Portion into a Base Rate Portion on a day
other than the day on which the applicable Interest Period ends.
2.14 Taxes. All payments by Borrower of principal of, and interest on,
the Revolving Loan, and all other amounts payable hereunder shall be made free
and clear of and without deduction for any present or future income, excise,
stamp or franchise taxes and other taxes, fees, duties, withholdings or other
charges of any nature whatsoever imposed by any taxing authority, but excluding
franchise taxes and taxes imposed on or measured by Lender's net income or
receipts (such non-excluded items being called "Taxes"). In the event that
any withholding or deduction from any payment to be made by Borrower hereunder
is required in respect of any Taxes pursuant to any applicable law, rule or
regulation, then, Borrower will:
(a) pay directly to the relevant authority the full amount required
to be so withheld or deducted;
(b) promptly forward to Lender an official receipt or other
documentation satisfactory to Lender evidencing such payment to such authority;
and
(c) pay to Lender such additional amount(s) as is necessary to
ensure that the net amount actually received by Lender will equal the full
amount such Lender would have received had no such withholding or deduction
been required.
If any Taxes are directly asserted against Lender with respect to any payment
received by Lender hereunder, Lender may pay such Taxes and Borrower will
promptly pay such additional amounts to Lender (including any penalties,
interest or expenses) as is necessary in order that the net amount received
by such person after the payment of such Taxes (including any taxes on such
additional amount) shall equal the amount such person would have received had
no such Taxes been asserted. If Borrower fails to pay any Taxes when due to
the appropriate taxing authority or fail to remit to Lender the required
receipts or other required documentary evidence, Borrower shall indemnify
Lender for any Taxes, interest or penalties that may become payable by Lender
as a result of any such failure.
<PAGE 14>
ARTICLE III
Borrowing Base and Required Prepayments Under Note
3.1 Borrowing Base. The "Borrowing Base" is initially set at the sum of
$17,000,000.00 but shall be subject to redetermination as further provided in
this Article.
3.2 Redeterminations of Borrowing Base and Monthly Commitment Reduction.
Lender shall redetermine the Borrowing Base and the Monthly Commitment Reduction
semi-annually, on or about October 1 and April 1 of each year, beginning October
1, 1996. Lender may require a redetermination of the Borrowing Base and Monthly
Commitment Reduction at any time in its sole discretion. In addition, Borrower
may request that Lender redetermine the Borrowing Base and Monthly Commitment
Reduction at any time, and Lender agrees to respond to each such request within
thirty (30) days; provided, however, that Borrower may request no more than one
Borrowing Base and Monthly Commitment Reduction redetermination during the
six-month period between each scheduled Borrowing Base redetermination.
Promptly following each redetermination of the Borrowing Base, Lender shall
notify Borrower in writing as to (a) the redetermined Borrowing Base assuming
a $-0- Monthly Commitment Reduction and (b) the redetermined Borrowing Base
assuming a Monthly Commitment Reduction determined by Lender. Following each
such notification by Lender, Borrower shall have five (5) Business Days to
elect either the Borrowing Base with a $-0- Monthly Commitment Reduction or
the Borrowing Base with the Monthly Commitment Reduction determined by Lender.
In connection with each Borrowing Base redetermination, upon Lender's receipt
of Borrower's written Borrowing Base election within said five-day period, the
Borrowing Base and Monthly Commitment Reduction selected by Borrower shall
become effective. In the event Borrower should fail to provide Lender with a
written Borrowing Base election within said five-day period, then at the end
of said five-day period the redetermined Borrowing Base with a $-0- Monthly
Commitment Reduction shall be deemed to have been selected by Borrower. Until
a change in the amount of the Borrowing Base or the Monthly Commitment Reduction
as provided above, the Borrowing Base and the Monthly Commitment Reduction shall
remain unchanged.
Borrower shall furnish to Lender, no later than thirty (30) days prior to
each redetermination date hereunder (or within thirty (30) days after receipt
of notice from Lender that it has elected to make a non-scheduled Borrowing Base
redetermination), as directed, by Lender, such information as Lender may
request, in form and substance acceptable to Lender, requisite to Lender's
redetermination of the Borrowing Base.
3.3 Standards for Redetermination. All Borrowing Base and Monthly
Commitment Reduction redeterminations shall be made by Lender in the exercise
of its sole discretion in accordance with its customary practices and standards
for loans in similar amounts to borrowers similarly situated, at the time and
under the circumstances then prevailing.
3.4 Borrowing Base Redetermination Fee. In addition to the payments
provided for in the Note, Borrower shall pay to Lender as a Borrowing Base
redetermination fee the sum of $750 at the time Lender provides the notice
required by Section 3.2 and at any time that Borrower requests a non-scheduled
Borrowing Base redetermination pursuant to Section 3.2; provided, however, that
<PAGE 15>
Borrowing Base redetermination fees payable by Borrower hereunder shall not
exceed $3000 during any calendar year. The parties acknowledge and agree
that the Borrowing Base redetermination fees payable hereunder are intended
as reasonable compensation to Lender for its efforts in redetermining the
Borrowing Base during the term of the Revolving Loan and for no other purpose.
3.5 Mandatory Increase in Collateral or Prepayment of Principal of the
Note. In the event that the Obligation shall, at any time, be in excess of
the Revolving Commitment, Borrower shall, at Borrower's option, either (i)
within thirty (30) days thereafter, by instruments satisfactory in form and
substance to Lender, provide Lender with additional collateral with value in
amounts satisfactory to Lender, in its sole discretion, in order to increase
the Borrowing Base by an amount at least equal to such excess, or (ii) within
thirty (30) days thereafter, prepay the principal of the Note (together with
accrued interest on the principal amount so prepaid) in an amount at least
equal to such excess.
ARTICLE IV
Security and Assignment
To secure full and complete payment and performance of the Obligation,
Borrower hereby grants and conveys to and creates in favor of Lender Bank
Liens in, to and on all of the following items and types of property (referred
to collectively herein as the "Collateral"), all as more particularly described
in the Loan Papers:
(a) all present and future interest now owned or hereafter acquired
by Borrower in the Mineral Interests identified in the Deed of Trust, together
with all proceeds of production therefrom;
(b) all present and future increases, profits, combinations,
reclassifications, improvements and products of, accessions, attachments, and
other additions to, tools, parts and equipment used in connection with, and
substitutes and replacements for, any of the Collateral;
(c) all cash and noncash proceeds and other Rights arising from or
by virtue of, or from the voluntary or involuntary sale, lease or other
disposition of, or collections with respect to, or insurance proceeds payable
with respect to, or proceeds payable by virtue of warranty or other claims
against manufacturers of, or claims against any other person with respect to,
any of the Collateral;
(d) all present and future security for the payment to Borrower for
any of the Collateral;
(e) all goods which gave or will give rise to any of the Collateral
or are evidenced, identified or represented therein or thereby; and
(f) all certificates of title, manufacturer's statements of origin,
or other documents, accounts and chattel paper arising from or related to any of
the Collateral.
<PAGE 16>
All Bank Liens created in favor of Prior Lender pursuant to the Prior
Loan Agreement are hereby ratified, renewed and extended in favor of Lender,
without lapse or interruption of perfection or priority.
