-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sau0MCFYxtG5DPvJJ+95F5ioAuKtwpVMXDXW03FuCA3XdqO+JP7NUbjWsOknB0KM KPjJbzh64pyJMmPRIhFfMw== 0000899243-02-000886.txt : 20020415 0000899243-02-000886.hdr.sgml : 20020415 ACCESSION NUMBER: 0000899243-02-000886 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOODRICH PETROLEUM CORP CENTRAL INDEX KEY: 0000943861 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760466193 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12719 FILM NUMBER: 02595335 BUSINESS ADDRESS: STREET 1: 815 WALKER STREET 2: SUITE 1040 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7137809494 MAIL ADDRESS: STREET 1: 815 WALKER STREET 2: SUITE 1040 CITY: HOUSTON STATE: TX ZIP: 77002 10-K 1 d10k.txt FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For Fiscal Year Ended December 31, 2001 Commission file number 1-7940 GOODRICH PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) Delaware 76-0466193 (State of incorporation) (I.R.S. Employer Identification No.) 815 Walker St., Suite 1040 77002 Houston, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code is (713) 780-9494 Title of each Name of each exchange class on which registered ----- --------------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.20 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Series A Preferred Stock, $1.00 par value NASDAQ Small Cap 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] At March 15, 2002, there were 17,896,356 shares of Goodrich Petroleum Corporation common stock outstanding. The aggregate market value of shares of common stock held by non-affiliates of the registrant as of March 15, 2002, was approximately $35,235,000 based on a closing price of $4.06 per share on the New York Stock Exchange on such date. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I Items 1 and 2. Business and Properties. General Goodrich Petroleum Corporation and subsidiaries ("Goodrich" or "the Company") is an independent oil and gas company engaged in the exploration, exploitation, development and production of oil and natural gas properties in the transition zone of south Louisiana and in north Louisiana, the Gulf Coast of Texas and east Texas. The Company owns working and overriding royalty interests in 132 active oil and gas wells located in 27 fields in five states. At December 31, 2001, Goodrich had estimated proved reserves of approximately 8,750,000 barrels of oil and condensate and 34.0 Bcf of natural gas, or an aggregate of 86.5 Bcfe with a pre-tax present value of future net revenues, discounted at 10%, of $78.9 million and an after-tax Standardized Measure value of $73.1 million. The Company's principal executive offices are located at 815 Walker, Suite 1040 Houston, Texas 77002. The Company also has offices in Shreveport, Louisiana. At March 15, 2002, the Company had 17 employees. Company Background Goodrich resulted from a business combination on August 15, 1995 between La/Cal Energy Partners ("La/Cal") and Patrick Petroleum Company and subsidiaries ("Patrick"). La/Cal was a privately held independent oil and gas partnership formed in July 1993 and engaged in the development, production and acquisition of oil and natural gas properties, primarily in southern Louisiana. Patrick was a NYSE listed independent oil and gas company engaged in the exploration, production, development and acquisition of oil and natural gas properties in the continental United States. Patrick's oil and gas operations and properties were primarily located in West Texas and Michigan at the time of the combination, with additional operations and properties in certain western states. Oil and Gas Operations and Properties The following is a summary description of the Company's oil and gas properties. Louisiana The majority of the Company's proved natural gas reserves are in the transition zone of the south Louisiana producing region. This region refers to the geographic area that covers the onshore and in-land waters of south Louisiana lying in the southern half of Louisiana, which is one of the most prolific oil and natural gas producing sedimentary basins. The region generally contains sedimentary sandstones, which are of high qualities of porosity and permeabilities. There is a myriad of types of reservoir traps found in the region. These traps are generally formed by faulting, folding and subsurface salt movement, or a combination of one or more of these. The formations found in the southern Louisiana producing region range in depth from 1,000 feet to 20,000 feet below the surface. These formations range from the Sparta and Frio formations in the northern part of the region to Miocene and Pleistocene in the southern part of the region. The Company's production comes predominately from Miocene and Frio age formations. Burrwood and West Delta Block 83 Fields. The Burrwood and West Delta Block 83 fields, located in Plaquemines Parish, Louisiana, were discovered in 1955 by Chevron. The fields lie upthrown to a large down-to-the southeast growth fault system with the structure striking northeast-southwest and dipping northwestward in a counter-regional direction. The fields have collectively produced 49.1 million barrels of oil and 143 Bcf of natural gas. The productive sands are Miocene and Pliocene age sands ranging in depth from 6,300 feet to approximately 11,700 feet. There are currently 23 active producing wells in the fields. 2 Goodrich acquired a 95% working interest in approximately 8,600 acres through an acquisition that closed on March 2, 2000 with an effective date of January 1, 2000. On March 12, 2002, the Company, in an effort to monetize a portion of the value created in its Burrwood and West Delta fields and enhance its liquidity position, completed the sale of a thirty percent (30%) working interest in the existing production and shallow rights, and a fifteen percent (15%) working interest in the deep rights below 10,600 feet, in the Fields for $12 million to Malloy Energy Company, LLC led by Patrick E. Malloy, III and participated in by Sheldon Appel, both members of the Company's Board of Directors. The sale price was determined by discounting the present value of the acquired interest in the field's proved, probable and possible reserves using prevailing oil and gas prices. The Company retains a sixty-five percent (65%) working interest in the existing production and shallow rights, and a thirty-two and one-half percent (32.5%) working interest in the deep rights after the close of the transaction. In conjunction with the sale, the investor group will provide a $7.7 million line of credit. The $7.7 million line of credit, which will reduce to $5.0 million on January 1, 2003, is subordinate to the Company's senior facility and can be used for acquisitions, drilling, development and general corporate purposes until December 31, 2004. The investor group retains the option, during the two-year period, to convert the amount outstanding under the credit line, and/or provide cash on any unused credit to a maximum of $7.7 million in the first year, reduced to $5.0 million after December 31, 2002, into working interests in any acquisition(s) the Company may make in Louisiana prior to January 1, 2005. The conversion of the credit facility will be on a pro-rata basis with the Company and may not exceed a maximum of $7.7 million, reduced to $5.0 million after December 31, 2002, or thirty percent (30%) of any potential acquisition(s). The Company will record a gain of approximately $2.1 million in the first quarter of 2002 as a result of the sale. The proceeds were used to reduce outstanding debt under its credit facility to approximately $12 million. Lafitte Field. The Lafitte Field is located in Jefferson Parish, Louisiana and was discovered in 1935 by Texaco. The Lafitte Field is a large, north- south elongated salt dome anticline feature. There are currently more than thirty (30) defined productive sands, which have collectively produced in excess of 264 million barrels of oil and 319 Bcf of natural gas. The productive sands are Miocene and Pliocene age sands ranging in depth from 3,000 feet to approximately 12,000 feet. There are currently 35 active producing wells in the field. In September 1999, the Company acquired an approximate 49% interest in the Lafitte Field with respect to the field's leases, surface facilities and equipment and an approximate 45% average interest in the 31 active producing wells. In November 1999, the Company acquired additional interests, resulting in an approximate field-wide interest of 49%. Second Bayou Field. The Second Bayou Field is located in Cameron Parish, Louisiana and was discovered in 1955 by the Sun Texas Company. Goodrich is the operator of nine producing wells, six of which are dually completed, and has an average working interest of approximately 29% in 1,395 gross acres. To date, the field has produced over 425 Bcf of natural gas and 3.6 million barrels of oil from multiple Miocene aged sands ranging from 4,000 to 15,200 feet. Pecan Lake Field. The Pecan Lake Field was discovered in 1944 by the Superior Oil Company. Geologically, the field is comprised of a relatively low relief, four-way closure and multiple stacked pay sands. The Pecan Lake Field comprises approximately 870 gross leased acres in Cameron Parish, Louisiana, approximately 42 miles southeast of Lake Charles, Louisiana. The field has produced from over 15 Miocene sands ranging in depths from 7,500 to 11,800 feet, which have been predominately gas and gas condensate reservoirs. These sand reservoirs are characterized by generally widespread development and strong waterdrive production mechanisms. The field has produced in excess of 354 Bcf of gas and 798,000 barrels of condensate. All of the field production to date has come from normal pressured reservoirs. The Company is the operator of seven producing wells with working interests ranging from approximately 43% to 47%. Isle St. Jean Charles Field. Isle St. Jean Charles Field is located in Terrebonne Parish, Louisiana. The field is a northwest extension of the Bayou Jean LaCroix Field located in the southeastern area of the Parish. These fields are trapped on a four-way closure, downthrown on a major east-west trending down to the south fault. 3 Production is from multiple Miocene-aged sands, which are normally pressured and range in depth from 9,000 feet to 13,000 feet. The field was developed primarily in the 1950's by Exxon and reservoirs have exhibited both depletion and water drive mechanisms. To date, this field has produced in excess of 57 billion cubic feet of gas and 6.61 million barrels of oil and condensate. Goodrich acquired its interest in its leasehold of approximately 425 acres through both acreage acquisitions and a farmout from Fina, et al. Goodrich is operator of the field and holds an approximate 34% working interest. Lake Raccourci Field. The Lake Raccourci Field was discovered by a predecessor to Exxon in 1949, with the field extended to the south by a predecessor to Amoco in 1958. Geologically, the field is a large four-way dipping closure, which is cross-cut by numerous northeast-southwest striking down to the south faults. The field has produced from a minimum of 18 different Miocene age sandstones, ranging in depth from 9,000 to 16,500 feet. These normally and abnormally pressured reservoirs exhibit depletion, water and combination drive mechanisms, and have produced in excess of 834 billion cubic feet of gas and 20 million barrels of oil and condensate. Goodrich acquired its average 27% working interest in the field through a farmout from a predecessor to Apache in July 1996 and a separate farmout from Exxon. The Company controls approximately 1,079 acres in the field. In December 2001, the Company purchased Exxon's interest in one of the wells in the field. Other. The Company maintains ownership interests in acreage and wells in several additional fields in Louisiana, including the (i) Opelousas Field, located in St. Landry Parish, (ii) Sibley Field, located in Webster Parish, (iii) City of Lake Charles Field, located in Calcasieu Parish, (iv) South Drew Field, located in Ouachita Parish, (v) Mosquito Bay Field, located in Terrebonne Parish and (vi) Kings Ridge Field, located in Lafourche Parish, and (vii) Ada Field, located in Bienville Parish Texas Goodrich explores and has production in the western, eastern and southern regions of Texas. Sean Andrew Field. The Sean Andrew Field was discovered by the Company in 1994 utilizing the Company's 375 square mile 3-D seismic database in West Texas. The Company is the operator of four wells in the field and holds an approximate 37.5% working interest. Marholl Field. The Marholl Field is a Siluro-Devonian (Fussellman) field in Dawson County discovered in 1995 through the use of 3-D seismic. The Company operates two wells in the field with an approximate 23% working interest. Mary Blevins Field. The Mary Blevins Field is located in Smith County, Texas. It was a new discovery that is fault separated from Hitts Lake Field, which was discovered in 1953 by Sun Oil. Currently there are four producing wells in the field in which Goodrich serves as operator, having an approximate 48% working interest in 782 gross acres. To date, Hitts Lake has produced over 14 million barrels of oil and Mary Blevins has produced over 551,000 barrels of oil from the Paluxy, which occurs at a depth of approximately 7,300 feet. Other. The Company maintains ownership interests in acreage and wells in several additional fields in Texas including the (i) Ackerly Field, located in Dawson and Howard Counties, (ii) Lamesa Farms Field, located in Dawson County, (iii) Midway Field, located in San Patricio County, (iv) East Jacksonville Field, located in Cherokee County, and (v) Mott Slough Field, located in Wharton County. Australia Goodrich has interest in two exploration permits in the Carnarvon Basin of Western Australia. 4 The Carnarvon Basin is two-thirds the size of the Gulf of Mexico and has produced in excess of 4.3 TCF and 550 million barrels of oil from less than 1000 wells. The Carnarvon Basin retains significant exploration potential. Additional strengths of the basin include large inexpensive acreage blocks, vast available geological and geophysical data sets, existing and expanding petroleum infrastructure and increasing domestic demands for natural gas. EP-395. Goodrich Petroleum has a 6.9% non-operated working interest in the 240 square kilometer Exploration Permit in 1995. Since 1995, the partners have reprocessed the original 2-D seismic data sets, shot a 38 km 3-D seismic survey (1995), and shot an additional 93 km of high quality 2-D seismic. EP-397. This Permit covers 160 square kilometers in which the Company has a 33% working interest. The 130 km of available seismic has been reprocessed and interpreted with several prospect leads. Oil and Natural Gas Reserves The following tables set forth summary information with respect to the Company's proved reserves as of December 31, 2001 and 2000, as estimated by the Company by compiling reserve information, substantially all of which was prepared by the engineering firm of Coutret and Associates, Inc.
After-Tax Net Reserves Pre-Tax Present Standardized Measure ---------------------------- Value of Future of Discounted Future Oil Net Revenues Net Revenues Category (Bbls) Gas (Mcf) Bcfe(1) (in millions) (in millions) -------- --------- ---------- ------- --------------- -------------------- December 31, 2001 Proved Developed...... 3,399,610 16,692,390 37.1 $ 42.39 Proved Undeveloped.... 5,350,810 17,263,860 49.4 36.50 --------- ---------- ---- ------- Total Proved........ 8,750,420 33,956,250 86.5 $ 78.89 $ 73.12 ========= ========== ==== ======= ======= December 31, 2000 Proved Developed...... 3,196,330 22,251,970 41.4 $162.41 Proved Undeveloped.... 3,593,028 7,258,709 28.8 87.70 --------- ---------- ---- ------- Total Proved........ 6,789,358 29,510,679 70.2 $250.11 $179.78 ========= ========== ==== ======= =======
- -------- (1) Estimated by the Company using a conversion ratio of 1.0 Bbl/6.0 Mcf. Reserve engineering is a subjective process of estimating underground accumulations of crude oil, condensate and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. The quantities of oil and natural gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil and natural gas sales prices may all differ from those assumed in these estimates. Therefore, the pre-tax Present Value of Future Net Revenues amounts shown above should not be construed as the current market value of the estimated oil and natural gas reserves attributable to the Company's properties. In accordance with the Commission's guidelines, the engineers' estimates of future net revenues from the Company's properties and the pre-tax Present Value of Future Net Revenues thereof are made using oil and natural gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The prices as of December 31, 2001, and 2000 used in such estimates averaged $2.51 and $10.06 per Mcf, respectively, of natural gas and $17.91 and $26.10 per Bbl, respectively, of crude oil/condensate. 5 Productive Wells The following table sets forth the number of active well bores in which the Company maintains ownership interests as of December 31, 2001:
Oil Gas Total --------------- --------------- --------------- Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2) -------- ------ -------- ------ -------- ------ California...................... -- -- 4.00 2.09 4.00 2.09 Louisiana....................... 54.00 34.44 40.00 18.90 94.00 53.34 Michigan........................ 2.00 .26 5.00 .05 7.00 .31 New Mexico...................... -- -- 1.00 .03 1.00 .03 Texas........................... 22.00 10.83 4.00 .64 26.00 11.47 ----- ----- ----- ----- ------ ----- Total Productive Wells........ 78.00 45.53 54.00 21.71 132.00 67.24 ===== ===== ===== ===== ====== =====
- -------- (1) Does not include royalty or overriding royalty interests. (2) Net working interest. Productive wells consist of producing wells and wells capable of production, including gas wells awaiting pipeline connections. A gross well is a well in which the Company maintains an ownership interest, while a net well is deemed to exist when the sum of the fractional working interests owned by the Company equals one. Wells that are completed in more than one producing horizon are counted as one well. Of the gross wells reported above, twelve had multiple completions. Acreage The following table summarizes the Company's gross and net developed and undeveloped natural gas and oil acreage under lease as of December 31, 2001. Acreage in which the Company's interest is limited to a royalty or overriding royalty interest is excluded from the table.
Gross Net ------- ------ Developed acreage California............................................... 1,280 568 Louisiana................................................ 24,087 14,855 Michigan................................................. 1,920 19 Texas.................................................... 4,365 1,491 Undeveloped acreage Offshore Australia....................................... 98,841 17,306 Louisiana................................................ 2,123 1,344 Michigan................................................. 640 50 Texas.................................................... 1,000 552 ------- ------ Total.................................................. 134,256 36,185 ======= ======
Undeveloped acreage is considered to be those lease acres on which wells have not been drilled or completed to the extent that would permit the production of commercial quantities of natural gas or oil, regardless of whether or not such acreage contains proved reserves. As is customary in the oil and gas industry, the Company can retain its interest in undeveloped acreage by drilling activity that establishes commercial production sufficient to maintain the leases or by payment of delay rentals during the remaining primary term of such a lease. The natural gas and oil leases in which the Company has an interest are for varying primary terms; however, most of the Company's developed lease acreage is beyond the primary term and is held so long as natural gas or oil is produced. 6 Operator Activities Goodrich Petroleum operates a majority in value of the Company's producing properties, and will generally seek to become the operator of record on properties it drills or acquires in the future. Drilling Activities The following table sets forth the drilling activities of the Company for the last three years. (As denoted in the following table, "Gross" wells refers to wells in which a working interest is owned, while a "net" well is deemed to exist when the sum of fractional ownership working interests in gross wells equals one.)