ARTICLE V
Conditions Precedent
5.1 Renewal and Extension. The obligation of Lender to accept the Note
in renewal and rearrangement of the Prior Note shall be subject to satisfaction
of each of the following conditions precedent:
(a) There shall have been executed, where appropriate, and delivered
by Borrower (and/or any other requisite party thereto) (i) the documents listed
on Schedule 5.1 hereto, all of which shall be in form and substance satisfactory
to Lender and its counsel, and (ii) such other documents or instruments as
Lender may reasonably require.
(b) All requirements of notice necessary to perfect each Bank Lien
shall have been accomplished or arrangements made therefor to the satisfaction
of Lender and its counsel.
(c) Lender shall have received from Borrower's legal counsel a
favorable legal opinion in form and substance satisfactory to Lender and its
counsel respecting the matters set forth in Section 6.1, 6.2, 6.5 and 6.15
hereof.
(d) No Material Adverse Change shall have occurred in the financial
condition, assets or business prospects of Borrower since March 31, 1996.
(e) All fees due and payable to the Prior Lender and all accrued
and unpaid interest on the Prior Note shall have been paid up to the date
hereof.
(f) Borrower shall have paid to Lender a Facility Fee in the amount
of $25,000.
(g) Lender shall have received an Assignment of Notes, Liens and
Security Interests from the Prior Lender in form and substance satisfactory
to Lender.
(h) Lender shall have received from Borrower acceptable title
information covering up to ninety percent (90%) of the engineered value of
Borrower's Mineral Interests.
5.2 All Advances. The obligation of Lender to make any Advance hereunder
shall be subject to satisfaction of each of the following conditions precedent:
(a) An authorized individual shall have requested such Advance in
accordance with the requirements of Section 2.2(a) hereof.
<PAGE 17>
(b) No Event of Default shall have occurred that has not been waived
in writing by Lender, and there shall exist no condition or event that, with
the giving of notice or lapse of time or both, would constitute an Event of
Default.
(c) Borrower shall have observed, performed and complied with all
covenants, agreements, duties and obligations contained in the Loan Papers.
ARTICLE VI
Representations and Warranties
In order to induce Lender to enter into this Agreement, Borrower represents
and warrants to Lender as of the date hereof, which representations and
warranties shall survive the delivery of the Note, as follows:
6.1 Existence and Authority. Borrower is (i) a corporation duly
organized, legally existing and in good standing under the laws of the State
of Delaware, and (ii) duly qualified as a foreign corporation and in good
standing in the State of Texas. Except to the extent that the failure to
qualify would not cause or result in a Material Adverse Change, there are no
other states or jurisdictions wherein Borrower's operations, transaction of
business or ownership of property makes such qualification necessary.
6.2 Powers. Borrower is duly authorized and empowered to create and issue
the Note and to execute and deliver this Agreement, the other Loan Papers and
all other instruments referred to or mentioned herein, and all action (corporate
or otherwise) on Borrower's part requisite for the due creation, issuance and
delivery of the Note and the due execution and delivery of this Agreement and
the other Loan Papers has been duly and effectively taken. This Agreement is,
and the other Loan Papers when duly executed and delivered will be, legal,
valid and binding obligations of Borrower enforceable in accordance with their
terms (subject to any applicable bankruptcy, insolvency or other laws generally
affecting the enforcement of creditors' rights). The Loan Papers do not
violate any provisions of Borrower's articles of incorporation or bylaws or of
any contract, partnership or other agreement, law or regulation to which
Borrower is subject, and the same do not require the consent or approval of
any other person or entity, including without limitation, any regulatory
authority or governmental body of the United States, of any state or of any
political subdivision of the United States or of any State.
6.3 Financial Statements. The financial statements of Borrower for the
three (3) months ended March 31, 1996 which have been delivered to Lender,
are complete and correct, have been prepared in conformity with GAAP, and
fairly present the financial condition and results of operations of Borrower
as of the dates and for the periods stated. No Material Adverse Change in
the financial condition of Borrower has occurred since March 31, 1996.
6.4 Liabilities. As of the date hereof, Borrower has no material
liabilities, direct or contingent, other than those set forth in the financial
statements of Borrower referred to in Section 6.3 hereof. Borrower knows of
no fact, circumstance, act, condition or development that will or could cause
a Material Adverse Change.
<PAGE 18>
6.5 Litigation. Borrower is not involved in, nor is aware of the threat
of, any material litigation, nor are there any outstanding or unpaid judgments
against Borrower.
6.6 Taxes. All tax returns required to be filed by Borrower in all
jurisdictions have been filed, and all taxes, assessments, fees and other
governmental charges upon Borrower or upon any of its property, income or
franchises, which are due and payable, have been paid, or adequate reserves
determined in conformity with GAAP have been provided for payment thereof.
6.7 Purpose of Loan. The proceeds of any Advances (a) are not and will
not be used directly or indirectly for the purpose of purchasing or carrying,
or for the purpose of extending credit to others for the purpose of purchasing
or carrying, any "margin stock" as that term is defined in Regulation U of the
Board of Governors of the Federal Reserve System, as amended; and (b) will be
otherwise used for lawful purposes.
6.8 Properties; Liens.
(a) With regard to the Mineral Interests included in the Deed of
Trust, (i) Borrower has good and marketable title to all such Mineral Interests,
free and clear of all Liens except Liens permitted under Section 8.1 hereof,
and has full authority to create Bank Liens thereon; and (ii) all such Mineral
Interests are valid, subsisting and in full force and effect, and all rentals,
royalties and other amounts due and payable in respect thereof have been duly
paid.
(b) Borrower has good and marketable title to all of its other
respective properties reflected on the financial statements referred to in
Section 6.3 hereof, and, except for the Liens permitted under Section 8.1,
there is no Lien on any asset of Borrower.
(c) Subject to the Liens permitted under Section 8.1 and Liens
that neither materially detract from the marketability of the property nor
impair the use of the property, and except as may be limited or otherwise
affected by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, upon execution, delivery and recording, or filing,
as appropriate, the Loan Papers will be effective to create in favor of Lender
a legal, valid and continuing first Lien on the property (real and personal,
tangible and intangible) described therein, prior and superior to all other
existing or future Liens, and, upon the filing of the appropriate notice
documents, will be enforceable as such against creditors and purchasers from
Borrower, and no other filings, recordings or other actions are necessary or
desirable in order to establish, preserve, protect and perfect such Lien in
favor of Lender as a valid and perfected first Lien on such property, except
a continuation statement may be required under the Uniform Commercial Code.
(d) None of the Collateral is or will be subject to a gas balancing
arrangement under which a material imbalance exists with respect to which
imbalance Borrower is in an overproduced status and is required to (i) permit
one or more third parties to take a portion of the production attributable to
such Collateral without payment (or without full payment) therefor, and/or (ii)
make payment in cash in order to correct such imbalance.
6.9 Material Agreements. Except for the Loan Papers, the Material
Agreements described on Schedule 6.9, agreements, documents and instruments
giving rise to Mineral Interests, farmout agreements, gas contracts and
<PAGE 19>
operating and joint operating agreements related to any Mineral Interests,
there are no Material Agreements of Borrower. The performance by Borrower
under any Material Agreement will not cause a Material Adverse Change.
Borrower is not, nor will the execution, delivery and performance of and
compliance with the terms of the Loan Papers cause Borrower to be, in default
(nor has any potential default occurred) under any Material Agreement, any
agreement, document or instrument giving rise to Mineral Interests, farmout
agreements, gas contracts or any operating or joint operating, or unitization
agreements related to Mineral Interests, other than in each case such defaults
or potential defaults which could not, individually or collectively, cause a
Material Adverse Change. A default by Borrower under any operating or joint
operating agreement related to any Mineral Interests it owns will not result
in any loss or diminution of any other Mineral Interests it owns.
6.10 ERISA. All plans maintained by Borrower are in compliance with all
funding and other requirements of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and none have been terminated or have accrued
any funding deficiency for which Borrower would be liable under said statute.
6.11 Location of Records. The records of Borrower concerning the
Collateral are kept at the following location: 110 North Marienfeld, Suite
465, Midland, Texas 79701.
6.12 Permits and Franchises, Etc. Borrower has all rights, licenses,
permits, franchises, patents, patent rights, trademarks, trademark rights and
copyrights that are required in order for it to conduct its business as now
conducted without known conflict with the rights of others. Borrower is not
aware of any fact or condition that might cause any of such rights not to be
renewed in due course.
6.13 Subsidiaries. Borrower presently has no Subsidiary or owns any stock
in any other corporation or association. Borrower is not a member of any
general or limited partnership, joint venture or association of any type
whatsoever except associations, joint ventures or other relationships (a)
that are established pursuant to a standard form operating agreement or similar
agreement or that are partnerships for purposes of federal income taxation
only, (b) that are not corporations or partnerships (or subject to the Uniform
Partnership Act) under applicable state law, and (c) whose businesses are
limited to the exploration, development and operation of oil, gas or mineral
properties and interests owned directly by the parties in such associations,
joint ventures or relationships.
6.14 Hazardous Wastes and Substances. Borrower and its properties are
in compliance with applicable state and federal environmental laws and
regulations and Borrower is not aware of and has not received any notice of
any violation of any applicable state or federal environmental law or regulation
and, except as previously disclosed in writing to Lender, there has not
heretofore been filed any complaint, nor commenced any administrative procedure,
against Borrower or any of its predecessors, alleging a violation of any
environmental law or regulation. Except in substantial compliance with
relevant environmental laws, Borrower has not installed, used, generated,
stored or disposed of any hazardous waste, toxic substance, asbestos or
related material ("Hazardous Materials") on its properties. For the purposes
<PAGE 20>
of this Agreement, Hazardous Materials shall include, but shall not be limited
to, substances defined as "hazardous substances" or "toxic substances" in the
Comprehensive Environmental Response Compensation and Liability Act of 1980,
as amended, 42 U.S.C. 9061, et seq., Hazardous Materials Transportation Act,
49 U.S.C. 1802, et seq., and the Resource Conservation and Recovery Act, 42
U.S.C. 6901, et seq., or as "hazardous substances," "hazardous waste" or
"pollutant or contaminant" in any other applicable federal, state or local
environmental law or regulation. There do not exist upon any property owned
by Borrower any underground storage tanks or facilities, and to the knowledge
of Borrower, none of such property has ever been used for the treatment,
storage, recycling, or disposal of any Hazardous Materials.
6.15 Public Utility Holding Company Act. Borrower is not a "holding
company," or "subsidiary company" of a "holding company," or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding company" or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended.
6.16 General. There are no significant material facts or conditions
relating to the Loan Papers, any of the Collateral, or the financial condition
or business of Borrower that could, collectively or individually, cause a
Material Adverse Change and that have not been related, in writing, to Lender
as an attachment to this Agreement; and all writings heretofore or hereafter
exhibited or delivered to Lender by or on behalf of Borrower are and will be
genuine and in all respects what they purport and appear to be.
ARTICLE VII
Affirmative Covenants
As an inducement to Lender to enter into this Agreement, Borrower covenants
and agrees that, from the date hereof and until termination of this Agreement
and payment in full of the Obligation (except as otherwise provided in this
Article), unless otherwise agreed to by Lender in writing:
7.1 Financial Statements and Other Information. Borrower will promptly
furnish to Lender copies of (i) such information regarding its business and
affairs and financial condition as Lender may reasonably request, and (ii)
without request, the following:
(a) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of Borrower, a consolidated balance sheet of
Borrower as of the close of such fiscal year and the related statements of
income, cash flows and stockholders' equity of Borrower for such year, which
shall be audited and accompanied by the unqualified opinion and report thereon
issued by Borrower's independent public accountants;
(b) as soon as available and in any event within forty-five (45)
days after the end of each fiscal quarter of Borrower, a balance sheet as of
the close of such fiscal quarter and the related statements of income and
stockholders' equity for such fiscal quarter;
(c) as soon as available and in any event within forty-five (45)
days after the end of each fiscal quarter of Borrower, a report summarizing
<PAGE 21>
production, gross revenues, expenses, and net revenues from all of Borrower's
Mineral Interests for such quarter on a field by field basis and, if requested
by Lender, on a lease by lease basis;
(d) on or before March 31 of each year, an oil and gas reserve
evaluation as of the close of the immediately preceding fiscal year covering
all of Borrower's Mineral Interests under the defined categories of proved
developed producing, proved developed nonproducing, and proved undeveloped,
prepared by independent petroleum engineers selected by Borrower and
satisfactory to Lender;
(e) within forty-five (45) days after the end of each fiscal
quarter of Borrower, the Compliance Certificate in the form of Exhibit 7.1
hereto signed by the President or Chief Financial Officer of Borrower;
(f) immediately upon becoming aware of the existence of, or any
material change in the status of, any litigation which could create a Material
Adverse Change if determined adversely against Borrower, a written communication
to Lender of such matter;
(g) immediately upon becoming aware of an Event of Default or the
existence of any condition or event that constitutes, or with notice or lapse of
time, or both, would constitute an Event of Default, a verbal notification to
Lender specifying the nature and period of existence thereof and what action
Borrower is taking or proposes to take with respect thereto and, immediately
thereafter, a written confirmation to Lender of such matters;
(h) immediately upon becoming aware that any person has given notice
or taken any other action with respect to a claimed default under any material
indenture, mortgage, deed of trust, promissory note, loan agreement, note
agreement, drilling contract, operating or joint venture agreement or any
other Material Agreement or undertaking to which Borrower is a party, a verbal
notification to Lender specifying the notice given or action taken by such
person and the nature of the claimed default and what action Borrower is
taking or proposes to take with respect thereto and, immediately thereafter,
a written communication to Lender of such matters; and
(i) immediately upon becoming aware of the commencement of any
material action or material proceeding against Borrower or any of its properties
by any governmental agency, including, without limitation, the Internal Revenue
Service, the Environmental Protection Agency, the U.S. Department of Energy
or the Federal Energy Regulatory Commission, a written communication to Lender
of such matter.
All financial statements, schedules and other financial information delivered
hereunder shall be prepared in conformity with GAAP and shall be certified as
true and correct by the President or Chief Financial Officer of Borrower by
signature and date thereon.
7.2 Taxes. Borrower will pay and discharge or cause to be paid and
discharged all taxes, assessments and governmental charges or levies imposed
upon it or upon its income and profits or upon any of its property, real,
personal or mixed, or upon any part thereof, before the same shall become in
default, as well as all lawful claims for labor, materials and supplies or
otherwise, which, if not paid, might become a Lien upon such properties or
<PAGE 22>
any part thereof; provided that Borrower shall not be required to pay and
discharge or cause to be paid or discharged any such tax, assessment, charge,
levy or claim contested by it in good faith by appropriate proceedings if
Borrower shall have set up adequate reserves therefor, if required, under
GAAP; and provided, further, that the immediately preceding provision shall
not apply to any Lien imposed by the U.S. Government for failure to pay income,
payroll, FICA or similar taxes, and payment with respect to any such tax,
assessment, charge, levy or claim shall be made before any property of Borrower
shall be seized and sold in satisfaction thereof.