Year Ended December 31, ---------------------------- 2001 2000 1999 --------- --------- -------- Development Wells: Productive................................. 4.00 3.39 3.00 1.77 1.00 .49 Non-Productive............................. -- -- 1.00 .49 -- -- ---- ---- ---- ---- ---- --- Total.................................... 4.00 3.39 4.00 2.26 1.00 .49 ==== ==== ==== ==== ==== === Exploratory Wells: Productive................................. 1.00 .17 2.00 .93 -- -- Non-Productive............................... 2.00 1.40 2.00 1.00 1.00 .12 ---- ---- ---- ---- ---- --- Total.................................... 3.00 1.57 4.00 1.93 1.00 .12 ==== ==== ==== ==== ==== === Total Wells: Productive................................. 5.00 3.56 5.00 2.70 1.00 .49 Non-Productive............................. 2.00 1.40 3.00 1.49 1.00 .12 ---- ---- ---- ---- ---- --- Total.................................... 7.00 4.96 8.00 4.19 2.00 .61 ==== ==== ==== ==== ==== ===
Net Production, Unit Prices and Costs The following table presents certain information with respect to oil, gas and condensate production attributable to the Company's interests in all of its fields, the revenue derived from the sale of such production, average sales prices received and average production costs during each of the years in the three-year period ended December 31, 2001.
2001 2000 1999 --------- --------- --------- Net Production: Natural gas (Mcf)........................ 3,823,227 3,394,921 2,930,655 Oil (barrels)............................ 581,680 571,766 394,442 Natural gas equivalents (Mcfe)(1)........ 7,313,307 6,825,517 5,297,307 Average Net Daily Production: Natural gas (Mcf)........................ 10,475 9,301 8,029 Oil (Bbls)............................... 1,594 1,566 1,081 Natural gas equivalents (Mcfe)(1)........ 20,039 18,697 14,515 Average Sales Price Per Unit(2): Natural gas (per Mcf).................... $ 3.97 3.95 2.41 Oil (per Bbl)............................ $ 24.67 25.55 16.88 Other Data: Lease operating expense (per Mcfe)....... $ 0.90 0.69 0.45 Production taxes (per Mcfe).............. $ 0.26 0.32 0.23 DD & A (per Mcfe)........................ $ 0.94 0.87 0.90 Exploration (per Mcfe)................... $ 0.57 0.41 0.31
- -------- (1) Estimated by the Company using a conversion ratio of 1.0 Bbl/6.0 Mcf. (2) See results of operations under Item 7 for discussion of the effects of hedging on results. 7 The Company's acquisition strategy calls for the acquisition of mature oil and gas fields with declining production profiles, established production histories and multiple production sands that have been overlooked and/or starved of capital. Acquisitions of this type generally require significant lease operation, exploration and capital expenditure cash outlays during initial years of ownership. The Company's Lafitte, Burrwood and West Delta Fields acquisitions in late 1999 and early 2000, were strategic acquisitions that fit the aforementioned profile, and account for the increased unit costs noted above in the 2001 and 2000 periods presented above. Oil and Gas Marketing and Major Customers Marketing. Goodrich's natural gas production is sold under spot or market- sensitive contracts and to various gas purchasers on short-term contracts. Goodrich's natural gas condensate is sold under short-term rollover agreements based on current market prices. The Company's crude oil production is marketed to several purchasers based on short-term contracts. The Company entered into an agreement with Natural Gas Ventures, L.L.C. ("NGV"), a Louisiana limited liability company, for the purpose of marketing the Company's and its contracting parties' natural gas. The Company and other contracting parties contribute natural gas to NGV, who then markets to gas purchasers, pursuant to the joint venture agreement between NGV and Seaber Corporation of Louisiana ("Seaber"). The Company can terminate this agreement on 60-days notice. The Company believes its contract with NGV allows it to realize higher prices for its contributed gas because of the greater market power associated with larger volumes of gas than the Company would have for sale on a stand-alone basis. Customers. Due to the nature of the industry, the Company sells its oil and natural gas production to a limited number of purchasers and, accordingly, amounts receivable from such purchasers could be significant. Revenues from these sources as a percent of total revenues for the periods presented were as follows:
Year Ended December 31, ---------------- 2001 2000 1999 ---- ---- ---- Seaber Corporation of Louisiana............................ 56% 48% 37% Genesis Crude Oil, L.P..................................... 22% 27% Navajo Refining Company.................................... 4% 4% Gulfmark Energy, Inc....................................... -- 10% 10% Equiva Trading............................................. -- 8% 27% Texla Energy Management.................................... -- -- 10%
Competition The oil and gas industry is highly competitive. Major and independent oil and gas companies, drilling and production acquisition programs and individual producers and operators are active bidders for desirable oil and gas properties, as well as the equipment and labor required to operate those properties. Many competitors have financial resources substantially greater than those of the Company, and staffs and facilities substantially larger than those of the Company. The availability of a ready market for the oil and gas production of the Company will depend in part on the cost and availability of alternative fuels, the level of consumer demand, the extent of domestic production of oil and gas, the extent of importation of foreign oil and gas, the cost of and proximity to pipelines and other transportation facilities, regulations by state and federal authorities and the cost of complying with applicable environmental regulations. Regulations The availability of a ready market for any natural gas and oil production depends upon numerous factors beyond the Company's control. These factors include regulation of natural gas and oil production, federal and 8 state regulations governing environmental quality and pollution control, state limits on allowable rates of production by a well or proration unit, the amount of natural gas and oil available for sale, the availability of adequate pipeline and other transportation and processing facilities and the marketing of competitive fuels. For example, a productive natural gas well may be "shut- in" because of an oversupply of natural gas or the lack of an available natural gas pipeline in the areas in which the Company may conduct operations. State and federal regulations generally are intended to prevent waste of natural gas and oil, protect rights to produce natural gas and oil between owners in a common reservoir, control the amount of natural gas and oil produced by assigning allowable rates of production and control contamination of the environment. Pipelines are subject to the jurisdiction of various federal, state and local agencies as well. Environmental Regulation Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the Company's operations and costs as a result of their effect on oil and gas development, exploration and production operations. It is not anticipated that the Company will be required in the near future to expend amounts that are material in relation to its total capital expenditures program by reason of environmental laws and regulations but, inasmuch as such laws and regulations are frequently changed by both federal and state agencies, the Company is unable to predict the ultimate cost of continued compliance. Additionally, see existing EPA matters discussed in Item 3--Legal Proceedings. State statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. In addition, there are state statutes, rules and regulations governing conservation matters, including the unitization or pooling of oil and gas properties, establishment of maximum rates of production from oil and gas wells and the spacing, plugging and abandonment of such wells. Such statutes and regulations may limit the rate at which oil and gas could otherwise be produced from the Company's properties and may restrict the number of wells that may be drilled on a particular lease or in a particular field. Item 3. Legal Proceedings. The U.S. Environmental Protection Agency ("EPA") has identified the Company as a potentially responsible party ("PRP") for the cost of clean-up of "hazardous substances" at an oil field waste disposal site in Vermilion Parish, Louisiana. The Company estimates that the remaining cost of long-term clean-up of the site will be approximately $3.5 million, with the Company's percentage of responsibility estimated to be approximately 3.05%. As of December 31, 2001, the Company had paid $321,000 in costs related to this matter and accrued $122,500 for the remaining liability. These costs have not been discounted to their present value. The EPA and the PRPs will continue to evaluate the site and revise estimates for the long-term clean-up of the site. There can be no assurance that the cost of clean-up and the Company's percentage responsibility will not be higher than currently estimated. In addition, under the federal environmental laws, the liability costs for the clean-up of the site is joint and several among all PRPs. Therefore, the ultimate cost of the clean-up to the Company could be significantly higher than the amount presently estimated or accrued for this liability. On February 8, 2000, the Company commenced a suit against the operator and joint owner of the Lafitte Field, alleging certain items of misconduct and violations of the letter agreement associated with the joint acquisition. The suit is ongoing and it is too early to predict a likely outcome, however, as the Company is the plaintiff in this action, this action is not expected to have a significantly adverse impact on the operations or financial position of the Company. The Company is party to additional lawsuits arising in the normal course of business. The Company intends to defend these actions vigorously and believes, based on currently available information, that adverse results or judgments from such actions, if any, will not be material to its financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders. None. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock is traded on the New York Stock Exchange. At March 15, 2002 the number of holders of record of the Company's common stock without determination of the number of individual participants in security position was 2,187 with 17,896,356 shares outstanding. High and low sales prices for the Company's common stock for each quarter during the calendar years 2001 and 2000 are as follows:
2001 2000 ---------- --------- Quarter Ended High Low High Low ------------- ----- ---- ---- ---- March 31............................................. $6.50 4.88 6.25 2.63 June 30.............................................. $6.75 5.80 5.56 4.25 September 30......................................... $5.83 4.80 6.25 4.50 December 31.......................................... $5.35 3.71 6.50 5.00
The Company has not paid a cash dividend on its common stock and does not intend to pay such a dividend in the foreseeable future. 10 Item 6. Selected Financial Data. Selected Statement of Operations Data: The following table sets forth selected financial data of the Company for each of the years in the five-year period ended December 31, 2001, which information has been derived from the Company's audited financial statements. This information should be read in connection with and is qualified in its entirety by the more detailed information in the Company's financial statements under Item 8 below and Item 7, "Management's Discussion And Analysis Of Financial Condition And Results Of Operations."
Year Ended December 31, ----------------------------------------------------------- 2001 2000 1999 1998 1997 ----------- ---------- ---------- ---------- ---------- Revenues................ $29,894,779 28,489,391 14,020,574 10,591,873 12,901,361 Depletion, Depreciation and Amortization....... 6,844,751 5,953,641 4,743,608 4,094,447 4,862,754 Exploration............. 4,174,436 2,813,332 1,656,158 6,010,425 3,205,730 Interest Expense........ 1,290,681 4,390,331 2,810,576 1,909,849 1,416,675 Total Costs and Expenses............... 25,687,242 24,712,518 15,330,062 18,311,421 14,978,629 Gain (Loss) on sale of assets................. 26,779 307,299 (519,495) 4,206 688,304 Income taxes............ 1,487,070 (1,655,032) -- -- -- Net Income(Loss)........ 2,747,246 5,739,204 (1,828,983) (7,715,342) (1,388,964) Preferred Stock Dividends.............. 3,002,872 1,193,768 1,249,343 1,255,638 1,205,210 Income(Loss) Applicable to Common Stock........ (255,626) 4,545,436 (3,078,326) (8,970,980) (2,594,174) Basic Income(Loss) Per Average Common Share... $ (.01) .46 (.58) (1.71) (.50) Diluted Income(Loss) Per Average Common Share... $ (.01) .35 (.58) (1.71) (.50) Average Common Shares Outstanding Basic...... 17,351,375 9,903,248 5,288,011 5,243,105 5,229,307 Average Common Shares Outstanding Diluted.... 17,351,375 13,116,641 5,288,011 5,243,105 5,229,307 Year Ended December 31, ----------------------------------------------------------- 2001 2000 1999 1998 1997 ----------- ---------- ---------- ---------- ---------- Selected Balance Sheet Data: Total Assets.......... $82,243,931 65,343,594 56,258,552 44,036,588 37,537,918 Total Long Term Debt.. 24,500,000 22,965,000 36,953,117 29,500,000 18,500,000 Stockholders' Equity.. $47,920,547 32,605,216 6,411,044 4,959,388 14,332,676
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company was created by the combination of Patrick Petroleum Company ("Patrick") and La/Cal Energy Partners, a partnership in which it had a controlling interest ("La/Cal"), in August 1995. The combination was a reverse merger in which the Company's current management gained control of the combined company, renamed it Goodrich Petroleum Corporation and assumed Patrick's New York Stock Exchange listing. Results of Operations Year ended December 31, 2001 versus year ended December 31, 2000--Total revenues in 2001 amounted to $29,895,000 and were $1,406,000 (5%) higher than total revenues in 2000 due primarily to higher oil and gas sales. Oil and gas sales were $29,542,000 for the twelve months ended 2001, compared to $28,014,000, or $1,528,000 higher due to higher oil and gas production volumes partially offset by lower oil prices. Oil sales were reduced by $89,000 and gas sales were reduced by $972,000 for the year ended December 31, 2001 11 compared to reductions of $2,461,000 for oil sales and $441,000 for gas sales in the year ended December 31, 2000 as a result of settlement of the Company's outstanding futures contracts. The Company recorded a gain on the sale of certain non-core oil and gas properties of $27,000 for the twelve months ended December 31, 2001 compared to a gain of $307,000 for the twelve months ended December 31, 2000. The following table reflects the production volumes and pricing information for the periods presented:
2001 2000 ------------------------ ------------------------ Production Average Price Production Average Price ---------- ------------- ---------- ------------- Gas (Mcf)............... 3,823,227 $ 3.97 3,394,921 $ 3.95 Oil (Bbls).............. 581,680 $24.67 571,766 $25.55
Lease operating expense was $6,576,000 for 2001 compared to $4,695,000 for 2000, or $1,881,000 higher, due primarily to a full twelve months of costs at Burrwood and West Delta 83 fields in the 2001 period compared to ten months in the prior period and an increased number of net properties. Production taxes in 2001 were $1,866,000 compared to $2,219,000 or $353,000 lower due to severance tax exemptions received on certain production in the Burrwood and West Delta 83 fields. Depletion, depreciation and amortization was $6,845,000 in 2001 versus $5,954,000 in 2000, or $891,000 higher, due to increased oil and gas production. The Company incurred $4,174,000 of exploration expense in 2001 compared to $2,813,000 in 2000, or $1,361,000 higher, due primarily to dry hole and seismic costs of $1,604,000 and $994,000 respectively in 2001, compared to $796,000 and $475,000 respectively in 2000. The Company recorded an impairment in the recorded value of certain oil and gas properties in 2001 in the amount of $1,801,000 due primarily to a sooner than anticipated depletion of reserves in two non-core fields. This compares to an impairment of $1,835,000 recorded in 2000. Interest expense was $1,291,000 in the twelve months ended December 31, 2001 compared to $4,390,000 in the twelve months ended December 31, 2000, or $3,099,000 lower, due primarily to lower average debt outstanding and a lower average effective interest rate for the twelve months ended December 31, 2001. The 2001 amount includes $242,000 of non cash expenses associated with the amortization of deferred debt financing costs and amortization of the discount associated with the production payment liability recorded in connection with the Lafitte Field acquisition. The 2000 amount includes $919,000 of non cash expenses associated with the amortization of financing costs and debt discount in connection with the September 1999 private placement and amortization of the discount associated with the production payment liability recorded in connection with the Lafitte Field acquisition. General and administrative expenses amounted to $3,135,000 for 2001 versus $2,518,000 in 2000, 617,000 higher, due mostly to an increase in legal expenses in the 2001 period. The Company recorded deferred tax expense (does not require current cash payment) of $1,487,000 in 2001 compared to the recording of a deferred tax benefit of $1,655,000 in 2000 based primarily on the evaluation of utilization of net operating loss carryforwards. During 2001, the Company paid dividends of $626,000 on its Series A preferred stock. The Company exchanged each share of its Series B preferred stock for 1.8 shares of its common stock and recorded a conversion premium on the income statement as dividends, of $2,377,000 to reflect the excess of the 1.8 conversion factor over the terms of the original preferred stock issuance. For the period ended December 31, 2000, the Company paid an aggregate of approximately $1.8 million of dividend arrearages and $580,000 of regular quarterly (third and fourth quarter 2000) dividends on its outstanding Series of preferred stock. At December 31, 2001 and 2000, the Company was current as to dividends its preferred stock. The Company also accrued non-cash dividends on its Goodrich--Louisiana Series A Preferred units, prior to conversion, of $38,000 that is reflected as preferred dividends of subsidiary in the statement of operations for the 2000 period. Year ended December 31, 2000 versus year ended December 31, 1999--Total revenues in 2000 amounted to $28,489,000 and were $14,468,000 (103%) higher than total revenues in 1999 due primarily to higher oil and 12 gas sales. Oil and gas sales were $28,014,000 for the twelve months ended 2000, compared to $13,735,000, or $14,279,000 higher due to higher oil and gas prices and higher oil and gas production volumes associated with the Burrwood and West Delta 83 Fields acquisition in February 2000, and a full year of production at the Lafitte Field in 2000 compared to four months in 1999. Oil sales were reduced by $2,461,000 and gas sales were reduced by $441,000 for the year ended December 31, 2000 as a result of settlement of the Company's outstanding futures contracts. The Company recorded a gain on the sale of certain non-core oil and gas properties of $307,000 for the twelve months ended December 31, 2000. The Company incurred a loss on the sale of marketable equity securities of $519,000 for the twelve months ended December 31, 1999. The following table reflects the production volumes and pricing information for the periods presented:
2000 1999 ------------------------ ------------------------ Production Average Price Production Average Price ---------- ------------- ---------- ------------- Gas (Mcf)............... 3,394,921 $ 3.95 2,930,655 $ 2.41 Oil (Bbls).............. 571,766 $25.55 394,442 $16.88