7.3 Discharge of Contractual Obligations. Borrower will do and perform
every act and discharge all of the obligations provided to be performed and
discharged under the Loan Papers, and any and all of the instruments or
documents referred to or mentioned herein at the time or times and in the
manner required.
7.4 Legal Status. Borrower will do or cause to be done all things
necessary to preserve, renew and keep in full force and effect its existence,
rights, licenses, permits and franchises and comply with all laws and
regulations applicable to it, and, further, comply with all applicable laws
and regulations, whether now in effect or hereafter enacted or promulgated by
any governmental authority having jurisdiction over any of its assets or
properties, noncompliance with which would cause a Material Adverse Change.
7.5 Maintenance and Evidence of Priority of Bank Liens. Borrower shall
perform such acts and duly authorize, execute, acknowledge, deliver, file,
and record (or cause to be filed and recorded) such additional assignments,
security agreements, deeds of trust, mortgages and other agreements, documents,
instruments and certificates as Lender may reasonably deem necessary or
appropriate in order to perfect and maintain the Bank Liens and preserve and
protect the Rights of Lender in respect of all present and future Collateral,
and cause to be furnished to Lender such opinions of counsel as Lender may
request regarding the priority of Borrower's title to, and the Bank Liens
upon, the assets of Borrower, all of which opinions shall be prepared by such
law firm or firms as may be acceptable to Lender.
7.6 Insurance. Borrower presently maintains and will continue to maintain
such policies of liability, hazard, damage, business interruption and workmen's
compensation insurance as are customarily carried by companies similarly
situated. If requested by Lender, any such policies of insurance shall show
Lender therein as loss payee. Upon request by Lender, Borrower will furnish
Lender with certificates and policies necessary to give Lender reasonable
assurance of the existence of such coverage. Borrower agrees to notify
promptly Lender of any termination or other material change in Borrower's
insurance coverage, and to provide Lender, upon request, with all information
about the renewal of each policy at least 15 days prior to the expiration
thereof.
7.7 Reimbursement of Fees and Expenses. Borrower agrees to pay, on
demand, all reasonable out-of-pocket fees and expenses incurred by Lender or
its designated representatives in connection with the negotiation, preparation
and execution of this Agreement, all renewals hereof, the other Loan Papers or
other transactions pursuant hereto or to the Loan Papers, as well as all costs
of filing and recordation, all legal and accounting fees, costs associated with
Borrowing Base redeterminations as provided in Section 3.4, all inspection,
<PAGE 23>
environmental audit and similar costs related to the evaluation of the
Collateral, all costs associated with enforcing any of Lender's Rights
under the Loan Papers (including, without limitation, costs of repossessing,
storing, transporting, preserving and insuring any of the Collateral), all
court costs associated with enforcing or defending any Rights against
Borrower or any third party challenging said Rights and any other cost or
expense incurred by Lender or its designated representatives in connection
herewith or with the other Loan Papers, together with interest at the Highest
Lawful Rate per annum on each such amount commencing 10 days after the date
notice of such expenditure is given to Borrower by Lender until the date it
is repaid to Lender.
7.8 Indemnification. Borrower agrees to indemnify Lender, its officers,
directors, shareholders, employees, and affiliates (collectively "Indemnitee"),
from and against any and all liabilities, obligations, claims, losses, damages,
penalties, actions, judgments, suits, remedial actions, costs, expenses or
disbursements (collectively, "Claims") of any kind or nature whatsoever that
may be imposed on, incurred by, or asserted against Indemnitee growing out of
or resulting from (i) the Loan Papers and the transactions and events at any
time associated therewith (including, without limitation, the enforcement of
the Loan Papers and the defense of Indemnitee's actions and inactions in
connection with the Loan), except to the limited extent such Claims are
proximately caused by Indemnitee's gross negligence or willful misconduct;
(ii) the presence of any Hazardous Materials on or under the properties
covered by the Deed of Trust; or (iii) any activity carried on or undertaken
on or off the properties covered by the Deed of Trust, whether prior to or
during the term hereof and whether by Borrower or by any third person, in
connection with the treatment, storage, recycling, removal, handling or
disposal of Hazardous Materials at any time located on or under the
properties covered by the Deed of Trust. Indemnitee shall have the right to
defend any such Claims, employing its attorneys therefor. While Borrower
shall also be entitled to employ its own attorneys and to participate in the
defense of any such Claims, Indemnitee shall, if not furnished
with reasonable indemnity, have the right to compromise and adjust all such
Claims. The covenants and conditions of this section shall at all times be
construed to be personal covenants in favor of Indemnitee and shall not run
with the lands; provided, however, that such covenants and indemnity shall
remain in full force and effect notwithstanding the payment in full of the
Obligation and the release, either partially or wholly, of the Bank Liens or
any foreclosure thereunder. All such Claims as may be paid by Indemnitee shall
bear interest at the Highest Lawful Rate per annum until paid by Borrower and
shall be part of the Obligation secured by the Bank Liens. THE PARTIES
HERETO INTEND FOR THE PROVISIONS OF THIS PARAGRAPH TO APPLY TO AND PROTECT
EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF STRICT LIABILITY IMPOSED OR
THREATENED TO BE IMPOSED ON ANY INDEMNIFIED PARTY AS WELL AS FROM THE
CONSEQUENCES OF ITS OWN NEGLIGENCE (EXCEPT GROSS NEGLIGENCE), WHETHER OR NOT
THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR CONCURRING CAUSE OF ANY CLAIMS
INDEMNIFIED AGAINST IN THIS PARAGRAPH.
7.9 Curing of Defects. Borrower will promptly cure any material defects
in the execution and delivery of any of the Loan Papers, and in any other
instrument or document referred to or mentioned herein. Borrower will
immediately execute and deliver to Lender, upon request, all such other and
further instruments as may be reasonably required or desired by Lender from
time to time in compliance with or accomplishment of the covenants and
agreements of Borrower made in the Loan Papers.
<PAGE 24>
7.10 Inspection and Visitation. Borrower will grant Lender access to all
of its books and records, as well as to all of the Collateral, and allow
inspection and copying of same by Lender or its designated representatives at
any time during normal business hours or such other time as Lender may
reasonably request.
7.11 Notices. Borrower will give prompt written notice to Lender of any
proceedings instituted against it by or in any federal or state court or before
any commission or other regulatory body, federal, state or local, which, if
adversely determined, would cause a Material Adverse Change.
7.12 Bank Lien on Other Assets. If requested by Lender, Borrower shall
execute and deliver to Lender one or more mortgages, deeds of trust, assignments
of production, security agreements, financing statements, pledge agreements,
or other security documents in favor of Lender covering every interest in
every asset or property (including, without limitation, Mineral Interests)
owned by Borrower, whether now owned or hereafter acquired, which shall become
part of the Collateral.
7.13 Compliance. Borrower will observe and comply with:
(a) all laws, statutes, codes, acts, ordinances, rules, regulations,
directions and requirements of all federal, state, county, municipal and other
governments, departments, commissions, boards, courts, authorities, officials
and officers, domestic and foreign, where the failure to observe or comply would
cause a Material Adverse Change; and
(b) all orders, judgments, decrees, injunctions, certificates,
franchises, permits, licenses and authorizations of all federal, state, county,
municipal and other governments, departments, commissions, boards, courts,
authorities, officials and officers, domestic and foreign, where the failure
to observe or comply would cause a Material Adverse Change and against which
it shall maintain such reserves as are appropriate under GAAP.
7.14 Compliance with Environmental Laws. The Borrower is and will remain
substantial compliance with all state and federal environmental laws and
regulations and Borrower will not place nor permit to be placed any Hazardous
Materials on any of its properties in violation of applicable state and federal
environmental laws. In the event Borrower should discover any Hazardous
Materials on any of its properties which could result in a breach of the
foregoing covenant, Borrower shall notify Lender within three (3) days after
such discovery. Borrower shall dispose of all material amounts of Hazardous
Materials generated by the Borrower only at facilities and/or with carriers
that maintain valid governmental permits under the Resource Conservation and
Recovery Act, 42 U.S.C. 6901. In the event of any notice or filing of any
complaint or commencement of any administrative hearing or procedure against
the Borrower alleging a violation of any environmental law or regulation,
Borrower shall give notice to Lender within five (5) days after Borrower has
received notice of such notice or filing.
7.15 Use of Proceeds. Borrower will use the proceeds of the Revolving
Loan for refinancing the Prior Note, financing oil and gas acquisitions or
capital expenditures, or working capital in Borrower's oil and gas business.
<PAGE 25>
7.16 Deposit Accounts. Borrower agrees to maintain all of its significant
operating demand deposit accounts with Lender.
7.17 Title Curative. As soon as practicable after receipt by Borrower
from Lender or its counsel of written notice of material title defects Lender
reasonably requires to be cured, Borrower shall use its best efforts to provide
such curative information, in form and substance satisfactory to Lender.
ARTICLE VIII
Negative Covenants
As an inducement to Lender to enter into this Agreement, Borrower hereby
covenants and agrees that, from the date hereof and until termination of this
Agreement and payment in full of the Obligation (except as otherwise provided
in this Article), unless otherwise agreed to by Lender in writing:
8.1 Liens. Borrower will not create, assume or suffer to exist any Lien
upon any of its properties or assets now owned or hereafter acquired securing
any indebtedness other than the Obligation or acquire or agree to acquire any
property under any conditional sale agreement or other title retention
agreement, excluding, however, from the operation of this section:
(a) deposits or pledges to secure payments of workmen's compensation,
unemployment insurance, old age pensions or other social security;
(b) deposits or pledges to secure performance of bids, tenders,
contracts (other than contracts for the payment of money), leases, public or
statutory obligations, surety or appeal bonds, or other deposits or pledges
for purposes of like general nature in the ordinary course of business;
(c) Liens for taxes, assessments or other governmental charges or
levies that are not delinquent or that are in good faith being contested or
litigated, if such reserve as shall be required by GAAP shall have been made
therefor, provided, that this exception shall not allow any Lien imposed by
the U.S. Government for failure to pay income, payroll, FICA or similar taxes;
(d) mechanics', carriers', workmen's, repairman's or other like
Liens arising in the ordinary course of business securing obligations less
than ninety (90) days from the date of invoice, and on which no suit to
foreclose has been filed, or which are in good faith being contested or
litigated, if such reserve as shall be required by GAAP shall have been made
therefor;
(e) Liens created by or resulting from any litigation or legal
proceeding that is currently being contested in good faith by appropriate
proceedings, if such reserve as shall be required by GAAP shall have been
made therefor;
(f) Liens, charges and encumbrances incidental to the conduct of
its business or the ownership of its properties or assets, which were not
<PAGE 26>
incurred in connection with the borrowing of money or the obtaining of advances
or credit and that do not materially detract from the value of such property
or assets or materially impair the use thereof in the operation of its business;
(g) landlords' Liens for rental not yet due and payable and which,
to the extent the same encumbers any of the Collateral, are subordinate to
the Bank Liens;
(h) Liens arising in the normal course of business under operating
agreements covering oil and gas properties and interests therein, including
such Liens as may arise thereunder because of the default of other parties
to the operating agreement; or
(i) the Bank Liens.
8.2 Indebtedness. Borrower will not create, assume, incur or have
outstanding, or in any manner become or be liable directly or indirectly
(whether by way of guaranty or otherwise) in respect of, any indebtedness
for borrowed money or the purchase price of any property (including direct,
indirect and capitalized leases), excluding, however, from the operation of
this section:
(a) the Note;
(b) accounts payable for services furnished and for the purchase
price of materials and supplies acquired in the ordinary course of its business,
not more than ninety (90) days from the date of invoice; and
(c) other indebtedness not to exceed an aggregate amount of $100,000
at any time outstanding.
8.3 ERISA Compliance. Borrower will not at any time permit any plan
subject to ERISA maintained by it to (i) engage in any "prohibited transaction"
as such term is defined in Section 4975 of the Internal Revenue Code of 1986,
as amended; (ii) incur any "accumulated funding deficiency" as such term is
defined in Section 302 of ERISA; or (iii) terminate any such plan in a manner
which could result in the imposition of a lien on its property pursuant to
Section 4068 of ERISA.
8.4 Investments. Borrower will not make or commit to make, any advance,
loan, extension of credit or capital contribution to, or purchase of any stock,
bonds, notes, debentures or other securities of, or make any other investment
in any person, or accept any item in satisfaction of indebtedness (all of the
aforesaid transactions being herein called "Investments"), except:
(a) Investments in accounts, contract rights and chattel paper (as
defined in the Uniform Commercial Code), and notes receivable, arising or
acquired in the ordinary course of business;
(b) Investments with maturities of not more than 180 days in direct
obligations of the United States of America, or obligations, the principal and
interest of which are unconditionally guaranteed by the United States of
America;
(c) certificates of deposit maintained with Lender; and
<PAGE 27>
(d) other Investments not to exceed $50,000 in the aggregate at any
time outstanding.
8.5 Mergers, Consolidations. Borrower will not (i) amend or otherwise
modify its corporate charter or otherwise change its structure in any manner
that would cause a Material Adverse Change; (ii) form any new subsidiary
company; or (iii) consolidate with or merge into, or acquire any party or
permit any party to consolidate with or merge into, or acquire it.
8.6 Dividends and Distributions. Neither Borrower nor any Subsidiary
will declare, pay or make any loans, advances, dividends or distributions, of
any kind to its stockholders, or make any other distribution on account of, or
purchase, acquire or redeem or retire any stock or other security issued by
Borrower.
8.7 Transactions with Affiliates. Borrower will not, directly or
indirectly, enter into any transaction (including, but not limited to, the
sale or exchange of property or the rendering of services) with any of its
affiliates, other than in the ordinary course of business and upon fair and
reasonable terms no less favorable than Borrower could obtain or could become
entitled to in an arm's length transaction with a person that was not an
affiliate.
8.8 Accounting Method and Fiscal Year. Borrower will not make any change
in its present accounting method unless such changes are required for conformity
with GAAP.
8.9 Nature of Business. Borrower will not make any substantial change
in the nature of its businesses as now conducted.
8.10 Disposition of Assets. Borrower will not sell, transfer, lease,
exchange, alienate or otherwise dispose of any of its property or assets except,
to the extent not otherwise forbidden under the Deed of Trust:
(a) equipment that is worthless or obsolete or which is replaced by
equipment of equal suitability and value;
(b) inventory that is sold in the ordinary course of business; and
(c) interests in oil and gas leases, or portions thereof, so long as
no well situated on any such lease or located on any unit containing all or
any part thereof, is capable (or is subject to being made capable through
commercially feasible operations) of producing oil, gas or other hydrocarbons
or minerals in commercial quantities.