Lease operating expense was $4,695,000 for 2000 compared to $2,681,000 for 1999, or $2,014,000 higher, due primarily to costs associated with the Company's Burrwood and West Delta 83 Fields and Lafitte Field acquisitions, and higher base operating costs associated with certain mature oil and gas fields. Production taxes for 2000 were $2,219,000 compared to $910,000 for 1999 or $1,309,000 higher due to higher oil and gas sales as a result of the Burrwood, West Delta 83 Field and Lafitte Field acquisitions. Depletion, depreciation and amortization was $5,954,000 in 2000 versus $4,744,000 in 1999, or $1,210,000 higher, due to increased oil and gas production including volumes associated with the Burrwood, West Delta 83 and Lafitte Field properties and increased capitalized costs. The Company incurred $2,813,000 of exploration expense in 2000 compared to $1,656,000 in 1999, or $1,157,000 higher, due primarily to seismic and dry hole costs of $796,000 and $475,000 respectively in 2000, compared to $51,000 and $68,000 respectively in 1999. The Company recorded an impairment in the recorded value of certain oil and gas properties in 2000 in the amount of $1,835,000 due primarily to a sooner than anticipated depletion of reserves in one non-core field. This compares to an impairment of $465,000 recorded in 1999. Interest expense was $4,390,000 in the twelve months ended December 31, 2000 compared to $2,810,000 in the twelve months ended December 31, 1999, or $1,580,000 higher, due to higher average debt outstanding and higher average effective interest rate for the twelve months ended December 31, 2000. The 2000 amount includes $919,000 of non cash expenses associated with the amortization of financing costs and debt discount in connection with the September 1999 private placement and amortization of the discount associated with the production payment liability recorded in connection with the Lafitte Field acquisition. Such non-cash expenses totaled $252,000 for the 1999 period. General and administrative expenses amounted to $2,518,000 for 2000 versus $1,990,000 in 1999. Liquidity and Capital Resources Net cash provided by operating activities was $15,760,000 or 25% higher in 2001 compared to $12,641,000 in 2000 and $1,065,000 in 1999. The accompanying consolidated statements of cash flows identify major differences between net income (loss) and net cash provided by operating activities for each of the years presented. Net cash used in investing activities amounted to $31,846,000 in 2001 compared to $15,881,000 in 2000 and $6,407,000 in 1999. Net cash used in investing activities for 2001 consists of capital expenditures of $32,253,000 and proceeds from the sale of oil and gas properties and equipment of $407,000. Net cash used in 13 investing activities for the twelve months ended December 31, 2000, reflects capital expenditures totaling $15,142,000, cash paid in connection with the acquisition of oil and gas properties of $1,199,000 and proceeds from the sale of oil and gas properties of $460,000. The amount for year ended December 31, 1999 is composed almost entirely of cash paid in connection with the purchase of oil and gas properties of $4,100,000 and exploration and drilling capital expenditures of $2,557,000. These amounts were partially offset by proceeds from the sale of marketable equity securities and the sale of an oil and gas property of $240,000 and $9,000, respectively. Net cash provided by financing activities was $12,802,000 in 2001 compared to $842,000 in 2000 and $11,176,000 in 1999. The 2001 amounts consist of proceeds from the issuance of common stock of $15,000,000 and pay downs by the Company under its line of credit of $13,690,000. The 2001 amounts also include proceeds from bank borrowings of $15,225,000, the payment of debt financing and public offering costs of $1,984,000, changes in restricted cash of $799,000, and production payments of $545,000. In addition, the 2001 amount includes preferred stock dividends of $626,000 and proceeds from the exercise of stock warrants and employee stock options of $210,000 and $12,000, respectively. The 2000 amount includes proceeds from the issuance of common stock of $9,150,000 and paydowns by the Company under its line of credit of $4,125,000. The 2000 amount includes preferred stock dividends of $2,308,000, changes in restricted cash of $1,240,000 and proceeds from the exercise of stock purchase warrants and director and employee stock options of $451,000. The 2000 amount also includes production payments of $653,000 and payment of debt and equity financing costs of $432,000. The 1999 amount includes proceeds from the issuance of convertible notes of $12,000,000 and proceeds from the issuance of preferred stock of $3,000,000. The amount also includes debt financing costs of $1,303,000 and pay downs of $2,409,000 by the Company under its line of credit. The 1999 period reflects no preferred dividends. Credit Facility On November 9, 2001, the Company established a new credit facility with BNP Paribas Bank, with a borrowing base of $25,000,000. The borrowing base will remain effective until the next borrowing base redetermination, which is scheduled to be made on or before March 31, 2002. Interest on the credit facility will accrue at a rate calculated at the option of the Company as either the BNP Paribas Bank base rate plus 0.00% to 0.50%, or LIBOR plus 1.50%--2.50% depending on borrowing base utilization. Interest on LIBOR-Rate borrowings is due and payable on the last day of its respective Interest Period. Accrued interest on each Base-Rate borrowings is due and payable on the last day of each quarter. The credit facility will mature on November 8, 2004. The credit facility requires that the Company pay a 0.375% per annum commitment fee, payable in quarterly installments quarter based on the Company's borrowing base utilization. Prior to maturity, no payments are required so long as the maximum borrowing base amount exceeds the amounts outstanding under the credit facility. The credit facility requires the Company to monitor tangible net worth and maintain certain financial statement ratios at certain levels. Substantially all the Company's assets are pledged to secure the credit facility. Public Offering On February 1, 2001, the Company completed a public offering of 3,000,000 shares of its common stock at $5.00 per share resulting in net proceeds of approximately $13.2 million to the Company. The Company used the proceeds from the offering and available cash to reduce outstanding debt under its credit facility by approximately $13.7 million. Exchange of Series B Preferred Stock Prior to the public offering, the Company reached an agreement with all of the holders of its Series B preferred stock to exchange each share of Series B for 1.8 shares of its common stock. Concurrent with the closing of the public offering, the Company exchanged all 660,839 shares of its Series B preferred stock into 1,189,510 shares of common stock. In connection with the conversion of the Series B preferred stock, a 14 conversion premium in the amount of $2,377,000 was recorded to reflect the excess of the 1:8 conversion factor over the terms of the original preferred stock issuance. This one-time, non-cash charge has been reflected as a preferred stock dividend to arrive at net income applicable to common stock and had no effect on stockholders equity. Stock Listing The Company has been notified by the New York Stock Exchange ("NYSE") that it has been removed from the NYSE's "Watch List" under the Exchange's continued listing and compliance standards and is now considered a "company in good standing" as the NYSE rule filing No. SR-NYSE-2001-02 was approved by the Securities and Exchange Commission on June 27, 2001. The Company will be subject to the NYSE's normal continued listing requirements and its monitoring process. Subsequent Events--Sale of Oil and Gas Properties to Related Party On March 12, 2002, the Company, in an effort to monetize a portion of the value created in its Burrwood and West Delta fields and enhance its liquidity position, completed the sale of a thirty percent (30%) working interest in the existing production and shallow rights, and a fifteen percent (15%) working interest in the deep rights below 10,600 feet, in its Burrwood and West Delta 83 fields for $12 million to Malloy Energy Company, LLC led by Patrick E. Malloy, III and participated in by Sheldon Appel, both members of the Company's Board of Directors. The sale price was determined by discounting the present value of the acquired interest in the fields' proved, probable and possible reserves using prevailing oil and gas prices. The Company has retained a sixty-five percent (65%) working interest in the existing production and shallow rights, and a thirty-two and one-half percent (32.5%) working interest in the deep rights after the close of the transaction. In conjunction with the sale, Malloy Energy Company, LLC, will provide a $7.7 million line of credit. The $7.7 million line of credit, which will reduce to $5.0 million on January 1, 2003, is subordinate to the Company's senior facility and can be used for acquisitions, drilling, development, and general corporate purposes until December 31, 2004. Malloy Energy Company, LLC, retains the option, during the two-year period, to convert the amount outstanding under the credit line, and/or provide cash on any unused credit up to a maximum of $7.7 million in the first year, reduced to $5.0 million after December 31, 2002, into working interests in any acquisition(s) the Company may make in Louisiana prior to January 1, 2005. The conversion of the credit line will be on a pro-rata basis with the Company and may not exceed a maximum of $7.7 million reduced to $5.0 million after December 31, 2002, or thirty percent (30%) of any potential acquisition(s). The Company will record a gain of approximately $2.1 million in the first quarter of 2002 as a result of the sale. The Company used the proceeds to reduce outstanding debt under its credit facility to approximately $12 million. Burrwood and West Delta 83 Field Performance Bond and Seismic Study In connection with the March 2, 2000 Burrwood and West Delta 83 Field aquisition, the Company secured a performance bond and established an escrow account to be used for the payment of obligations associated with the plugging and abandonment of the wells, salvage and removal of platforms and related equipment, and the site restoration of the fields. Required escrowed outlays included an initial cash payment of $750,000 and monthly cash payments of $70,000 beginning June 1, 2000 and continuing until June 1, 2005. The escrow agreement was amended in the fourth quarter of 2001 to suspend monthly cash payments and cap the escrow account at its current balance of $2,039,000. The escrow account is shown on the Balance Sheet as Restricted Cash. In addition, as part of the purchase agreement, the Company agreed to shoot a 3-D seismic survey over the fields which was completed in the fourth quarter of 2001. The cost of the seismic study was approximately $2,500,000 of which $1,250,000 was paid in 2001. Conversion of Private Placement Securities On February 17, 2000, all of the holders of the 300,000 outstanding preferred units of Goodrich Petroleum Company, LLC's Series A Preferred Units converted their units into approximately 1,550,000 shares of the 15 Company's common stock. The conversion of the preferred units into common stock increased the Company's stockholders equity by approximately $2,700,000. On August 17, 2000, the holders of approximately $12,943,000 of principal and accrued interest on the above mentioned convertible notes converted their notes into 3,235,647 shares of the Company's common stock. The conversion of the notes into common stock increased stockholders equity by approximately $10,130,000, inclusive of approximately $1,033,000 in remaining deferred loan financing costs, which were eliminated. Financing Transactions In October 2000 the Company completed a private placement of 1,000,000 shares of its common stock for gross proceeds of $5.0 million. In August 2000, the Company issued 3,235,647 shares of its common stock in connection with the conversion of convertible notes issued by two of its subsidiaries. The convertible notes had outstanding principal and accrued interest of $12.9 million at the time of conversion. In February 2000, the Company completed a private placement of 1,533,333 shares of its common stock resulting in gross proceeds of $4.5 million. Contractual Obligations and Guarantees--The Company is obligated to make future cash payments under its borrowing agreement. Total payments due after 2001 under such contractual obligations are shown below.
Amount Due ----------------------------------------- Total 2002 2003-2005 2006-2007 After 2007 (Millions of dollars) ----- ---- --------- --------- ---------- Long-term debt.................. $24.5 -- 24.5 -- --
Accounting Matters Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) were issued in July 2001. SFAS No. 141 requires that all business combinations be accounted for under the purchase method of accounting and that certain acquired intangible assets in a business combination be recognized and reported as assets apart from goodwill. SFAS No. 142 requires that amortization of goodwill be replaced with periodic tests of the goodwill's impairment at least annually in accordance with the provisions of SFAS No. 142 and that intangible assets other than goodwill be amortized over their useful lives. The Company will adopt SFAS No. 141 immediately and SFAS No. 142 in the first quarter 2002. The adoption of SFAS No. 141 and 142 are not expected to have a significant impact on the Company's financial statements. Statement of Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143) has been approved for issuance. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The statement is effective for fiscal years beginning after June 15, 2002. The Company has not yet determined what, if any, impact the adoption of this statement may have on its financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long- lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued 16 operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company is required to adopt SFAS No. 144 on January 1, 2002. The Company has not yet determined what, if any, impact the adoption of this statement may have on its financial statements. Significant accounting policies--In preparing the financial statements of the Company in accordance with accounting principles generally accepted in the United States of America, management must make a number of estimates and assumptions related to the reporting of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities. Application of certain of the Company's accounting policies requires a significant amount of estimates. These accounting policies are described below. . Proved oil and natural gas reserves--Proved reserves are defined by the Securities and Exchange Commission (SEC) as those volumes of crude oil, condensate, natural gas liquids and natural gas that geological and engineering data demonstrate with reasonable certainty are recoverable from known reservoirs under existing economic and operating conditions. Proved developed reserves are volumes expected to be recovered through existing wells with existing equipment and operating methods. Although the Company's external engineers are knowledgeable of and follow the guidelines for reserves as established by the SEC, the estimation of reserves requires the engineers to make a significant number of assumptions based on professional judgment. Estimated reserves are often subject to future revision, certain of which could be substantial, based on the availability of additional information, including: reservoir performance, new geological and geophysical data, additional drilling, technological advancements, price changes and other economic factors. Changes in oil and natural gas prices can lead to a decision to start-up or shut-in production, which can lead to revisions to reserve quantities. Reserve revisions inherently lead to adjustments of depreciation rates utilized by the Company. The Company cannot predict the types of reserve revisions that will be required in future periods. . Successful efforts accounting--The Company utilizes the successful efforts method to account for exploration and development expenditures. Unsuccessful exploration wells are expensed and can have a significant effect on operating results. Successful exploration drilling costs and all development capital expenditures are capitalized and systematically charged to expense using the units of production method based on proved developed oil and natural gas reserves as estimated by engineers. The Company also uses proved developed reserves for calculating the amount of expense to recognize for future estimated dismantlement and abandonment costs. . Impairment of properties--The Company continually monitors its long- lived assets recorded in Property, Plant and Equipment in the Consolidated Balance Sheet to make sure that they are presented fairly and accurately. The Company must evaluate its properties for potential impairment when circumstances indicate that the carrying value of an asset could exceed its fair value. Performing these evaluations requires a significant amount of judgment since the results are based on estimated future events. Such events include a projection of future oil and natural gas sales prices, an estimate of the ultimate amount of recoverable oil and natural gas reserves that will be produced from a field, the timing of this future production, future costs to produce the oil and natural gas, and future inflation levels. The need to test a property for impairment can be based on several factors, including a significant reduction in sales prices for oil and/or natural gas, unfavorable adjustments to reserves, or other changes to contracts, environmental regulations or tax laws. The Company cannot predict the amount of impairment charges that may be recorded in the future. . Income taxes--The Company is subject to income and other related taxes in areas in which it operates. When recording income tax expense, certain estimates are required by management due to timing and the impact of future events on when income tax expenses and benefits are recognized by the Company. The Company has recorded a deferred tax asset relating primarily to its tax operating loss carryforwards. The Company periodically evaluates its deferred tax asset to determine the likelihood of its realization. A valuation allowance has been recorded for the deferred tax asset to the extent that they are not likely to be realized based on management's estimation. 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Debt and debt-related derivatives The Company is exposed to interest rate risk on its short-term and long-term debt with variable interest rates. Based on the overall interest rate exposure on variable rate debt at December 31, 2001 a hypothetical 2% increase in the interest rates would increase interest expense by approximately $315,000. Hedging Activity The Company enters into futures contracts or other hedging agreements from time to time to manage the commodity price risk for a portion of its production. The Company considers these to be hedging activities and, as such, monthly settlements on these contracts are reflected in its oil and natural gas sales. The Company's strategy, which is reviewed periodically by its board of directors, has been to hedge between 30% and 70% of its production. Most of the Company's hedging arrangements are in the form of costless collars, whereby a floor and a ceiling are fixed. It is the Company's belief that the benefits of the downside protection afforded by these costless collars outweigh the costs incurred by losing potential upside when commodity prices increase. On January 1, 2001, the Company adopted a formal policy with respect to hedging arrangements in accordance with accounting pronouncements. The Company does not expect its hedging policy or future hedging practice to differ materially from its historical practice. The Company has no plans to engage in speculative activity not supported by production. The Company's futures contract agreements provide for separate contracts tied to the New York Mercantile Exchange ("NYMEX") light sweet crude oil and natural gas futures contracts. The contracts contain specific price ranges or "collars" that are settled monthly based on the differences between the contract price or price ranges and the average NYMEX prices for each month applied to the related contract volumes. To the extent the average NYMEX price exceeds the contract price, the Company pays the difference, and to the extent the contract price exceeds the average NYMEX price, the Company receives the difference. As of December 31, 2001, the Company's open forward position on its outstanding natural gas future contracts were as follows: (a) 2000 Mmbtu per day with a no cost collar of $2.50 and $3.18 per Mmbtu through December 31, 2002; and (b) 1333 Mmbtu per day with a no cost collar of $2.75 and $3.09 per Mmbtu through December 31, 2002. The fair value of the natural gas hedging contracts in place at December 31, 2001, resulted, in an asset of $13,000. The Company entered into the following oil and gas hedging contracts subsequent to December 31, 2001. Natural Gas 1,200 MMBtu per day "swap" at $2.87 for April through November 2002; 1,500 MMBtu per day "swap" at $2.89 for April through November 2002; and 3,000 MMBtu per day "swap" at $3.50 for December 2002 through February 2003. 18 Crude Oil 200 barrels of oil per day "swap" at $21.43 for March 2002; 300 barrels of oil per day "swap" at $21.95 for April and May 2002; 150 barrels of oil per day "swap" at $24.07 for April and May 2002; and 150 barrels of oil per day "swap" at $23.22 for April and May 2002 Price fluctuations and the volatile nature of markets Despite the measures the Company has taken to attempt to control price risk, it remains subject to price fluctuations for oil and natural gas sold in the spot market. Prices received for natural gas sold in the spot market are volatile due primarily to seasonality of demand and other factors beyond the Company's control. Oil and natural gas prices can change dramatically primarily as a result of the balance between supply and demand. The Company's average natural gas price received for the year ending December 31, 2001, was $3.97 per Mcf, up from $3.95 per Mcf in 2000 and $2.41 per Mcf in 1999. The Company's average oil price received for the year ended December 31, 2001, was $24.67, down from an average price received of $25.55 in 2000 and up from an average price received of $16.88 in 1999. There can be no assurance that prices will not decline from current levels. Declines in domestic oil and natural gas prices could have a material adverse effect on the Company's financial position, results of operations and quantities of reserves recoverable on an economic basis. Based on oil and gas pricing in effert at December 31, 2001, a hypothetical 2% increase or decrease in oil and gas pricing would not have had a material effect on the Company's financial statements. Disclosure Regarding Forward-Looking Statements This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Annual Report on Form 10-K regarding reserve estimates, planned capital expenditures, future oil and gas production and prices, future drilling activity, the Company's financial position, business strategy and other plans and objectives for future operations, are forward- looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates made by different engineers often vary from one another. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revisions of such estimates and such revisions could change the schedule of any further production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. Additional important factors that could cause actual results to differ materially from the Company's expectations include changes in oil and gas prices, changes in regulatory or environmental policies, production difficulties, transportation difficulties and future drilling results. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. 19 Item 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Goodrich Petroleum Corporation: We have audited the accompanying consolidated balance sheets of Goodrich Petroleum Corporation and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, cash flows and stockholders' equity and comprehensive income for each of the years in the three year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Goodrich Petroleum Corporation and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note B to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments and hedging activities. KPMG LLP Shreveport, Louisiana March 22, 2002 20 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2001 2000 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents........................ $ 248,701 3,531,763 Accounts receivable Trade and other, net of allowance.............. 825,593 241,659 Accrued oil and gas revenue.................... 3,456,210 4,553,863 Prepaid insurance and other...................... 139,452 238,647 Fair value of oil and gas derivatives............ 13,000 -- ------------ ------------ Total current assets........................... 4,682,956 8,565,932 ------------ ------------ PROPERTY AND EQUIPMENT Oil and gas properties........................... 108,019,749 79,252,980 Furniture, fixtures and equipment................ 321,393 240,150 ------------ ------------ 108,341,142 79,493,130 Less accumulated depletion, depreciation and amortization.................................... (33,247,502) (26,044,257) ------------ ------------ Net property and equipment..................... 75,093,640 53,448,873 ------------ ------------ OTHER ASSETS Restricted Cash.................................. 2,039,000 1,240,000 Deferred taxes................................... 207,605 1,694,675 Other............................................ 220,730 394,114 ------------ ------------ Total Other Assets............................. 2,467,335 3,328,789 ------------ ------------ TOTAL ASSETS................................... $ 82,243,931 65,343,594 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable................................. 2,398,437 3,043,477 Accrued liabilities.............................. 1,693,674 1,231,965 Current portion of other noncurrent liabilities.. 124,875 820,454 ------------ ------------ Total current liabilities...................... 4,216,986 5,095,896 ------------ ------------ LONG TERM DEBT..................................... 24,500,000 22,965,000 OTHER NONCURRENT LIABILITIES Production payment payable....................... 1,264,729 969,870 Accrued abandonment costs........................ 4,341,669 3,707,612 ------------ ------------ Total liabilities.............................. 34,323,384 32,738,378 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock; authorized 10,000,000 shares: Series A convertible preferred stock, par value $1.00 per share; issued and outstanding 791,968 and 791,968 shares (liquidating preference $10 per share, aggregating to $7,919,680).......... 791,968 791,968 Series B convertible preferred stock, par value $1.00 per share; issued and outstanding 0 and 660,839 shares (liquidation preference $10 per share, aggregating to $6,608,390).............. -- 660,839 Common stock, par value $0.20 per share; authorized 25,000,000 shares; issued and outstanding 17,896,356 and 13,318,920 shares.... 3,579,271 2,663,784 Additional paid-in capital....................... 52,279,331 39,348,013 Accumulated deficit.............................. (8,738,473) (10,859,388) Accumulated other comprehensive income........... 8,450 ---- ------------ ------------ Total stockholders' equity..................... 47,920,547 32,605,216 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $ 82,243,931 65,343,594 ============ ============
See notes to consolidated financial statements. 21 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ----------------------------------- 2001 2000 1999 ----------- ---------- ---------- REVENUES Oil and gas sales....................... $29,541,662 28,014,245 13,734,691 Other................................... 353,117 475,146 285,883 ----------- ---------- ---------- Total revenues........................ 29,894,779 28,489,391 14,020,574 ----------- ---------- ---------- COSTS AND EXPENSES Lease operating expense................. 6,576,247 4,694,714 2,680,934 Production taxes........................ 1,865,726 2,219,254 910,493 Depletion, depreciation and amortization........................... 6,844,751 5,953,641 4,743,608 Exploration............................. 4,174,436 2,813,332 1,656,158 Impairment of oil and gas properties.... 1,800,536 1,834,654 465,465 Interest expense........................ 1,290,681 4,390,331 2,810,576 General and administrative.............. 3,134,865 2,518,228 1,989,703 Other................................... -- 250,000 -- Preferred dividend requirements of subsidiary............................. -- 38,364 73,125 ----------- ---------- ---------- Total costs and expenses.............. 25,687,242 24,712,518 15,330,062 ----------- ---------- ---------- GAIN (LOSS) ON SALES OF ASSETS............ 26,779 307,299 (519,495) ----------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES......... 4,234,316 4,084,172 (1,828,983) Income Taxes............................ 1,487,070 (1,655,032) -- ----------- ---------- ---------- NET INCOME (LOSS)......................... 2,747,246 5,739,204 (1,828,983) Preferred stock dividends............... 3,002,872 1,193,768 1,249,343 ----------- ---------- ---------- INCOME (LOSS) APPLICABLE TO COMMON STOCK.. (255,626) 4,545,436 (3,078,326) =========== ========== ========== BASIC INCOME (LOSS) PER AVERAGE COMMON SHARE.................................... $ (.01) .46 (.58) =========== ========== ========== DILUTED INCOME (LOSS) PER AVERAGE COMMON SHARE.................................... $ (.01) .35 (.58) =========== ========== ========== AVERAGE COMMON SHARES OUTSTANDING--BASIC.. 17,351,375 9,903,248 5,288,011 AVERAGE COMMON SHARES OUTSTANDING-- DILUTED.................................. 17,351,375 13,116,641 5,288,011
See notes to consolidated financial statements. 22 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------ 2001 2000 1999 ----------- ----------- ---------- OPERATING ACTIVITIES Net income(loss)........................ $ 2,747,246 5,739,204 (1,828,983) Adjustments to reconcile net income(loss) to net cash provided by operating activities: Depletion, depreciation and amortization........................... 6,844,751 5,953,641 4,743,607 Amortization of leasehold costs......... 1,017,426 1,007,636 1,103,219 Amortization of deferred debt financing costs.................................. 121,945 331,042 109,088 Deferred income taxes................... 1,487,070 (1,655,032) -- Impairment of oil and gas properties.... 1,800,536 1,834,654 465,465 Accrued interest and other charges on private placement borrowings........... -- 973,631 -- Amortization of debt discount........... -- 357,016 142,500 Amortization of production payment discount............................... 119,728 230,649 251,154 Preferred dividends of subsidiary....... -- 38,364 73,125 (Gain)Loss on sale of asset............. (26,779) (307,299) 519,495 Director stock grant.................... 30,000 30,000 30,000 Dry hole costs.......................... 1,604,226 475,130 119,800 Payment of contingent liability......... -- -- (68,636) Other................................... -- 250,000 -- Net change in: Accounts receivable.................... 513,719 (2,188,070) 678,953 Prepaid insurance and other............ 93,945 (181,323) 195,975 Accounts payable....................... (645,041) 331,728 (5,051,761) Accrued liabilities.................... 81,709 (95,030) (418,092) Other liabilities...................... -- (484,525) -- ----------- ----------- ---------- Net cash provided by operating activities........................... 15,790,481 12,641,416 1,064,909 ----------- ----------- ---------- INVESTING ACTIVITIES Proceeds from sales of assets........... 406,779 459,526 249,487 Acquisition of oil and gas properties... -- (1,198,631) (4,099,956) Capital expenditures.................... (32,252,774) (15,141,818) (2,556,901) ----------- ----------- ---------- Net cash used in investing activities........................... (31,845,995) (15,880,923) (6,407,370) ----------- ----------- ---------- FINANCING ACTIVITIES Proceeds from private placement of common stock........................... 15,000,000 9,150,000 -- Principal payments of bank borrowings... (13,690,000) (4,125,617) (2,409,383) Proceeds from bank borrowings........... 15,225,000 -- -- Preferred stock dividends............... (626,331) (2,308,011) -- Proceeds from private placement borrowings............................. -- -- 12,000,000 Proceeds from preferred stock issue..... -- -- 3,000,000 Exercise of stock purchase warrants..... 180,233 249,322 -- Exercise of employee stock options...... 11,563 191,444 3,909 Exercise of director stock options...... -- 9,875 -- Net change in restricted cash........... (799,000) (1,240,000) -- Payment of debt and equity financing costs.................................. (1,983,691) (431,557) (1,303,496) Production payments..................... (545,322) (653,415) (114,970) ----------- ----------- ---------- Net cash provided by financing activities........................... 12,772,452 842,041 11,176,060 ----------- ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. (3,283,062) (2,397,466) 5,833,599 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................. $ 3,531,763 5,929,229 95,630 ----------- ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. 248,701 3,531,763 5,929,229 =========== =========== ========== NON CASH INVESTING AND FINANCING ACTIVITIES Conversion of net carrying amount of notes payable and accrued interest..... -- 10,130,349 -- Conversion of preferred stock of subsidiary............................. -- 2,721,489 -- Acquisition of oil and gas properties and assumption of related liabilities.. -- -- 6,036,342 Costs of private placement.............. -- -- 355,800
See notes to consolidated financial statements. 23 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Years Ended December 31, 2001, 2000 and 1999
Additional Accumulated Series A Series B Paid-In Accumulated Other Comprehensive Preferred Stock Preferred Stock Common Stock Capital Deficit Income ----------------- ------------------- --------------------- ------------ ------------- ------------------- Balance at 796,318 January 1, 1999 $796,318 750,000 $ 750,000 5,247,705 $1,049,541 $ 15,226,027 $ (12,461,598) $ (400,900) Net loss........ -- -- -- -- -- -- -- (1,828,983) -- Realized loss on sale of marketable Securities...... -- -- -- -- -- -- -- -- 400,900 Total Comprehensive Income (Loss)... -- -- -- -- -- -- -- -- -- Issuance of Common Stock purchase Warrants with Preferred Stock........... -- -- -- -- -- -- 210,000 -- -- Issuance of Common Stock purchase Warrants for services........ -- -- -- -- 40,000 8,000 113,800 -- -- Issuance of Common Stock purchase Warrants as transaction fee............. -- -- -- -- -- -- 234,000 -- -- Issuance of Common Stock Purchase Warrants with debt............ -- -- -- -- -- -- 2,280,000 -- -- Director Stock Grants.......... -- -- -- -- 30,000 6,000 24,000 -- -- Exercise of Employee Stock Options......... -- -- -- -- 5,250 1,050 2,889 -- -- Conversion of Series B Preferred Stock to Common Stock........... -- -- (84,241) (84,241) 94,216 18,843 65,398 -- -- ------- -------- -------- --------- ---------- ---------- ------------ ------------- ---------- Balance at December 31, 1999............ 796,318 $796,318 665,759 $ 665,759 5,417,171 $1,083,434 $ 18,156,114 $(14 ,290,581) $ -- ======= ======== ======== ========= ========== ========== ============ ============= ========== Net Income...... -- -- -- -- -- -- -- 5,739,204 -- Total Comprehensive Income.......... -- -- -- -- -- -- -- -- -- Issuance of Common Stock.... -- -- -- -- 2,533,333 506,667 8,643,333 -- -- Conversion of preferred stock of subsidiary to common stock.... -- -- -- -- 1,547,665 309,533 2,411,956 -- -- Exercise of director stock option.......... -- -- -- -- 12,500 2,500 7,375 -- -- Conversion of notes payable... -- -- -- -- 3,295,647 659,130 9,751,719 -- -- Preferred stock dividends....... -- -- -- -- -- -- -- (2,308,011) -- Exercise of common stock purchase warrants........ -- -- -- -- 252,022 50,403 198,919 -- -- Exercise of Employee Stock Options......... -- -- -- -- 245,698 49,140 142,304 -- -- Director Stock Grant........... -- -- -- -- 6,000 1,200 28,800 -- -- Conversion of Series B Preferred Stock to Common Stock........... -- -- (4,920) (4,920) 5,486 1,097 3,823 -- -- Conversion of Series A Preferred Stock to Common Stock........... (4,350) (4,350) -- -- 3,398 680 3,670 -- -- ------- -------- -------- --------- ---------- ---------- ------------ ------------- ---------- Balance at December 31, 2000............ 791,968 $791,968 660,839 $ 660,839 13,318,920 $2,663,784 $ 39,348,013 $(10, 859,388) $ -- ======= ======== ======== ========= ========== ========== ============ ============= ========== Net Income...... -- -- -- -- -- -- -- 2,747,246 -- Cumulative Effect of Accounting Change, net of tax............. -- -- -- -- -- -- -- -- (2,535,469) Net Derivative Gain, net of tax............. -- -- -- -- -- -- -- -- 1,797,336 Reclassification Adjustment, net of tax.......... -- -- -- -- -- -- -- -- 746,583 Total Comprehensive Income.......... -- -- -- -- -- -- -- -- -- Issuance of Common Stock.... -- -- -- -- 3,000,000 600,000 12,469,170 -- -- Preferred stock dividends....... -- -- -- -- -- -- -- (626,331) -- Exercise of common stock purchase warrants........ -- -- -- -- 375,296 75,059 105,174 -- -- Exercise of Employee Stock Options......... -- -- -- -- 7,500 1,500 10,063 -- -- Conversion of Series B Preferred Stock to Common Stock........... -- -- (660,839) (660,839) 1,189,510 237,902 317,937 -- -- Director Stock Grant........... -- -- -- -- 5,130 1,026 28,974 -- -- ------- -------- -------- --------- ---------- ---------- ------------ ------------- ---------- Balance at December 31, 2001............ 791,968 $791,968 -- $ -- 17,896,356 $3,579,271 $ 52,279,331 $ (8,738,473) $ 8,450 ======= ======== ======== ========= ========== ========== ============ ============= ========== Total Stockholders' Equity ------------- Balance at January 1, 1999 $ 4,959,388 Net loss........ (1,828,983) Realized loss on sale of marketable Securities...... 400,900 ------------- Total Comprehensive Income (Loss)... (1,428,083) Issuance of Common Stock purchase Warrants with Preferred Stock........... 210,000 Issuance of Common Stock purchase Warrants for services........ 121,800 Issuance of Common Stock purchase Warrants as transaction fee............. 234,000 Issuance of Common Stock Purchase Warrants with debt............ 2,280,000 Director Stock Grants.......... 30,000 Exercise of Employee Stock Options......... 3,939 Conversion of Series B Preferred Stock to Common Stock........... -- ------------- Balance at December 31, 1999............ $ 6,411,044 ============= Net Income...... 5,739,204 ------------- Total Comprehensive Income.......... 5,739,204 Issuance of Common Stock.... 9,150,000 Conversion of preferred stock of subsidiary to common stock.... 2,721,489 Exercise of director stock option.......... 9,875 Conversion of notes payable... 10,410,849 Preferred stock dividends....... (2,308,011) Exercise of common stock purchase warrants........ 249,322 Exercise of Employee Stock Options......... 191,444 Director Stock Grant........... 30,000 Conversion of Series B Preferred Stock to Common Stock........... -- Conversion of Series A Preferred Stock to Common Stock........... -- ------------- Balance at December 31, 2000............ $32,605,216 ============= Net Income...... 2,747,246 Cumulative Effect of Accounting Change, net of tax............. (2,535,469) Net Derivative Gain, net of tax............. 1,797,336 Reclassification Adjustment, net of tax.......... 746,583 ------------- Total Comprehensive Income.......... 2,755,696 Issuance of Common Stock.... 13,069,170 Preferred stock dividends....... (626,331) Exercise of common stock purchase warrants........ 180,233 Exercise of Employee Stock Options......... 11,563 Conversion of Series B Preferred Stock to Common Stock........... (105,000) Director Stock Grant........... 30,000 ------------- Balance at December 31, 2001............ 47,920,547 =============
See notes to consolidated financial statements 24 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE A--Description of Business The Company is in the primary business of exploration and production of crude oil and natural gas. The Company's subsidiaries have interests in such operations in seven states, primarily in Louisiana and Texas. NOTE B--Summary of Significant Accounting Policies Principles of Consolidation--The consolidated financial statements include the financial statements of Goodrich Petroleum Corporation and its wholly- owned subsidiaries. Significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition--Revenues from the production of crude oil and natural gas properties in which the Company has an interest with other producers are recognized on the entitlements method. The Company records a liability for natural gas balancing when the Company has sold more than its working interest share of natural gas production. At December 31, 2001 and 2000, the liabilities for gas balancing were immaterial. Differences between actual production and net working interest volumes are routinely adjusted. These differences are not significant. Property and Equipment--The Company uses the successful efforts method of accounting for exploration and development expenditures. Leasehold acquisition costs are capitalized. When proved reserves are found on an undeveloped property, leasehold cost is reclassified to proved properties. Significant undeveloped leases are reviewed periodically, and a valuation allowance is provided for any estimated decline in value. Cost of all other undeveloped leases is amortized over the estimated average holding period of the leases. Costs of exploratory drilling are initially capitalized, but if proved reserves are not found, the costs are subsequently expensed. All other exploratory costs are charged to expense as incurred. Development costs are capitalized, including the cost of unsuccessful development wells. The Company follows SFAS No. 121 and recognizes an impairment when the net of future cash inflows expected to be generated by an identifiable long-lived asset and cash outflows expected to be required to obtain those cash inflows is less than the carrying value of the asset. The Company performs this comparison for its oil and gas properties on a field-by-field basis using the Company's estimates of future commodity prices. The amount of such loss is measured based on the difference between the discounted value of such net future cash flows and the carrying value of the asset. The Company recorded such impairments in 2001, 2000 and 1999 in the amounts of $1,801,000, $1,835,000 and $465,000 respectively. The impairments were generally the result of certain non-core fields depleting earlier than anticipated. Depreciation and depletion of producing oil and gas properties are provided under the unit-of-production method. Proved developed reserves are used to compute unit rates for unamortized tangible and intangible development costs, and proved reserves are used for unamortized leasehold costs. Estimated dismantlement, abandonment, and site restoration costs, net of salvage value, are considered in determining depreciation and depletion provisions. Gains and losses on disposals or retirements that are significant or include an entire depreciable or depletable property unit are included in income. All other dispositions, retirements, or abandonments are reflected in accumulated depreciation, depletion, and amortization. Cash and Cash Equivalents--Cash and cash equivalents include cash on hand, demand deposit accounts and temporary cash investments with maturities of ninety days or less at date of purchase. 25 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 Marketable Equity Securities--The Company classifies its investment in marketable equity securities as available for sale. Accordingly, unrealized holding gains and losses are excluded from earnings and are reported as other comprehensive income until realized. Income Taxes--The Company follows the provisions of SFAS No. 109, Accounting for Income Taxes, which requires income taxes be accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share--Basic income per common share is computed by dividing net income available for common stockholders, for each reporting period by the weighted average number of common shares outstanding during the period. Diluted income per common share is computed by dividing net income available for common stockholders for each reporting period by the weighted average number of common shares outstanding during the period, plus the effects of potentially dilutive common shares. Derivative Instruments and Hedging Activities--The Company utilizes derivative instruments such as futures, forwards, options, collars and swaps for purposes of hedging its exposure to fluctuations in the price of crude oil and natural gas. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 138. See also Note K for further information about the Company's derivative instruments. In accordance with the transition provisions of SFAS 133, the Company recorded a cumulative-effect- type adjustment of $2,535,000 (net of $1,365,000 in income taxes) in accumulated other comprehensive income to recognize at fair value all derivatives that were designated as cash flow hedging instruments. There was no cumulative effect on earnings. The fair value of a derivative instrument is recognized as an asset or liability in the Company's Consolidated Balance Sheet. Upon entering into a derivative contract, the Company may designate the derivative as either a fair value hedge or a cash flow hedge, or decide that the contract is not a hedge, and thenceforth, mark the contract to market through earnings. The Company documents the relationship between the derivative instrument designated as a hedge and the hedged items, as well as its objective for risk management and strategy for use of the hedging instrument to manage the risk. Derivative instruments designated as fair value or cash flow hedges are linked to specific assets and liabilities or to specific firm commitments or forecasted transactions. The Company assesses at inception, and on an ongoing basis, whether a derivative instrument used as a hedge is highly effective in offsetting changes in the fair value or cash flows of the hedged item. A derivative that is not a highly effective hedge does not qualify for hedge accounting. Changes in the fair value of a qualifying fair value hedge are recorded in earnings along with the gain or loss on the hedged item. Changes in the fair value of a qualifying cash flow hedge are recorded in other comprehensive income, until earnings are affected by the cash flows of the hedged item. When the cash flow of the hedged item is recognized in the Statement of Income, the fair value of the associated cash flow hedge is reclassified from other comprehensive income into earnings. Ineffective portions of a cash flow hedging derivative's change in fair value are recognized currently in earnings. If a derivative instrument no longer qualifies as a cash flow hedge, hedge accounting is discontinued and the gain or loss that was recorded in other comprehensive income is recognized immediately in earnings. 26 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the years ended December 31, 2000, and 1999, prior to the adoption of SFAS No. 133, gains and losses from derivatives designated as hedges of sales were reported on the Statement of Income as an increase or reduction of oil and gas sales in the period related to the actual sale of product. Premiums paid on hedging contracts were amortized over the life of the contracts as a reduction to oil and gas sales. Accounting Matters--Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) were issued in July 2001. SFAS No. 141 requires that all business combinations be accounted for under the purchase method of accounting and that certain acquired intangible assets in a business combination be recognized and reported as assets apart from goodwill. SFAS No. 142 requires that amortization of goodwill be replaced with periodic tests of the goodwill's impairment at least annually in accordance with the provisions of SFAS No. 142 and that intangible assets other than goodwill be amortized over their useful lives. The Company will adopt SFAS No. 141 immediately and SFAS No. 142 in the first quarter 2002. The adoption of SFAS No. 141 and 142 are not expected to have a significant impact on the Company's financial statements. Statement of Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143) has been approved for issuance. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The statement is effective for fiscal years beginning after June 15, 2002. The Company has not yet determined what, if any, impact the adoption of this statement may have on its financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long- lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company is required to adopt SFAS No. 144 on January 1, 2002. The Company has not yet determined what, if any, impact the adoption of this statement may have on its financial statements. Stock Based Compensation--The Company uses SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense, over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and provide pro forma net income and pro forma earnings per share and other disclosures for employee stock options grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the disclosure provisions of SFAS No. 123. Commitments and Contingencies--Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Recoveries from third parties, which are probable of realization, are separately recorded, and are not offset against the related environmental liability. 27 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Use of Estimates--Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. NOTE C--Sale of Oil and Gas Properties to Related Party On March 12, 2002, the Company, in an effort to monetize a portion of the value created in its Burrwood and West Delta fields and enhance its liquidity position, completed the sale of a thirty percent (30%) working interest in the existing production and shallow rights, and a fifteen percent (15%) working interest in the deep rights below 10,600 feet, in its Burrwood and West Delta 83 fields for $12 million to Malloy Energy Company, LLC led by Patrick E. Malloy, III and participated in by Sheldon Appel, both members of the Company's Board of Directors. The sale price was determined by discounting the present value of the acquired interest in the fields' proved, probable and possible reserves using prevailing oil and gas prices. The Company retains a sixty-five percent (65%) working interest in the existing production and shallow rights, and a thirty-two and one-half percent (32.5%) working interest in the deep rights after the close of the transaction. In conjunction with the sale, the investor group will provide a $7.7 million line of credit. The $7.7 million line of credit, which will reduce to $5.0 million on January 1, 2003, is subordinate to the Company's senior facility and can be used for acquisitions, drilling, development and general corporate purposes until December 31, 2004. The investor group retains the option, during the two-year period, to convert the amount outstanding under the credit line, and/or provide cash on any unused credit to a maximum of $7.7 million in the first year, reduced to $5.0 million after December 31, 2002, into working interests in any acquisition(s) the Company may make in Louisiana prior to January 1, 2005. The conversion of the credit facility will be on a pro-rata basis with the Company and may not exceed a maximum of $7.7 million reduced to $5.0 million after December 31, 2002 or thirty percent (30%) of any potential acquisition(s). The Company will record a gain of approximately $2.1 million in the first quarter of 2002 as a result of the sale. The proceeds were used to reduce outstanding debt under its credit facility to approximately $12 million. NOTE D--Public Offering On February 1, 2001, the Company completed a public offering of 3,000,000 shares of its common stock at $5.00 per share resulting in net proceeds of approximately $13.2 million to the Company. The Company used the proceeds from the offering along with other available funds to reduce outstanding debt under its credit facility by approximately $13.7 million. NOTE E--Exchange of Series B Preferred Stock Prior to the public offering, the Company reached an agreement with all of the holders of its Series B preferred stock to exchange each share of Series B preferred stock for 1.8 shares of its common stock. Concurrent with the closing of the public offering, the Company exchanged all 660,839 shares of its Series B preferred stock into 1,189,510 shares of common stock. In connection with the conversion of the Series B preferred stock, a conversion premium in the amount of $2,377,000 was recorded to reflect the excess of the 1:8 conversion factor over the terms of the original preferred stock issuance. This one-time, non-cash charge was reflected as a preferred stock dividend to arrive at net income applicable to common stock and did not have an affect on total stockholders' equity. 28 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE F--Indebtedness Indebtedness at December 31, 2001 and 2000 consists of the following:
2001 2000 ----------- ---------- Bank Debt Borrowings under credit facility, interest, at BNP prime plus 0.5% or Libor plus 2.5% (weighted average rate at December 31, 2001--7.4%); principal due November 8, 2004...................................... $24,500,000 -- Borrowings under credit facility, interest, at Compass Prime plus 5/8% (weighted average rate at December 31, 2000--9.9%)........................................... $ -- 22,965,000 Less current portion................................... -- -- ----------- ---------- Long-term debt, excluding current portion.............. $24,500,000 22,965,000 =========== ==========
BNP Paribas Credit Facility On November 9, 2001, the Company established a new credit facility with BNP Paribas Bank, with a borrowing base of $25,000,000. The borrowing base will remain effective until the next borrowing base redetermination, which is scheduled to be made on or before March 31, 2002. Interest on the credit facility will accrue at a rate calculated at the option of the Company as either the BNP Paribas Bank base rate plus 0.00% to 0.50%, or LIBOR plus 1.50%-2.50% depending on borrowing base utilization. Interest on each LIBOR- Rate borrowing is due and payable on the last day of the borrowing term. Accrued interest on each Base-Rate borrowing is due and payable on the last day of each quarter. The credit facility will mature on November 8, 2004. The credit facility requires that the Company pay a 0.375% per annum commitment fee each quarter based on the Company's borrowing base utilization. Prior to maturity no payments are required so long as the maximum borrowing base amount exceeds the amounts outstanding under the credit facility. The credit facility requires the Company to monitor tangible net worth and maintain certain financial statement ratios at certain levels. Substantially all the Company's assets are pledged to secure the credit facility. Interest paid during 2001, 2000 and 1999 amounted to $849,725, $2,182,724 and $2,338,840 respectively. NOTE G--Income (Loss) Per Share Net income (loss) was used as the numerator in computing both basic and diluted income (loss) per common share for the years ended December 31, 2001, 2000 and 1999. The following table reconciles the weighted average shares outstanding used for these computations.
Year Ended December 31, ------------------------------- 2001 2000 1999 ---------- ---------- --------- Basic Method................................ 17,351,375 9,903,248 5,288,011 Dilutive Stock Warrants..................... -- 2,842,858 -- Dilutive Stock Options...................... -- 370,535 -- Convertible Debt............................ -- -- -- ---------- ---------- --------- --- Diluted Method.............................. 17,351,375 13,116,641 5,288,011 ========== ========== =========
The Company's Series A convertible preferred stock and its stock options are considered to be potential common stock. Additionally, stock purchase warrants issued in the 1999 Private Placement are also considered potential common stock. Approximately 798,000 stock options and 1,067,000 shares issuable in connection with 29 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the convertible preferred stock have not been included in the computation of diluted income per share in 2000 respectively, because to do so would have been antidilutive. No potential common stock amounts have been included in the computation of diluted per share in 2001 and 1999 because to do so would have been antidilutive. The calculation of the dilutive effects of potentially dilutive securities has been calculated under the treasury stock method. NOTE H--Income Taxes Income tax expense (benefit) for the years ending December 31, 2001, 2000 and 1999 consists of:
Current Deferred Total ------- ---------- ---------- Year Ended December 31, 2001: U.S. Federal........................... $ -- 1,487,070 1,487,070 State.................................. -- -- -- ------ ---------- ---------- -- 1,487,070 1,487,070 ====== ========== ========== Year Ended December 31, 2000: U.S. Federal........................... $ -- (1,655,032) (1,655,032) State.................................. -- -- -- ------ ---------- ---------- -- (1,655,032) (1,655,032) ====== ========== ========== Year Ended December 31, 1999: U.S. Federal........................... $ -- -- -- State.................................. -- -- -- ------ ---------- ---------- -- -- -- ====== ========== ==========
- -------- (1) Includes the recognition of the benefit of $1,436,000 of net operating loss carry forwards. The following is a reconciliation of the U.S. statutory income to the Company's income (loss) before income taxes for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 --------- ---------- -------- U.S. statutory income tax................. 1,482,011 1,429,460 (640,144) Increase in deductible temporary differences for which no benefit recorded................................. -- -- 640,144 Change in the beginning of the year balance of the valuation allowance allocated to income tax expense.......... -- (3,089,767) -- Nondeductible expenses.................... 5,059 5,275 -- --------- ---------- -------- --- 1,487,070 (1,655,032) -- ========= ========== ========
30 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below.
2001 2000 ------------ ------------ Deferred tax assets: Differences between book and tax basis of: Contingent liabilities........................ $ 107,848 132,349 Other......................................... 229,798 157,247 Operating loss carryforwards.................. 12,878,565 14,383,974 Statutory depletion carryforward.............. 6,695,115 6,407,941 AMT Tax credit carryforward................... 1,399,890 1,477,872 Investment tax credit carryforward............ -- 2,108 ------------ ------------ Total gross deferred tax assets............... 21,311,216 22,561,491 Less valuation allowance...................... (17,000,473) (16,816,199) ------------ ------------ Net deferred tax assets....................... 4,310,743 5,745,292 ------------ ------------ Deferred tax liability: Differences between book and tax basis of: Property and equipment........................ (4,103,138) (4,050,617) ------------ ------------ Total gross deferred liability................ (4,103,138) (4,050,617) ------------ ------------ Net deferred tax asset........................ $ 207,605 1,694,675 ============ ============
The valuation allowance for deferred tax assets increased $184,274 and decreased $2,968,470 for the years ended December 31, 2001 and 2000, respectively. The increase in 2001 is primarily the result of changes in deferred tax assets. The decrease in 2000 is primarily the result of recognizing a change in the beginning of the year valuation allowance resulting from changes in management's estimates of future taxable income. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based primarily upon the level of projections for future taxable income and the reversal of future taxable temporary differences over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2001. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 31 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 The following table summarizes the amounts and expiration dates of operating loss and investment tax credit carryforwards:
Operating loss carryforwards ---------------------------------------------------------------- Amount Expires ----------- ------- $ 3,963,174 2006 8,860,622 2007 4,285,746 2008 3,247,494 2009 6,450,859 2010 600,706 2011 1,939,496 2012 4,530,029 2018 2,546,445 2019 371,329 2020 ----------- $36,795,900 ===========
An ownership change in accordance with Internal Revenue Code (IRC) (S)382, occurred in August 1995 and again in August 2000. The net operating losses (NOLs) generated prior to August 1995 are subject to an annual IRC (S)382 limitation of $1,682,797. The IRC (S)382 annual limitation for the ownership change in August 2000 is $3,647,700. The latter IRC (S)382 ownership change limitation is a cumulative limitation and does not eliminate or increase the limitation on the pre-August 1995 NOLs. The NOL's generated after August 1995 and prior to August 2000, are subject to an annual limitation of $3,647,700 less the annual amount utilized for pre-August 1995 NOLs. It should be noted that the same IRC (S)382 limitations apply to the alternative minimum tax net operating loss carryforwards depletion carryforwards, and alternative minimum tax credit carryforwards. The minimum tax credit carryforward (MTC) of $1,399,890 as of December 31, 2000, will not begin to be utilized until after the available NOLs have been utilized or expired and when regular tax exceeds the current year alternative minimum tax. Additionally, the statutory (percentage) depletion carryforward of $19,128,899 is considered a special deduction under FASB Statement 109. In accordance with Statement 109, the tax benefits of special deductions are generally recognized in the year they become deductible on the tax return. The unused annual IRC (S)382 limitations can be carried over to subsequent years. NOTE I--Production Payment Obligation A production payment was entered into by the Company to assist in the financing of the Lafitte Field acquisition in September 1999. The original amount of the production payment obligation was $2,940,000, which was recorded as a production payment liability of $2,228,000 after a discount to reflect an effective rate of interest of 11.25%. At December 31, 2001 the remaining principal amount was $1,627,000 and the recorded liability was $1,265,000. Under the terms of the production payment the Company must make monthly cash payments which approximate the Company's forty-nine percent share of 10% of the monthly gross oil and gas revenue of the Lafitte Field. The Company's estimate as of December 31, 2001, based on expected production and prices and expected discount amortization is that projected payments will decrease the recorded liability as follows: 2002, $481,000; 2003, $451,000 and 2004, $333,000. 32 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 NOTE J--Stockholders' Equity On February 1, 2001, the Company completed a public offering of 3,000,000 shares of its common stock at $5.00 per share resulting in net proceeds of approximately $13.2 million to the Company. The Company used the proceeds from the offering along with other available funds to reduce outstanding debt under its credit facility by approximately $13.7 million. On October 23, 2000, the Company completed a private placement of 1,000,000 shares of common stock at $5.00 per share. Net proceeds from the private placement amounted to $4,650,000 and were used primarily to accelerate the development of the Company's Burrwood and West Delta 83 fields. An affiliate of a member of the Company's board of directors received $250,000 in compensation for its service in placing the shares in the private placement. On February 18, 2000, the Company completed a private placement of shares of its common stock resulting in net proceeds to the Company of $4,500,000. The Company issued 1,533,000 shares of common stock in its offering. The $4,500,000 in offering proceeds was used to assist in the acquisition and development of the Burrwood and West Delta 83 fields, and to further develop the Lafitte field purchased in 1999. Common Stock--At December 31, 2001 unissued shares of Goodrich common stock were reserved in the amount of 4,534,000 shares for the exercise of stock warrants issued in connection with the private placement transaction of September 23, 1999 and 330,013 shares for stock option plans. Preferred Stock The Series A convertible preferred stock has a par value of $1.00 per share with a liquidation preference of $10.00 per share, and is convertible at the option of the holder at any time, unless earlier redeemed, into shares of common stock of the Company at an initial conversion rate of .417 shares of common stock per share of Series A preferred. The Series A preferred stock also will automatically convert to common stock if the closing price for the Series A preferred stock exceeds $15.00 per share for ten consecutive trading days. The Series A preferred stock is redeemable in whole or in part, at $12.00 per share, plus accrued and unpaid dividends. Dividends on the Series A preferred stock accrue at an annual rate of 8% and are cumulative. The Company issued 750,000 shares of Series B convertible preferred stock in connection with its acquisition of the La/Cal II properties on January 31, 1997. The Series B convertible preferred stock had a par value of $1.00 per share with a liquidation preference of $10.00 per share and ranked junior to the Series A preferred stock. The shares of Series B preferred stock were convertible at the option of the holder at any time, unless earlier redeemed, into shares of common stock of the Company at the conversion rate of 1.12 shares of common stock per share of Series B preferred stock. The Series B preferred stock was redeemable by the Company prior to January 31, 2001 at $10.00 per share. Dividends on the Series B preferred stock accrued at an annual rate of 8.25% and were cumulative. The Company reached an agreement with all of the holders of its Series B preferred stock to exchange each share of Series B for 1.8 shares of its common stock. Concurrent with the closing of its public offering (See Note E), the Company exchanged all 660,839 shares of its Series B preferred stock into 1,189,510 shares of common stock. Stock Option and Incentive Programs--Goodrich currently has two plans, which provide for stock option and other incentive awards for the Company's key employees, consultants and directors. The Goodrich Petroleum Corporation 1995 Stock Option Plan allows the Board of Directors to grant stock options, restricted stock awards, 33 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 stock appreciation rights, long-term incentive awards and phantom stock awards, or any combination thereof, to key employees and consultants. The Goodrich Petroleum Corporation 1997 Director Compensation Plan provides for the grant of stock and options to each director who is not and has never been an employee of the Company. Additionally, the Company assumed certain outstanding stock options of Patrick as a result of the business combination in 1995. The Goodrich plans authorize grants of options to purchase up to a combined total of 1,587,168 shares of authorized but unissued common stock. Stock options are generally granted with an exercise price equal to the stock's fair market value at the date of grant, and all stock options granted under the 1995 Stock Option Plan generally have ten year terms and three year pro rata vesting. The per share weighted average fair value of stock options granted during 2001, 2000 and 1999 was $2.63, $3.16 and $2.17 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2001--expected dividend yield 0%, risk-free interest rate of 6.0%, and an expected life of 6 years; 2000--expected dividend yield 0%, risk-free interest rate of 7.5%, and an expected life of 6 years; 1999--expected dividend yield 0%, risk-free interest rate of 7.5%, and an expected life of 6 years; expected volatility of stock over expected life of the options--35%. The Company applies APB Opinion No. 25 in accounting for its plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income (loss) would have been reduced to the pro forma amounts indicated below:
2001 2000 1999 ----------- --------- ---------- Net Income(loss)............... As reported $ 2,747,246 5,739,204 (1,828,983) Pro forma 1,476,318 4,920,701 (2,109,357) Income(loss) applicable to common stock.................. As reported (255,626) 4,545,436 (3,078,326) Pro forma (1,526,554) 3,726,933 (3,358,700) Basic income(loss) per average common share.................. As reported (0.01) 0.46 (0.58) Pro forma (0.09) 0.38 (0.64) Diluted income(loss) per average common share.......... As reported (0.01) 0.35 (0.58) Pro forma (0.09) 0.28 (0.64)
34 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 Stock option transactions during 2001, 2000 and 1999 were as follows:
Weighted Average Weighted Average Exercise Remaining Number of Options Price Range of Exercise Price Contractual Life -------------------- ------------- -------------------------------- ----------------- Patrick Patrick Patrick Total Only Total Only Total Patrick Only Total Only ---------- -------- ----- ------- --------------- ---------------- -------- -------- Outstanding January 1, 1999................... 433,252 65,193 $5.50 to $24.00 $16.00 to $24.00 7.0 yrs. 3.4 yrs. ========== ======== Granted--1995 Stock Option................ 389,196 -- 1.37 -- Granted--1997 Director Compensation Plan..... 37,063 -- .80 -- Exercised--1995 Stock Option Plan........... (5,250) -- .75 -- Expiration/Surrender of Options............... (381,377) (29,567) 7.61 18.00 ---------- -------- Outstanding December 31, 1999................... 472,884 35,626 $0.75 to $24.00 $16.00 to $24.00 8.5 yrs. 2.9 yrs. ========== ======== Granted--1995 Stock Option Plan... 600,000 -- 4.99 -- Granted--1997 Director Compensation Plan..... 12,000 -- 4.88 -- Exercised--1995 Stock Option Plan........... (245,696) -- .78 -- Exercised--1997 Director Stock Option Plan.................. (12,500) -- .79 -- Expiration of Options.. (63,750) -- 4.35 -- ---------- -------- Outstanding December 31, 2000................... 762,938 35,626 $0.75 to $24.00 $16.00 to $24.00 8.9 yrs. 1.9 yrs. ========== ======== Granted--1995 Stock Option................ 710,000 -- 5.79 -- Granted--1997 Director Compensation Plan..... 24,000 -- 5.85 -- Exercised--1995 Stock Option Plan........... (7,500) -- 1.54 -- Expiration of Options.. (24,376) (9,376) 7.67 22.00 ---------- -------- Outstanding December 31, 2001................... 1,465,062 26,250 $0.75 to $18.00 $16.00 to $18.00 8.7 yrs. 1.4 yrs. ========== ======== Exercisable December 31, 1999................... 71,438 35,625 $9.95 19.00 Exercisable December 31, 2000................... 129,356 35,625 $7.59 19.00 Exercisable December 31, 2001................... 349,063 26,250 $5.21 17.91
35 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 NOTE K--Hedging Activities The Company enters into futures contracts or other hedging agreements from time to time to manage the commodity price risk for a portion of its production. The Company considers these to be hedging activities and, as such, monthly settlements on these contracts are reflected in its oil and natural gas sales. The Company's strategy, which is set by the Company's hedging committee and reviewed periodically by its Board of Directors, has been to hedge between 30% and 70% of its production. Most of the Company's hedging arrangements are in the form of costless collars, whereby a floor and a ceiling are fixed. It is the Company's belief that in most cases the benefits of the downside protection afforded by these costless collars outweigh the costs incurred by losing potential upside when commodity prices increase. The Company has adopted a formal policy with respect to hedging arrangements in accordance with accounting pronouncements. The Company does not expect its hedging policy or future hedging practice to differ materially from its historical practice--to hedge a portion of its production ranging from 30% to 70% in order to reduce the impact of short-term fluctuations in prices. The Company does not plan to engage in speculative activity not supported by anticipated production. The Company's futures contract agreements provide for separate contracts tied to the New York Mercantile Exchange ("NYMEX") light sweet crude oil and natural gas futures contracts. The Company has contracts which contain specific price ranges or "collars" that are settled monthly based on the differences between the contract price or price ranges and the average NYMEX prices applied to the related contract volumes. To the extent the average NYMEX price exceeds the contract price, the Company pays the difference, and to the extent the contract price exceeds the average NYMEX price, the Company receives the difference. As of December 31, 2001, the Company's open forward position on its outstanding natural gas hedging contracts were as follows: a) 2,000 Mmbtu per day with a no cost collar of $2.50 and $3.18 per Mmbtu through December 31, 2002; and b) 1,333 Mmbtu per day with a no cost collar of $2.75 and $3.09 per Mmbtu through December 31, 2002. The fair value of the natural gas hedging contracts in place at December 31, 2001, resulted, in an asset of $13,000. As of December 31, 2001, $8,450 (net of $4,550 in income taxes) of deferred gains on derivative instruments accumulated in other comprehensive income are expected to be reclassified into earnings during the next twelve months. During 2001, $1,797,336 in net gains (net of $967,796 in income taxes) were recorded to accumulated other comprehensive income and $746,583 (net of $402,006 in income taxes) was reclassified from accumulated other comprehensive income to oil and gas sales as the cash flow of the hedged items was recognized. For the year ended December 31, 2001, the Company's earnings were not significantly impacted from cash flow hedging ineffectiveness arising from the natural gas hedging contracts. The Company entered into the following oil and gas hedging contracts subsequent to December 31, 2001. Natural Gas 1,200 MMBtu per day "swap" at $2.87 for April through November 2002; 1,500 MMBtu per day "swap" at $2.89 for April through November 2002; and 3,000 MMBtu per day "swap" at $3.50 for December 2002 through February 2003. 36 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 Crude Oil 200 barrels of oil per day "swap" at $21.43 for March 2002; 300 barrels of oil per day "swap" at $21.95 for April and May 2002; 150 barrels of oil per day "swap" at $24.07 for April and May 2002; and 150 barrels of oil per day "swap" at $23.22 for April and May 2002 The Company has the option to terminate its outstanding oil and natural gas hedging contracts by paying the amount of the liability. The Company does not anticipate terminating any of its open contracts. The Company is exposed to credit losses in the event of nonperformance by the counterparties to its hedging contracts. The Company anticipates, however, that counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral to support financial instruments but monitors the credit standing of the counterparties. Price fluctuations and volatile nature of markets Despite the measures taken by the Company to attempt to control price risk, the Company remains subject to price fluctuations for natural gas and oil sold in the spot market. Prices received for natural gas sold on the spot market are volatile due primarily to seasonality of demand and other factors beyond the Company's control. Domestic prices for oil and gas could have a material adverse effect on the Company's financial position, results of operations and quantities of reserves recoverable on an economic basis. NOTE L--Fair Value of Financial Instruments The following presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2001 and 2000.
2001 2000 ---------------------- --------------------- Carrying Carrying Amount Fair Value Amount Fair Value ----------- ---------- ---------- ---------- Financial liabilities-- Long-term debt (including current maturities)........... $24,500,000 24,500,000 22,965,000 22,965,000 Production payment liability... $ 1,264,729 1,264,729 1,691,050 1,691,050 Oil and gas derivatives-- Oil............................ $ -- -- -- -- Gas............................ $ 13,000 13,000 -- (3,881,000)
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents, accounts receivable, restricted cash, accounts payables and accrued liabilities: The carrying amounts approximate fair value because of the short maturity of those instruments. Therefore, these instruments were not presented in the table above. Long term debt and other noncurrent liabilities: The fair value is estimated using the discounted cash flow method based on the Company's borrowing rates or similar types of financing arrangements. Oil and gas derivatives: The fair value is calculated based on the discounted cash flow expected to be received or paid on the derivative utilizing future posted market prices of the underlying product. 37 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 NOTE M--Concentrations of Credit Risk and Significant Customers Due to the nature of the industry the Company sells its oil and natural gas production to a limited number of purchasers and, accordingly, amounts receivable from such purchasers could be significant. Revenues from these sources as a percent of total revenues for the periods presented were as follows:
Year Ended December 31, ---------------- 2001 2000 1999 ---- ---- ---- Seaber Corporation of Louisiana............................ 56% 48% 37% Genesis Crude Oil, L.P..................................... 22% 27% -- Navajo Refining Company.................................... 4% 4% 7% Gulfmark Energy, Inc....................................... -- 10% -- Equiva Trading............................................. -- 8% 27% Texla Energy Management.................................... -- -- 10%
NOTE N--Commitments and Contingencies The U.S. Environmental Protection Agency ("EPA") has identified the Company as a potentially responsible party ("PRP") for the cost of clean-up of "hazardous substances" at an oil field waste disposal site in Vermilion Parish, Louisiana. The Company estimates that the remaining cost of long-term clean-up of the site will be approximately $3.5 million, with the Company's percentage of responsibility estimated to be approximately 3.05%. As of December 31, 2001, the Company had paid $321,000 in costs related to this matter and accrued $122,500 for the remaining liability. These costs have not been discounted to their present value. The EPA and the PRPs will continue to evaluate the site and revise estimates for the long-term clean-up of the site. There can be no assurance that the cost of clean-up and the Company's percentage responsibility will not be higher than currently estimated. In addition, under the federal environmental laws, the liability costs for the clean-up of the site is joint and several among all PRPs. Therefore, the ultimate cost of the clean-up to the Company could be significantly higher than the amount presently estimated or accrued for this liability. In connection with the acquisition of its Burrwood and West Delta 83 fields, the Company secured a performance bond and established an escrow account to be used for the payment of obligations associated with the plugging and abandonment of the wells, salvage and removal of platforms and related equipment, and the site restoration of the fields. Required escrowed outlays include an initial cash payment of $750,000 and monthly cash payments of $70,000 beginning June 1, 2000 and continuing until June 1, 2005. The escrow agreement was amended in the fourth quarter of 2001 to suspend monthly cash payments and cap the escrow account at its current balance of $2,039,000. In addition, as part of the purchase agreement, the Company agreed to shoot a 3-D seismic survey over the fields which was completed in the fourth quarter of this year. The cost of the seismic survey was approximately $2,500,000 of which the final $1,250,000 was paid in 2001. On February 8, 2000, the Company commenced a suit against the operator and joint owner of the Lafitte Field, alleging certain items of misconduct and violations of the letter agreement associated with the joint acquisition. The trial is currently scheduled to begin in April 2002, but it is too early to predict a likely outcome. The Company is the plaintiff in this action, and does not expect the outcome to have a significantly adverse impact on the operations or financial position of the Company. The Company is party to additional lawsuits arising in the normal course of business. The Company intends to defend these actions vigorously and believes, based on currently available information, that adverse results or judgments from such actions, if any, will not be material to its financial position or results of operations. 38 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 NOTE O--Natural Gas and Crude Oil Cost Data and Results of Operations The following reflects the Company's capitalized costs related to natural gas and oil activities at December 31, 2001, and 2000:
2001 2000 ------------ ----------- Proved properties............................. $102,730,448 74,778,157 Unproved properties........................... 5,289,301 4,474,823 ------------ ----------- 108,019,749 79,252,980 Less accumulated depreciation and depletion... (32,981,657) (25,908,724) ------------ ----------- Net property and equipment.................... $ 75,038,092 53,344,256 ============ ===========
The following table reflects certain data with respect to natural gas and oil property acquisitions, exploration and development activities:
Year Ended December 31, ------------------------------------ 2001 2000 1999 ----------- ---------- ---------- Property acquisition Proved.......................... $ 175,110 1,198,631(a) 10,136,298(b) Unproved........................ 2,186,111 820,200 498,391 Exploration....................... 4,174,348 2,797,642 1,634,299 Development....................... 28,972,446 13,862,296 1,960,371 ----------- ---------- ---------- $35,508,103 18,678,769 14,229,359 =========== ========== ==========
- -------- (a) Burrwood and West Delta 83 Fields acquisition (b) Primarily Lafitte Field acquisition, inclusive of liabilities assumed in connection with the purchase. NOTE P--Related Party Transactions On June 1, 2001 the Company entered into a consulting agreement with Patrick E. Malloy, III, a member of the Company's Board of Directors, under which Mr. Malloy provides the Company advice on hedging and financial matters. The contract, which expires in May 2003, pays Mr. Malloy $120,000 per year. The Company paid Mr. Malloy $70,000 in 2001. On March 12, 2002, the Company completed the sale of a thirty percent (30%) working interest in the existing production and shallow rights, and a fifteen percent (15%) working interest in the deep rights below 10,600 feet, in its Burrwood and West Delta 83 fields for $12 million to Malloy Energy Company, LLC, led by Patrick E. Malloy, III and participated in by Sheldon Appel, both members of the Company's Board of Directors. See Note C for further information regarding the sale. NOTE Q--Supplemental Oil and Gas Reserve Information (Unaudited) The supplemental oil and gas reserve information that follows is presented in accordance with SFAS No. 69, Disclosures about Oil and Gas Producing Activities. The schedules provide users with a common base for preparing estimates of future cash flows and comparing reserves among companies. Additional background information follows concerning the schedules. 39 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 Schedules 1 and 2--Estimated Net Proved Oil and Gas Reserves Substantially all of the Company's reserve information related to crude oil, condensate, and natural gas liquids and natural gas was compiled based on evaluations performed by Coutret and Associates, Inc. All of the subject reserves are located in the continental United States. Many assumptions and judgmental decisions are required to estimate reserves. Quantities reported are considered reasonable but are subject to future revisions, some of which may be substantial, as additional information becomes available. Such additional knowledge may be gained as the result of reservoir performance, new geological and geophysical data, additional drilling, technological advancements, price changes, and other factors. Regulations published by the Securities and Exchange Commission define proved reserves as those volumes of crude oil, condensate, and natural gas liquids and natural gas that geological and engineering data demonstrate with reasonable certainty are recoverable from known reservoirs under existing economic and operating conditions. Proved developed reserves are those volumes expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are those volumes expected to be recovered as a result of making additional investments by drilling new wells on acreage offsetting productive units or recompleting existing wells. Schedule 3--Standardized Measure of Discounted Future Net Cash Flows to Proved Oil and Gas Reserves SFAS No. 69 requires calculation of future net cash flows using a ten percent annual discount factor and year end prices, costs, and statutory tax rates, except for known future changes such as contracted prices and legislated tax rates. The calculated value of proved reserves is not necessarily indicative of either fair market value or present value of future cash flows because prices, costs, and governmental policies do not remain static; appropriate discount rates may vary; and extensive judgment is required to estimate the timing of production. Other logical assumptions would likely have resulted in significantly different amounts. Crude oil and natural gas market prices at the end of each year, were used for this calculation, and averaged $17.91 per bbl and $2.51 per Mcf, respectively as of December 31, 2001; $26.10 per bbl and $10.06 per Mcf, respectively as of December 31, 2000; $25.16 per Bbl and $2.63 per Mcf, respectively as of December 31, 1999. Schedule 3 also presents a summary of the principal reasons for change in the standard measure of discounted future net cash flows for each of the three years in the period ended December 31, 2001. Schedule 1--Estimated Net Proved Gas Reserves (Mcf)
Year Ended December 31, ---------------------------------- 2001 2000 1999 ---------- ---------- ---------- Proved: Balance, beginning of period............. 29,510,679 20,849,592 28,144,310 Revisions of previous estimates.......... 6,070 708,580 (6,069,885) Purchase of minerals in place............ 1,527,172 5,955,477 1,705,822 Extensions, discoveries, and other additions............................... 6,735,556 5,546,322 -- Production............................... (3,823,227) (3,394,921) (2,930,655) Sales of minerals in place............... -- (154,371) -- ---------- ---------- ---------- Balance, end of period................... 33,956,250 29,510,679 20,849,592 ========== ========== ========== Proved developed: Beginning of period...................... 22,251,970 13,945,540 21,481,946 End of period............................ 16,692,390 22,251,970 13,945,450
40 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 Schedule 2--Estimated Net Proved Oil Reserves (Barrels)
Year Ended December 31, ------------------------------- 2001 2000 1999 --------- --------- --------- Proved: Balance, beginning of period................ 6,789,358 5,738,997 3,092,810 Revisions of previous estimates............. (5,602) 74,369 (12,989) Purchase of minerals in place............... 30,829 891,334 3,053,618 Extensions, discoveries, and other additions.................................. 2,517,515 665,911 -- Production.................................. (581,680) (571,766) (394,442) Sale of minerals in place................... -- (9,487) -- --------- --------- --------- Balance, end of period...................... 8,750,420 6,789,358 5,738,997 ========= ========= ========= Proved, developed: Beginning of period......................... 3,196,330 2,662,907 2,266,854 End of period............................... 3,399,610 3,196,330 2,662,907
The following table summarizes the Company's combined oil and gas reserve information on a Mcf equivalent basis. Estimates of oil reserves were converted using a conversion ratio of 1.0/6.0 Mcf.