8.11 Current Ratio. At all times during the term hereof, Borrower's
Current Ratio shall not be less than 1.00 to 1.
8.12 Leases. Borrower shall not pay or become liable to pay rentals or
lease payments on any lease (excluding oil and gas leases), sublease or similar
arrangement in an amount exceeding $250,000 in the aggregate in any fiscal
year.
<PAGE 28>
8.13 Net Worth. At all times during the term hereof, Borrower's Net Worth
shall not be less than (A) $9,500,000.00 plus (B) fifty percent (50%) of
Borrower's Adjusted Net Income for each fiscal quarter, if positive, and zero
percent (0%) if negative, determined on a cumulative basis, for the period
beginning July 1, 1996, and ending on the last day of the most recent fiscal
quarter as of the time in question. As used in this Section 8.13, Borrower's
Adjusted Net Income means for any period, Borrower's net income for such period,
provided there shall be excluded from such net income (to the extent otherwise
included therein) the cumulative effect of a change in accounting principles
and any gains or losses attributable to write-ups or write-downs of assets.
8.14 Debt Service Ratio. At all times during the term hereof, Borrower's
Debt Service Ratio shall not be less than 1.1 to 1.
ARTICLE IX
Default and Remedies
9.1 Events of Default. If any one or more of the following shall occur
and shall not have been remedied in the period, if any, provided, an "Event of
Default" shall be deemed to have occurred hereunder and with respect to all
of the Obligation, unless waived in writing by Lender:
(a) default shall occur in the payment when due of the Obligation
including, without limitation, any principal or interest due on the Note or
any commitment or other fee due hereunder;
(b) any representation, warranty or statement made by Borrower
herein, in any of the other Loan Papers or in any certificate furnished to
Lender hereunder shall be breached or shall prove to be untrue or misleading
in any material respect at the time when made;
(c) default shall occur in the performance or observance of any
covenant, agreement, duty or obligation of Borrower contained herein or in any
of the other Loan Papers; provided, that breach of the covenant contained in
Sections 8.11, 8.13 or 8.14 hereof shall not constitute an Event of Default
unless the same shall continue for a period of thirty (30) days;
(d) Borrower shall (i) apply for or consent to the appointment of a
receiver, trustee or liquidator of it or of all or a substantial part of its
assets; (ii) be unable, or admit in writing its inability, to pay its debts
as they become due; (iii) make a general assignment for the benefit of
creditors; (iv) be adjudicated a bankrupt or insolvent or file a voluntary
petition in bankruptcy; (v) file a petition or an answer seeking reorganization
or an arrangement with creditors or to take advantage of any bankruptcy or
insolvency law; (vi) file an answer admitting the material allegations of, or
consent to, or default in answering, a petition filed against it in any
bankruptcy, reorganization or insolvency proceedings; or (vii) take any
action (corporate or otherwise) for the purpose of effecting any of the
foregoing;
(e) an order, judgment or decree shall be entered by any court of
competent jurisdiction approving a petition seeking reorganization of Borrower
<PAGE 29>
or appointing a receiver, trustee or liquidator of Borrower or of all or a
substantial part of its assets, and such order, judgment or decree shall
continue unstayed in effect for any period of thirty (30) consecutive days;
(f) any Lien for failure to pay income, payroll, FICA or similar
taxes shall be filed by the U.S. Government or any agent or instrumentality
thereof against Borrower or any of its assets;
(g) there shall occur any acceleration, notice of default, filing
of suit or notice of breach by any other party to any Material Agreement to
which Borrower is a party wherein the amount involved or claimed exceeds
$100,000, following the passage of any grace period provided for thereunder;
(h) default shall occur in the payment of any indebtedness of
Borrower aggregating $100,000 or more under any note, loan agreement or
credit agreement and such default shall continue for more than the period of
grace, if any, specified therein, or any such indebtedness shall become due
before its stated maturity by acceleration of the maturity thereof or shall
become due by its terms and shall not be promptly paid or extended;
(i) any final judgment or judgments for the payment of money in the
amount of $100,000 or more, in the aggregate, shall be rendered against Borrower
and shall not be satisfied or discharged at least thirty (30) days prior to the
date on which any of its assets could be lawfully sold to satisfy such judgment
or judgments;
(j) the good faith belief by Lender that the prospect of payment or
performance of the Obligation is materially impaired, or that the value of the
Collateral has, or will be, materially decreased;
(k) a Material Adverse Change has occurred with respect to Borrower;
or
(l) A majority of the individuals comprising the current Board of
Directors of Borrower shall resign, be declared incompetent or otherwise be
removed (voluntarily or involuntarily) or cease to serve as members of the
Board of Directors of Borrower.
9.2 Remedies. Upon the occurrence of any Event of Default, Lender shall
have no further obligation to advance funds under the Note, and Lender may
declare all of the Obligation to be forthwith due and payable, whereupon the
same shall forthwith become due and payable without further presentment,
demand, protest, notice of acceleration or the intent to accelerate, or other
notice of any kind, all of which Borrower hereby expressly waives, anything
contained herein, in the Note or in any of the other Loan Papers to the contrary
notwithstanding; provided that any default under subsections (d) or (e) of
Section 9.1 shall result in all of the Obligation becoming immediately due
and payable in full without the necessity of any act by Lender. Further,
Lender may, in its discretion, but shall not be required to, exercise such
Rights as are provided it in any of the Loan Papers or at law or in equity.
Nothing contained in this Article shall be construed to limit or amend in any
way the Events of Default enumerated in the Loan Papers or any other document
executed in connection with the transactions contemplated herein. Further,
in such event, Lender shall have all other Rights afforded to it with respect
to Borrower or any of the Collateral under any of the Loan Papers or under any
applicable law or in equity.
<PAGE 30>
ARTICLE X
Miscellaneous
10.1 Survival of Representations and Warranties. All representations and
warranties of Borrower herein, and all covenants, agreements, duties and
obligations of Borrower herein not fully performed on or before the date of
this Agreement, shall survive such date.
10.2 Communications. Unless specifically provided otherwise, whenever any
Loan Paper requires or permits any consent, approval, notice, request, or
demand from one party to another, such communication must be in writing to be
effective and shall be deemed to have been given on the day actually delivered
or, if mailed, on the third day (or if such third day is not a Business Day,
then on the next succeeding Business Day) after it is enclosed in an envelope,
addressed to the party to be notified at the address stated below, properly
stamped, sealed, and deposited in the appropriate official postal service.
Until changed by notice pursuant hereto, the address for each party for
purposes hereof is as follows:
BORROWER: PARALLEL PETROLEUM CORPORATION
110 North Marienfeld, Suite 465
Midland, Texas 79701
LENDER: BANK ONE, TEXAS, N.A.
2301 West Wall Street
Midland County
Midland, Texas 79701
Attention: Michael J. Davis
10.3 Non-Waiver.
(a) The acceptance by Lender at any time and from time to time of
part payment on the Obligation shall not operate as a waiver of any Event of
Default then existing.
(b) No waiver by Lender of any Event of Default shall operate as a
waiver of any other then existing or subsequent Event of Default.
(c) No delay or omission by Lender in exercising any Right shall
impair such Right or operate as a waiver thereof, nor shall any single or
partial exercise of any such Right preclude other or further exercise thereof,
or the exercise of any other Right under the Loan Papers or otherwise.