Year Ended December 31, -------------------------------- 2001 2000 1999 ---------- ---------- ---------- Estimated Net Proved Reserves (Mcfe): Total Proved................................. 86,458,770 70,246,827 55,283,574 Proved Developed............................. 37,090,050 41,429,950 29,922,892
Schedule 3--Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Gas Reserves
Year Ended December 31, --------------------------- 2001 2000 1999 -------- -------- ------- (in thousands) Future cash inflows.............................. $220,367 452,310 182,292 Production costs................................. (59,906) (55,948) (31,647) Development costs................................ (35,673) (25,201) (15,458) Future income tax expense........................ (8,972) (101,113) (21,534) -------- -------- ------- Future net cash flows............................ 115,816 270,048 113,653 10% annual discount for estimated timing of cash flows........................................... (42,694) (90,268) (35,092) -------- -------- ------- Standardized measure of discounted future net cash flows...................................... $ 73,122 179,780 78,561 ======== ======== ======= Average year end prices: Natural gas (per Mcf).......................... $ 2.51 10.06 2.63 Crude oil (per Bbl)............................ $ 17.91 26.10 25.16
41 GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001 The following are the principal sources of change in the standardized measure of discounted net cash flows for the years shown:
Year Ended December 31, ---------------------------- 2001 2000 1999 ---------- ------- ------- (in thousands) Net changes in prices and production costs related to future production................... $ (209,020) 91,250 33,360 Sales and transfers of oil and gas produced, net of production costs............................ (21,100) (21,100) (10,144) Net change due to revisions in quantity estimates...................................... (26) 4,112 (10,277) Net change due to extensions, discoveries and improved recovery.............................. 19,930 33,974 -- Net change due to purchase and sales of minerals-in-place.............................. 1,562 39,485 33,476 Development costs incurred during the period.... 11,767 1,127 338 Net change in income taxes...................... 64,557 (56,485) (13,845) Accretion of discount........................... 25,011 9,241 4,064 Change in production rates (timing) and other... 661 (385) 954 ---------- ------- ------- $(106,658) 101,219 37,926 ========== ======= =======
42 GOODRICH PETROLEUM CORPORATION Consolidated Quarterly Income Information (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter Total ---------- --------- ---------- ---------- ---------- 2001 Revenues.............. $9,405,690 7,336,497 7,748,452 5,404,140 29,894,779 Costs and Expenses.... 5,936,133 6,375,295 5,650,079 7,725,735 25,687,242 Gain (loss) on sale of assets............... 38,380 33,606 -- (45,207) 26,779 Income taxes.......... 1,227,778 348,172 734,432 (823,312) 1,487,070 Net income (Loss)..... 2,280,159 646,636 1,363,941 (1,543,490) 2,747,246 Preferred stock dividends............ 2,534,908 158,367 154,798 154,799 3,002,872 Income (Loss) applicable to common Stock................ (254,749) 488,269 1,209,143 (1,698,289) (255,626) Basic earnings (Loss) per average common share................ (.02) .03 .07 (.09) (.01) Diluted earnings (Loss) per average common share......... $ (.02) .02 .06 (.09) (.01) 2000 Revenues.............. $4,673,790 6,678,141 8,686,376 8,451,083 28,489,391 Costs and Expenses.... 4,705,059 5,261,415 6,792,255 7,953,789 24,712,518 Gain on sale of assets............... 563 273,261 33,475 -- 307,299 Income taxes.......... -- -- (1,655,032) -- (1,655,032) Net income (Loss)..... (30,706) 1,689,987 3,582,628 497,294 5,739,204 Preferred stock dividends............ 307,607 295,945 295,562 294,654 1,193,766 Income (Loss) applicable to common Stock................ (338,313) 1,394,042 3,287,066 202,640 4,545,436 Basic earnings (Loss) per average common share................ (.05) .16 .31 .02 .46 Diluted income (Loss) per average common share................ (.05) .12 .23 .01 .35
The fourth quarter of 2001 and 2000 amount includes impairment of oil and gas properties of $1,801,000 and $1,835,000, respectively. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None 43 PART III Item 10. Directors and Executive Officers of the Registrant. * Item 11. Executive Compensation. * Item 12. Security Ownership of Certain Beneficial Owners and Management. * Item 13. Certain Relationships and Related Transactions. * - -------- * Reference is made to information under the captions "Election of Directors", "Executive Compensation", "Security Ownership of Certain Beneficial Owners and Management", and "Certain Relationships and Related Transactions", in the Company's Proxy Statement for the 2002 Annual Meeting of Stockholders. 44 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements The following consolidated financial statements of Goodrich Petroleum Corporation are included in Part II, Item 8:
Page ----- Independent Auditors' Report............................................ 20 Consolidated Balance Sheets--December 31, 2001 and 2000................. 21 Consolidated Statements of Operations--Years ended December 31, 2001, 2000 and 1999.......................................................... 22 Consolidated Statements of Cash Flows--Years ended December 31, 2001, 2000 and 1999.......................................................... 23 Consolidated Statements of Stockholders' Equity and Comprehensive Income--Years ended December 31, 2001, 2000 and 1999................... 24 Notes to Consolidated Financial Statements--Year ended December 31, 2001................................................................... 25-42 Consolidated Quarterly Income Information (Unaudited)................... 43
2. Financial Statement Schedules The schedules for which provision is made in Regulation S-X are not required under the instructions contained therein, are inapplicable, or the information is included in the footnotes to the financial statements. (b) Reports on Form 8-K None (c) Exhibits 3(I).1 Amended and Restated Certificate of Incorporation of the Company dated August 15, 1995, and filed with the Secretary of State of the State of Delaware on August 15, 1995 (Incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report filed on Form 10-Q for the three months ended September 30, 1995). 3(I).2 Certificate of Amendment of Restated Certificate of Incorporation of Goodrich Petroleum Corporation dated March 12, 1998. (Incorporated by reference to Exhibit 3(i)2 of the Company's Annual Report on Form 10- K for the year ended December 31, 1998). 3(ii).1 Bylaws of the Company, as amended and restated (Incorporated by reference to Exhibit 3.2 of the Company's Quarterly Report filed on Form 10-Q for the three months ended September 30, 1995). 4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.6 of the Company's Registration Statement filed February 20, 1996 on Form S-8 (File No. 33-01077)). 4.2 Credit Agreement between Goodrich Petroleum Company, L.L.C. and BNP Paribas dated November 9, 2001. Filed herewith. 10.1 Goodrich Petroleum Corporation 1995 Stock Option Plan (Incorporated by reference to Exhibit 10.21 to the Company's Registration Statement filed June 13, 1995 on Form S-4 (File No. 33-58631)). 10.2 Patrick Petroleum Company 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement filed June 13, 1995 on Form S-4 (File No. 33-58631)). 10.3 Consulting Services Agreement between Patrick E Malloy and Goodrich Petroleum Corporation dated June 1, 2001. Filed herewith.
45 10.4 Goodrich Petroleum Corporation 1997 Director Compensation Plan (Incorporated by reference to the May 20, 1998 Proxy). 10.5 Form of Subscription Agreement dated September 27, 1999 (Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K filing dated September 23, 1999). 10.6 Registration Rights Agreement (2000 Private Placement) (Incorporated by reference to Exhibit 10.11 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.7 Purchase and Sale Agreement between Malloy Energy Company, LLC, and Goodrich Petroleum Company, LLC, dated March 12, 2002. Filed herewith. 21 Subsidiaries of the Registrant Goodrich Petroleum Corporation, Inc. of Louisiana--incorporated in the state of Nevada Goodrich Petroleum Company LLC--incorporated in state of Louisiana Goodrich Petroleum Lafitte, LLC--incorporated in state of Louisiana Subsidiaries of Goodrich Petroleum Company of Louisiana Drilling & Workover Company, Inc.--incorporated in state of Louisiana LECE, Inc.--incorporated in the state of Texas National Marketing Company--incorporated in state of Delaware 23 Consent of KPMG LLP.
46 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. GOODRICH PETROLEUM CORPORATION (Registrant) /s/ Walter G. Goodrich By __________________________________ Date: March 28, 2002 Walter G. Goodrich President, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: March 28, 2002
Signature Title --------- ----- /s/ Walter G. Goodrich Chief Executive Officer and Director ______________________________________ (Principal Executive Officer) Walter G. Goodrich /s/ Roland L. Frautschi Senior Vice President, Treasurer ______________________________________ Roland L. Frautschi /s/ Lonnie J. Shaw Vice President (Principal Accounting ______________________________________ Officer) Lonnie J. Shaw /s/ Sheldon Appel Director ______________________________________ Sheldon Appel /s/ Henry Goodrich Director ______________________________________ Henry Goodrich /s/ Arthur A. Seeligson Director ______________________________________ Arthur A. Seeligson /s/ Donald M. Campbell Director ______________________________________ Donald M. Campbell /s/ Mike McGovern Director ______________________________________ Mike McGovern /s/ Michael J. Perdue Director ______________________________________ Michael J. Perdue /s/ Patrick E. Malloy, III Director ______________________________________ Patrick E. Malloy, III
47 EX-4.2 3 dex42.txt CREDIT AGREEMENT EXHIBIT 4.2 CREDIT AGREEMENT between GOODRICH PETROLEUM COMPANY, L.L.C. Borrower BNP PARIBAS Agent and CERTAIN LENDERS Lenders November 9, 2001 TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS AND TERMS........................................ 1 1.1 DEFINITIONS.................................................. 1 1.2 TIME REFERENCES.............................................. 11 1.3 OTHER REFERENCES............................................. 11 1.4 ACCOUNTING PRINCIPLES........................................ 11 SECTION 2. COMMITMENT................................................... 11 2.1 REVOLVING FACILITY........................................... 12 2.2 BORROWING PROCEDURE.......................................... 12 2.3 LETTERS OF CREDIT............................................ 13 2.4 BORROWING NOTICES AND LC REQUESTS............................ 15 2.5 TERMINATION.................................................. 15 2.6 BORROWING BASE DETERMINATIONS................................ 15 SECTION 3. TERMS OF PAYMENT............................................. 16 3.1 NOTES AND PAYMENTS........................................... 16 3.2 INTEREST AND PRINCIPAL PAYMENTS.............................. 17 3.3 INTEREST OPTIONS............................................. 17 3.4 QUOTATION OF RATES........................................... 17 3.5 DEFAULT RATE................................................. 17 3.6 INTEREST RECAPTURE........................................... 17 3.7 INTEREST CALCULATIONS........................................ 18 3.8 MAXIMUM RATE................................................. 18 3.9 INTEREST PERIODS............................................. 18 3.10 CONVERSIONS.................................................. 18 3.11 ORDER OF APPLICATION......................................... 19 3.12 SHARING OF PAYMENTS, ETC..................................... 19 3.13 OFFSET....................................................... 19 3.14 BOOKING BORROWINGS........................................... 20 3.15 BASIS UNAVAILABLE FOR LIBOR RATE............................. 20 3.16 ADDITIONAL COSTS............................................. 20 3.17 CHANGE IN LAWS............................................... 21 3.18 FUNDING LOSS................................................. 21 3.19 FOREIGN LENDERS, PARTICIPANTS, AND ASSIGNEES................. 21 SECTION 4. FEES......................................................... 22 4.1 TREATMENT OF FEES............................................ 22 4.2 FEES TO AGENT AND AFFILIATES................................. 22 4.3 LC FEES...................................................... 22 4.4 COMMITMENT FEE............................................... 22 SECTION 5. SECURITY..................................................... 23 5.1 GUARANTY..................................................... 23 5.2 COLLATERAL................................................... 23 5.3 COLLATERAL ACCOUNT........................................... 23 i 5.4 FURTHER ASSURANCES............................................ 24 5.5 RELEASE OF COLLATERAL......................................... 24 SECTION 6. CONDITIONS PRECEDENT.......................................... 24 SECTION 7. REPRESENTATIONS AND WARRANTIES................................ 25 7.1 PURPOSE AND REGULATION U...................................... 25 7.2 CORPORATE EXISTENCE, GOOD STANDING, AND AUTHORITY............. 25 7.3 SUBSIDIARIES AND NAMES........................................ 25 7.4 AUTHORIZATION AND CONTRAVENTION............................... 25 7.5 BINDING EFFECT................................................ 26 7.6 FINANCIALS AND EXISTING DEBT.................................. 26 7.7 [RESERVED].................................................... 26 7.8 SOLVENCY...................................................... 26 7.9 LITIGATION.................................................... 26 7.10 TAXES......................................................... 26 7.11 ENVIRONMENTAL MATTERS......................................... 26 7.12 EMPLOYEE PLANS................................................ 27 7.13 PROPERTIES; LIENS............................................. 27 7.14 GOVERNMENT REGULATIONS........................................ 28 7.15 TRANSACTIONS WITH AFFILIATES.................................. 28 7.16 DEBT.......................................................... 28 7.17 LEASES........................................................ 28 7.18 LABOR MATTERS................................................. 28 7.19 INTELLECTUAL PROPERTY......................................... 28 7.20 FULL DISCLOSURE............................................... 29 7.21 ESTIMATED OIL AND GAS RESERVES................................ 29 7.22 WORKING INTEREST.............................................. 29 7.23 NET REVENUE INTEREST.......................................... 29 7.24 BURDENSOME CONTRACTS.......................................... 29 7.25 REGULATORY DEFECTS............................................ 29 7.26 AGREEMENTS AFFECTING MINERAL INTERESTS........................ 29 7.27 LOCATIONS OF BUSINESS, OFFICES................................ 29 SECTION 8. AFFIRMATIVE COVENANTS......................................... 30 8.1 CERTAIN ITEMS FURNISHED....................................... 30 8.2 USE OF CREDIT................................................. 32 8.3 BOOKS AND RECORDS............................................. 32 8.4 INSPECTIONS................................................... 32 8.5 TAXES......................................................... 32 8.6 PAYMENT OF OBLIGATION......................................... 32 8.7 EXPENSES...................................................... 32 8.8 MAINTENANCE OF EXISTENCE, ASSETS, AND BUSINESS................ 33 8.9 INSURANCE..................................................... 33 8.10 ENVIRONMENTAL MATTERS......................................... 33 8.11 SUBSIDIARIES.................................................. 33 8.12 INDEMNIFICATION............................................... 33 8.13 OPERATIONS AND PROPERTIES..................................... 34 8.14 LEASES........................................................ 34 ii 8.15 DEVELOPMENT AND MAINTENANCE.................................... 35 8.16 MAINTENANCE OF LIENS........................................... 35 SECTION 9. NEGATIVE COVENANTS............................................. 35 9.1 PAYROLL TAXES.................................................. 35 9.2 DEBT........................................................... 35 9.3 LETTERS OF CREDIT.............................................. 35 9.4 LIENS.......................................................... 35 9.5 EMPLOYEE PLANS................................................. 35 9.6 TRANSACTIONS WITH AFFILIATES................................... 35 9.7 COMPLIANCE WITH LAWS AND DOCUMENTS............................. 35 9.8 LOANS, ADVANCES, AND INVESTMENTS............................... 36 9.9 DISTRIBUTIONS.................................................. 36 9.10 DISPOSITION OF ASSETS.......................................... 36 9.11 MERGERS, CONSOLIDATIONS, AND DISSOLUTIONS...................... 36 9.12 ASSIGNMENT..................................................... 36 9.13 FISCAL YEAR AND ACCOUNTING METHODS............................. 36 9.14 NEW BUSINESSES................................................. 36 9.15 GOVERNMENT REGULATIONS......................................... 36 9.16 STRICT COMPLIANCE.............................................. 37 9.17 ALTERATION OF MATERIAL AGREEMENTS.............................. 37 9.18 OPERATING AGREEMENTS........................................... 37 9.19 BURDENSOME CONTRACTS........................................... 37 9.20 MARKETING CONTRACTS; HEDGING................................... 37 SECTION 10. FINANCIAL COVENANTS............................................ 37 10.1 CURRENT RATIO.................................................. 37 10.2 INTEREST COVERAGE.............................................. 37 10.3 TANGIBLE-NET WORTH............................................. 37 SECTION 11. DEFAULT........................................................ 38 11.1 PAYMENT OF OBLIGATION.......................................... 38 11.2 COVENANTS...................................................... 38 11.3 DEBTOR RELIEF.................................................. 38 11.4 JUDGMENTS AND ATTACHMENTS...................................... 38 11.5 GOVERNMENT ACTION.............................................. 38 11.6 MISREPRESENTATION.............................................. 38 11.7 CHANGE OF CONTROL.............................................. 38 11.8 OTHER FUNDED DEBT.............................................. 38 11.9 SEC REPORTING REQUIREMENTS..................................... 39 11.10 VALIDITY AND ENFORCEABILITY.................................... 39 11.11 LCS............................................................ 39 SECTION 12. RIGHTS AND REMEDIES............................................ 39 12.1 REMEDIES UPON DEFAULT.......................................... 39 12.2 COMPANY WAIVERS................................................ 40 12.3 PERFORMANCE BY AGENT........................................... 40 12.4 NOT IN CONTROL................................................. 40 12.5 COURSE OF DEALING.............................................. 40 iii 12.6 CUMULATIVE RIGHTS............................................. 40 12.7 APPLICATION OF PROCEEDS....................................... 