(d) No notice or demand given by Lender in any case shall operate
as a waiver of Lender's right to take other action in the same, similar or
other instances without such notice or demand.
<PAGE 31>
(e) No Advance hereunder shall operate as a waiver by Lender of (i)
the representations, warranties and covenants of Borrower under the Loan Papers;
(ii) any Event of default; or (iii) any of the conditions to Lender's
obligation, if any, to make further Advances.
10.4 Strict Compliance. If any action or failure to act by Borrower
violates any covenant of Borrower contained herein or in any other Loan Paper,
then such violation shall not be excused by the fact that such action or
failure to act would otherwise be permitted by any covenant (or exception to
any covenant) other than the covenant violated.
10.5 Cumulative Rights. The Rights of Lender under the Loan Papers are
in addition to all other Rights provided by law, whether or not the Obligation
is due and payable and whether or not Lender has instituted any suit for
collection or other action in connection with the Loan Papers.
10.6 Governing Law. This Agreement has been prepared, is being executed
and delivered, and is intended to be performed, in the State of Texas. The
substantive laws of such state and the applicable federal laws of the United
States of America shall govern the validity, construction, enforcement and
interpretation of this Agreement and the other Loan Papers, without regard to
principles of conflicts of law, PROVIDED, HOWEVER, THAT THE RIGHTS PROVIDED
IN THE LOAN PAPERS WITH REFERENCE TO PROPERTIES SITUATED IN OTHER STATES MAY
BE GOVERNED BY THE LAWS OF SUCH OTHER STATES.
10.7 Choice of Forum; Consent to Service of Process and Jurisdiction.
Any suit, action or proceeding against Borrower arising out of or relating to
any of the Loan Papers or any judgment entered by any court in respect thereof,
may be brought or enforced in the courts of the State of Texas, County of
Midland, or in the United States courts located in the State of Texas, County
of Midland, or in the United States courts located in the State of Texas, as
Lender in its sole discretion may elect, and Borrower hereby submits to the
nonexclusive jurisdiction of such courts for the purpose of any such suit,
action or proceeding. Borrower hereby irrevocably consents to service of
process in any suit, action or proceeding in any of said courts by the mailing
thereof by Lender by registered or certified mail, postage prepaid, to Borrower,
at its address set forth herein. Borrower hereby irrevocably waives any
objections that it may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to any of the other
Loan Papers brought in any of said courts and hereby further irrevocably
waives any claim that any such suit, action or proceeding brought in any
such court has been brought in an inconvenient forum.
10.8 Usury Savings Clause. Nothing contained in this Agreement, the
Note, any other Loan Paper or in any other Agreement or undertaking relating
hereto or to the Obligation shall be construed to obligate Borrower, under
any circumstances whatsoever, to pay interest at a rate in excess of the
Highest Lawful Rate. All sums paid hereunder or under the Note that are
deemed to be interest shall be spread and prorated over the entire period
for which the Note is outstanding. In the event that any sums received
hereunder from Borrower are at any time under applicable law deemed or held
to provide a rate of interest in excess of the Highest Lawful Rate, the
effective rate of interest on the Obligation shall be deemed reduced to and
shall be the Highest Lawful Rate, and Borrower and any other parties hereby
agree to accept as their sole remedy under such circumstances either the
<PAGE 32>
return of any sums of interest that may have been collected in excess of the
Highest Lawful Rate or the application of these sums as a credit against the
unpaid principal amount of the Note, whichever remedy may be elected by
Lender. In addition, in the event that the maturity of the Note is accelerated
by reason of the election by Lender hereunder, then earned interest may never
include more than the amount calculated pursuant to the Highest Lawful Rate,
and if unearned interest is provided for in the Note or the other Loan Papers,
Borrower and any other parties liable on said documents hereby agree to accept
as their sole remedy under such circumstances either (a) the cancellation of
said unearned interest, or (b) if theretofore paid, either the return to
Borrower or the crediting of said unearned interest on the principal amount
due under the Note or other documents, whichever action may be elected by
Lender. To the extent the Highest Lawful Rate is determined by reference to
the laws of the State of Texas, same shall be the indicated (weekly) rate
ceiling as defined in Article 5069-1.04, Texas Revised Civil Statutes,
provided that Lender may, by notice to Borrower, elect such other reference
as is allowed by said statute.
10.9 Enforceability. If one or more of the provisions contained in the
Loan Papers shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such in validity, illegality, or unenforceability
shall not affect any other provision of the Loan Papers or any other instrument
referred to herein.
10.10 Binding Effect. The Loan Papers shall be binding upon and inure
to the benefit of Borrower and Lender and their respective successors and
assigns; provided, however, that Borrower shall not assign any Rights, duties
or obligations under the Loan Papers without the prior written consent of
Lender.
10.11 No Third Party Beneficiary.
(a) The parties do not intend the benefits of the Loan Papers to
inure to any third party, nor shall the Loan Papers be construed to make or
render Lender liable to any third party, including, without limitation, any
materialman, supplier, contractor, subcontractor, purchaser, lessor or lessee
having a claim against Borrower. Notwithstanding anything contained in the
Loan Papers, or any conduct or course of conduct by any or all of the parties
hereto, whether before or after signing this Agreement or any other Loan Paper,
no Loan Paper shall be construed as creating any right, claim or cause of
action against Lender in favor of any third party, including, without
limitation, any materialman, supplier, contractor, subcontractor, purchaser,
lessor or lessee having a claim against Borrower.
(b) All conditions to the obligation of Lender to make Advances
hereunder are imposed solely and exclusively for the benefit of Lender, and
no other person shall have standing to require satisfaction of such conditions
in accordance with their terms or be entitled to assume that Lender will make
or refuse to make Advances in the absence of strict compliance therewith, and
any or all of such conditions may be freely waived in whole or in part by
Lender at any time if Lender, in its sole and absolute discretion, deems it
advisable to do so.
10.12 Delegation by Lender. Lender may perform any of its duties or
exercise any of its Rights by or through its officers, directors, employees,
attorneys, agents or other representatives.
10.13 Setoff. Borrower hereby grants to Lender (and to each participant
to whom Lender has conveyed or may hereafter convey a participation in the
<PAGE 33>
Note) the right of setoff to secure payment of the Obligation upon any and
all moneys, securities or other property of Borrower and the proceeds
therefrom, now or hereafter held or received by or in transit to, Lender or
any such participant or any agent of Lender or such participant, from or for
the account of Borrower, whether for safekeeping, custody, pledge,
transmission, collection or otherwise, and also upon any and all deposits
(general or specific) and credits of Borrower and any and all claims of
Borrower against Lender or any such participant at any time existing.
Notwithstanding the foregoing, nothing contained herein shall grant to Lender
the right of setoff against an account if Lender has actual knowledge that
any person other than Borrower or any Subsidiary of Borrower has an ownership
interest in such account.
10.14 Additional Documents. It is contemplated that there may be certain
supplementary and/or corrective mortgages, deeds of trust, security agreements
and similar items prepared by Lender to be executed by Borrower subsequent
hereto, as well as certain other corrective and additional documentation not
executed concurrently with this Agreement because of the unavailability of
information such as property and collateral descriptions at the time of the
execution hereof. Borrower hereby agrees to cooperate with Lender and provide
such information in connection therewith as Lender may reasonably request,
and to execute and deliver such other and further documentation as Lender
shall reasonably request so as to provide Lender with a Bank Lien on the
Collateral.
10.15 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same instrument.
10.16 Amendments. Neither this Agreement nor any provision hereof may
be changed, waived, discharged or terminated orally but only by an instrument
in writing signed by Borrower and Lender.
10.17 Headings. All headings used herein are for convenience and
reference purposes only and shall not affect the substance of this Agreement.
10.18 Conflicts. In the event that there exists any conflict or
inconsistency between the terms hereof and the terms of any other Loan Paper,
the terms hereof shall govern and control, provided that the fact that any
representation, warranty or covenant contained in any other Loan Paper is not
contained herein shall not be, or be deemed to be, a conflict or inconsistency.
10.19 Entirety. This Agreement and the other Loan Papers embody the
entire agreement among the parties and supersede and supplant all prior
agreements and understandings with respect to the matters contained herein.
10.21 Participations. Lender may at any time, or from time to time,
sell or agree to sell to one or more other persons a participation in all or
any part of the Obligation, in which event each such other participant shall
be entitled to the rights and benefits under this Agreement and the other
<PAGE 34>
Loan Papers. It is understood and agreed that Lender may provide to
participants and prospective participants financial information and reports
and data concerning Borrower and Borrower's properties and operations as have
been provided to Lender pursuant to this Agreement.
10.22 Notice of Final Agreement. THIS WRITTEN AGREEMENT AND THE OTHER
LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
EXECUTED as of the date first above written.
PARALLEL PETROLEUM CORPORATION,
a Delaware corporation
By: /s/ Thomas R. Cambridge
---------------------------
Thomas R. Cambridge
Chairman of the Board
By: /s/ Larry C. Oldham
---------------------------
Larry C. Oldham
President
BANK ONE, TEXAS, N.A.
By: /s/ Michael J. Davis
---------------------------
Michael J. Davis
Vice President
<PAGE 35>
PROMISSORY NOTE
$30,000,000.00 Midland, Texas July 1, 1996
FOR VALUE RECEIVED, the undersigned PARALLEL PETROLEUM CORPORATION, a
Delaware corporation (referred to herein as "Borrower"), hereby unconditionally
promises to pay to the order of BANK ONE, TEXAS, N.A., a national banking
association ("Lender"), at 2301 West Wall Street, Midland County, Midland,
Texas 79701, or such other address as Lender shall designate in writing to
Borrower, the principal sum of THIRTY MILLION AND NO/100 DOLLARS
($30,000,000.00), or if less, so much thereof as may be advanced pursuant to
the Loan Agreement (as hereinafter defined), in lawful money of the United
States of America, together with interest from the date hereof until paid at
the rates specified in the Loan Agreement.
The principal and all accrued interest on this Note shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.
This Note is executed pursuant to that certain Loan Agreement dated of
even date herewith between Borrower and Lender (herein, as from time to time
amended, modified or restated, called the "Loan Agreement"), and is the Note
referred to therein. All capitalized terms used but not specifically defined
herein shall have the meanings ascribed thereto in the Loan Agreement.
Reference is made to the Loan Agreement and the other Loan Papers for a
statement of the prepayment rights and obligations of Borrower, a description
of the properties mortgaged and assigned as security, the nature and extent of
such security and the rights of the parties under the Loan Papers in respect
to such security, for a statement of the terms and conditions under which the
due date of this Note may be accelerated and for statements regarding other
matters affecting this Note (including without limitation the obligations of
the holder hereof to advance funds hereunder, principal and interest payment
due dates, voluntary and mandatory prepayments, exercise of rights and
remedies, payment of attorneys' fees, court costs and other costs of collection
and certain waivers by Borrower and others now or hereafter obligated for
payment of any sums due hereunder). Upon the occurrence of an Event of
Default, as that term is defined in the Loan Agreement or the other Loan
Papers, the holder hereof shall have all rights and remedies of the Lender
under the Loan Agreement and the other Loan Papers.
Nothing contained in this Note, the Loan Agreement, any other Loan Paper
or in any other agreement or undertaking relating hereto or to the Obligation
shall be construed to obligate Borrower, under any circumstances whatsoever,
to pay interest at a rate in excess of the Highest Lawful Rate. All sums paid
under the Loan Agreement or under this Note that are deemed to be interest
shall be spread and prorated over the entire period for which this Note is
outstanding. In the event that any sums received hereunder or under the Loan
Agreement from Borrower are at any time under applicable law deemed or held
to provide a rate of interest in excess of the Highest Lawful Rate, the
effective rate of interest on the Obligation shall be deemed reduced to and
shall be the Highest Lawful Rate, and Borrower and any other parties hereby
agree to accept as their sole remedy under such circumstances either the
<PAGE 36>
return of any sums of interest that may have been collected in excess of
the Highest Lawful Rate or the application of these sums as a credit against
the unpaid principal amount of this Note, whichever remedy may be elected by
Lender. In addition, in the event that the maturity of this Note is accelerated
by reason of the election by Lender hereunder or under the Loan Agreement,
then earned interest may never include more than the amount calculated pursuant
to the Highest Lawful Rate, and if unearned interest is provided for in this
Note or the other Loan Papers, Borrower and any other parties liable on said
documents hereby agree to accept as their sole remedy under such circumstances
either (a) the cancellation of said unearned interest, or (b) if theretofore
paid, either the return to Borrower or the crediting of said unearned interest
on the principal amount due under this Note or other documents, whichever
action may be elected by Lender. To the extent the Highest Lawful Rate is
determined by reference to the laws of the State of Texas, same shall be the
indicated (weekly) rate ceiling as defined in Article 5069-1.04, Texas Revised
Civil Statutes, provided that Lender may, by notice to Borrower, elect such
other reference as is allowed by said statute.
If any payment of principal or interest on this Note shall become due on
a day other than a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time shall in such case be
included in computing interest in connection with such payment.
If this Note is placed in the hands of an attorney for collection, or if
it is collected through any legal proceeding at law or in equity or in
bankruptcy, receivership or other court proceedings, Borrower agrees to pay
all costs of collection, including, but not limited to, court costs and
reasonable attorneys' fees.
Borrower 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, notice of acceleration or the
intention to accelerate the maturity, protest, notice of protest and
nonpayment, as to this Note and as to each and all installments hereof, and
agree that their liability under this Note shall not be affected by any
renewal or extension in the time of payment hereof, or in 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.
This Note shall be governed by and construed in accordance with the
applicable laws of the United States of America and the laws of the State of
Texas, except that Tex. Rev. Civ. Stat. Ann. art. 5069, Chapter 15 (which
regulates certain revolving credit loan accounts and revolving tri-party
accounts) shall not apply to this Note.
This Note is given, to the extent of $15,068,621.09, in renewal and
rearrangement, but not in extinguishment or novation, of the unpaid principal
balance of the certain promissory note dated June 12, 1996, in
<PAGE 37>
the original principal amount of $25,000,000, executed by Borrower and
payable to the order of NationsBank of Texas, N.A., which note has been
assigned to Lender.
THIS WRITTEN NOTE, THE LOAN AGREEMENT AND THE OTHER LOAN PAPERS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED this 1st day of July, 1996.
BORROWER:
PARALLEL PETROLEUM CORPORATION,
a Delaware corporation
By:/s/ Thomas R. Cambridge
---------------------------
Thomas R. Cambridge
Chairman of the Board
By:/s/ Larry C. Oldham
---------------------------
Larry C. Oldham
President