40 12.8 CERTAIN PROCEEDINGS........................................... 41 12.9 EXPENDITURES BY LENDERS....................................... 41 12.10 DIMINUTION IN VALUE OF COLLATERAL............................. 41 SECTION 13. AGENT AND LENDERS............................................. 41 13.1 AGENT......................................................... 41 13.2 EXPENSES...................................................... 42 13.3 PROPORTIONATE ABSORPTION OF LOSSES............................ 42 13.4 DELEGATION OF DUTIES; RELIANCE................................ 42 13.5 LIMITATION OF AGENT'S LIABILITY............................... 43 13.6 DEFAULT....................................................... 44 13.7 COLLATERAL MATTERS............................................ 44 13.8 LIMITATION OF LIABILITY....................................... 45 13.9 RELATIONSHIP OF LENDERS....................................... 45 13.10 BENEFITS OF AGREEMENT......................................... 45 SECTION 14. MISCELLANEOUS................................................. 45 14.1 NONBUSINESS DAYS.............................................. 45 14.2 COMMUNICATIONS................................................ 45 14.3 FORM AND NUMBER OF DOCUMENTS.................................. 45 14.4 EXCEPTIONS TO COVENANTS....................................... 45 14.5 SURVIVAL...................................................... 45 14.6 GOVERNING LAW................................................. 45 14.7 INVALID PROVISIONS............................................ 46 14.8 AMENDMENTS, CONSENTS, CONFLICTS, AND WAIVERS.................. 46 14.9 MULTIPLE COUNTERPARTS......................................... 46 14.10 PARTIES....................................................... 47 14.11 VENUE, SERVICE OF PROCESS, AND JURY TRIAL..................... 48 14.12 ENTIRETY...................................................... 48 SCHEDULES AND EXHIBITS Schedule 2 - Lenders and Commitments Schedule 6 - Closing Documents Schedule 7.3 - Companies and Names Schedule 7.9 - Litigation Schedule 7.11 - Environmental Matters Schedule 7.15 - Affiliate Transactions Schedule 9.2 - Permitted Debt Schedule 9.4 - Permitted Liens Schedule 9.8 - Permitted Loans, Advances, and Investments Exhibit A - Revolving Note Exhibit B - Form of Production Report Exhibit C-1 - Borrowing Request Exhibit C-2 - Conversion Notice Exhibit C-3 - LC Request iv Exhibit C-4 - Compliance Certificate Exhibit D - Opinion of Counsel to Companies Exhibit E - Assignment and Assumption Agreement v CREDIT AGREEMENT THIS AGREEMENT is entered into as of November 9, 2001, between GOODRICH PETROLEUM COMPANY, L.L.C., a Louisiana limited liability company ("Borrower"), Lenders (defined below), and BNP PARIBAS, a foreign banking corporation organized under the laws of the Republic of France, as agent for Lenders. The Borrower, Compass Bank, N.A., as agent (in such capacity, "Prior Agent") for itself and Bank One, Texas, National Association (the "Prior Lenders") Goodrich Petroleum Corporation and Goodrich Petroleum Company - Lafitte, L.L.C., have previously entered into that certain Credit Agreement dated January 31, 2001, (such Credit Agreement, as the same may have been heretofore amended, is herein referred to as the "Prior Credit Agreement"). The Borrower desires to obtain refinancing of its existing obligations and indebtedness (the "Existing Indebtedness") under the Prior Credit Agreement and the other Loan Documents (as defined in the Prior Credit Agreement) and certain additional financing from the Lenders. The Agent and the Lenders have agreed to provide such refinancing of the Existing Indebtedness and additional financing in the maximum principal amount not to exceed the lesser of $50,000,000 or the Borrowing Base (hereinafter defined) on the terms and conditions provided herein. Prior Agent and Prior Lenders have executed and delivered, contemporaneously herewith, the Compass Assignment (hereinafter defined) in favor of the Agent, for the benefit of the Lenders, resulting in the Lenders being the current owners and holders of the Existing Indebtedness. The Borrower, the Lenders and the Agent have agreed to amend and restate the Prior Credit Agreement, in its entirety, as set forth below. ACCORDINGLY, for adequate and sufficient consideration, Borrower, Lenders, and Agent agree that the Prior Credit Agreement is hereby amended and restated, in its entirety, as follows: SECTION 1. DEFINITIONS AND TERMS. 1.1 Definitions. As used in the Loan Documents: "Affiliate" of a Person means any other individual or entity who directly or indirectly controls, is controlled by, or is under common control with that Person. For purposes of this definition (a) "control," "controlled by," and "under common control with" mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of voting securities or other interests, by contract, or otherwise), and (b) the Companies are "Affiliates" of each other. "Agent" means, at any time, BNP Paribas, a foreign banking corporation organized under the laws of the Republic of France -- or its successor appointed under Section 13 -- acting as "agent" for Lenders under the Loan Documents. "Applicable Margin" means, for any day, a margin of interest over the Base Rate or the LIBOR Rate, as the case may be, that is applicable when the Base Rate or LIBOR Rate, as applicable, is determined under this agreement. (a) The Applicable Margin is subject to adjustment (upwards or downwards, as appropriate) on any day without notice to Borrower or any other Person based on the ratio of the Commitment Usage to the Borrowing Base, as stated in the table below. 1 (b) For purposes of the definition of "Applicable Margin", the ratio of the Commitment Usage to the Borrowing Base is determined as of each day by dividing the Commitment Usage for such day by the Borrowing Base in effect on such day. (c) If Borrower fails to timely furnish to Agent any Financials and related Compliance Certificate as required by this agreement, then the maximum Applicable Margin shall apply from the date those Financials and related Compliance Certificate are required to be delivered and remain in effect until Borrower furnishes them to Agent. For all Borrowings: RATIO OF COMMITMENT APPLICABLE APPLICABLE USAGE TO THE MARGIN FOR MARGIN FOR BORROWING BASE BASE-RATE LIBOR-RATE BORROWINGS BORROWINGS ---------------------------------------------------------------- less than or equal to 25% 0.00% 1.50% ---------------------------------------------------------------- greater than or equal to 0.00% 1.75% 25% but less than 50% ---------------------------------------------------------------- greater than or equal to 0.25% 2.00% 50% but less than 90% ---------------------------------------------------------------- greater than or equal to 0.50% 2.50% 90% "Applicable Percentage" means, for any day, a commitment fee percentage applicable under Section 4.4, equal to 0.375%. "Assignee" is defined in Section 14.10(c). "Assignments" is defined in Section 14.10(c). "Base Rate" means, for any day, the greater of either (a) the annual interest rate most recently announced by BNP Paribas as its prime rate or base rate of interest (which may not necessarily represent the lowest or best rate actually charged to any customer) in effect at its principal office in New York, New York, automatically fluctuating upward and downward as specified in each announcement without special notice to Borrower or any other Person, or (b) the sum of the Federal-Funds Rate plus 0.5%. "Base-Rate Borrowing" means a Borrowing bearing interest at the sum of the Base Rate plus the Applicable Margin. "Borrower" is defined in the preamble to this agreement. "Borrowing" means any amount disbursed under the Loan Documents by one or more Lenders to or on behalf of Borrower under the Loan Documents, either as an original disbursement of funds, a renewal, extension, or continuation of an amount outstanding, or a payment under an LC. 2 "Borrowing Base" shall mean the loan value of the Mineral Interests as Lenders determine, in their sole discretion, from time to time pursuant to Section 2.6 hereof. "Borrowing-Base Deficiency" means any amount by which the limitation in Section 2.1(c) is exceeded, whether because the Commitments have been fully or partially terminated or canceled, the Borrowing Base has been reduced or for any other reason. "Borrowing Date" is defined in Section 2.2(a). "Borrowing Request' means a request, subject to Section 2.2(a), substantially in the form of Exhibit D-1. "Business Day" means any day, other than a Saturday or Sunday or legal holiday, on which (i) commercial banks generally are open for business in New York, New York and Houston, Texas and (ii) in the case of LIBOR Rate Borrowings, dealings in eurodollar deposits are generally carried out in the London interbank eurodollar market. "Capital Lease" means any capital lease or sublease that is required by GAAP to be capitalized on a balance sheet. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. (S)(S)9601 et seq. "Change of Control" means the occurrence of any of the following events: (a) any Person or two or more Persons, other than Goodrich or any Affiliate of Goodrich, acting as a group shall acquire beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act, and including holding proxies to vote for the election of directors other than proxies held by Goodrich's management or their designees to be voted in favor of persons nominated by Goodrich's Board of Directors) of fifty percent (50%) or more of the outstanding voting securities of Goodrich, measured by voting power (including both ordinary shares and any preferred stock or other equity securities entitling the holders thereof to vote with the holders of common stock in elections for directors of Goodrich), (b) Goodrich shall fail beneficially to own, directly or indirectly, 100% of the outstanding shares of voting capital stock of any of the other Restricted Companies on a fully-diluted basis, or (c) 50% or more of the directors of Goodrich shall consist of Persons not nominated by Goodrich's Board of Directors (not including as Board nominees any directors which the Board is obligated to nominate pursuant to shareholders agreements, voting trust arrangements or similar arrangements). "Closing Date" means November 9, 2001. "Code" means the Internal Revenue Code of 1986. "Collateral" is defined in Section 5.2. "Collateral Documents" is defined in Section 5.2. "Commitment" means, at any time and for any Lender, the amounts stated beside that Lender's name on the most-recently amended Schedule 2 (which amount is subject to reduction and cancellation as provided in this agreement). 3 "Commitment Percentage" means, for any Lender, the proportion (stated as a percentage) that its Commitment bears to the total Commitments of all Lenders. "Commitment Usage" means, at any time and without duplication, the sum of (a) the Principal Debt plus (b) the LC Exposure. "Companies" means, at any time, Goodrich and each of its Subsidiaries. "Compass Assignment" shall mean that certain Assignment of Notes, Documents and Liens of even date herewith, executed by Prior Agent and Prior Lenders, in favor of the Agent, for the benefit of the Lenders, as the same may be from time to time modified, amended or supplemented. "Compliance Certificate" means a certificate substantially in the form of Exhibit D-4 and signed by a Responsible Officer. "Conversion Notice" means a request, subject to Section 3.10, substantially in the form of Exhibit D-2. "Current Financials:, unless otherwise specified means either (i) the Companies' consolidated Financials for the year ended December 31, 2000, together with the Companies' Financials for the six (6) months ended on June 30, 2001, or (ii) at any time after annual Financials are first delivered under Section 8.1, the Companies' annual Financials then most recently delivered to Lenders under Section 8.1(a), together with the Companies' quarterly Financials then most recently delivered to Lenders under Section 8.1(b). "Debt" means -- for any person, at any time, and without duplication -- the sum of (a) all obligations required by GAAP to be classified upon that Person's balance sheet as liabilities, (b) liabilities secured (or for which the holder of such liabilities has an existing Right, contingent or otherwise, to be so secured) by any Lien existing on property owned or acquired by that Person, (c) obligations that have been (or under GAAP should be) capitalized for financial reporting purposes, (d) all obligations under synthetic leases, plus (e) all guaranties, endorsements, and other contingent obligations for Debt of others. "Debtor Laws" means the Bankruptcy Code of the United States of America and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar Laws affecting creditors' Rights. "Default" is defined in Section 11. "Default Rate" means, for any day, an annual interest rate equal from day to day to the lesser of either (a) (i) with respect to any LIBOR-Rate Borrowing, the then existing LIBOR-Rate, plus the Applicable Margin plus 2.00%, (ii) with respect to any Base-Rate Borrowing, the then existing Base Rate plus the Applicable Margin, plus 2.00%, and (iii) with respect to any other portion of the Obligation, the then existing Base Rate plus 2.50%, or (b) the Maximum Rate. "Determining Lenders" means, at any time, any combination of Lenders holding (directly or indirectly) at least either (a) 66 2/3% of the total Commitments while there is no Principal Debt or LC Exposure or (b) 66 2/3% of the Principal Debt plus the LC Exposure while there is any Principal Debt or LC Exposure. 4 "Distribution" means, with respect to any shares of any capital stock or other equity securities issued by a Person (a) the retirement, redemption, purchase, or other acquisition for value of those securities, (b) the declaration or payment of any dividend on or with respect to those securities, (c) any loan or advance by that Person to, or other investment by that Person in, the holder of any of those securities, and (d) any other payment by that Person with respect to those securities. "EBITDAX" means for any Person, for any period, and without duplication -- the sum of (a) Net Income, minus extraordinary items, plus to the extent actually deducted in calculating Net Income, Interest Expense and income Taxes, plus (b) to the extent actually deducted in calculating Net Income, depreciation, depletion, amortization and exploration expenses. "Employee Plan" means an employee-pension-benefit plan covered by Title IV of ERISA and established or maintained by any Company. "Environmental Indemnity Agreement" means any agreement (including, without limitation, insurance policies), in form and substance satisfactory to Agent, by which a Restricted Company or Predecessor is entitled to receive reimbursement or other payment on account of any Environmental Liability other than any agreements (a) in the nature of environmental consulting or engineering agreements for professional services or (b) the terms of which preclude that Company or Predecessor from asserting a claim for reimbursement or other payment on account of any Environmental Liability. "Environmental Investigation" means any health, safety, or environmental site assessment, investigation, study, review, audit, compliance audit, or compliance review conducted at any time or from time to time -- whether at the request of Agent or any Lender, upon the order or request of any Tribunal, or at the voluntary instigation of any Company -- concerning any Real Property or the business operations or activities of any Company, including, without limitation (a) air, soil, groundwater, or surface-water sampling and monitoring, (b) repair, cleanup, remediation, or detoxification, (c) preparation and implementation of any closure, remedial, spill, emergency, or other plans, and (d) any health, safety, or environmental compliance audit or review. "Environmental Law" means any applicable Law that relates to (a) the condition of air, ground or surface water, soil, or other environmental media, (b) the environment or natural resources, (c) safety or health, or (d) the regulation of any contaminants, wastes, and Hazardous Substances, including, without limitation, CERCLA, OSHA, the Hazardous Materials Transportation Act (49 U.S.C. (S) 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. (S) 6901 et seq), the Clean Water Act (33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42 U.S.C. (S) 7401 et seq), the Toxic Substances Control Act (15 U.S.C. (S) 2601 et seq), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. (S) 136 et seq.), the Emergency Planning and Community Right-to-Know Act (42 U.S.C. (S) 11001 et seq.), the Safe Drinking Water Act (42 U.S.C. (S) 201 and (S) 300f et seq.), the Rivers and Harbors Act (33 U.S.C. (S) 401 et seq.), the Oil Pollution Act (33 U.S.C. (S) 2701 et seq), analogous state and local Laws, and any analogous future enacted or adopted Law, or (c) to the Release or threatened Release of Hazardous Substances. "Environmental Liability" means any liability, loss, fine, penalty, charge, lien, damage, cost, or expense of any kind that results directly or indirectly, in whole or in part (a) from the violation of any Environmental Law, (b) from the Release or threatened Release of any Hazardous Substance, (c) from removal, remediation, or other actions in response to the Release or threatened Release of any Hazardous Substance, (d) from actual or threatened damages to natural resources, (e) from the imposition of injunctive relief or other orders, (f) from personal injury, death, or property damage which occurs as a result of any Company's use, storage, handling, or the Release or threatened Release of a Hazardous 5 Substance, or (g) from any Environmental Investigation performed at, on, or for any Real Property (including without limitation, the Leases and the Mineral Interests). "Environmental Permit" means any permit, license, or other authorization from any Tribunal that is required under any Environmental Law for the lawful conduct of any business, process, or other activity. "Environmental Report" means any written or verbal report memorializing any Environmental Investigation. "ERISA" means the Employee Retirement Income Security Act of 1974. "Existing Preferred Stock" means the Goodrich Series A Preferred Stock currently traded on the NASDAQ Small Cap market. "Federal-Funds Rate" means, for any day, the annual rate (rounded upwards, if necessary, to the nearest 0.01%) determined (which determination is conclusive and binding, absent manifest error) by Agent to be equal to (a) the weighted average of the rates on overnight federal-funds transactions with member banks of the Federal Reserve System arranged by federal-funds brokers on that day, as published by the Federal Reserve Bank of New York on the next Business Day, or (b) if those rates are not published for any day, the average of the quotations at approximately 10:00 a.m. received by Agent from three federal-funds brokers of recognized standing selected by Agent in its sole discretion. "Financials" of a Person means balance sheets, profit and loss statements, reconciliations of capital and surplus, and statements of cash flow prepared (a) according to GAAP (subject to year end audit adjustments with respect to interim Financials) and (b) except as stated in Section 1.4, in comparative form to prior year-end figures or corresponding periods of the preceding fiscal year or other relevant period, as applicable. "Funded Debt" means for any Person, at any time and without duplication -- the sum of (a) the balance of any obligation for borrowed money, plus (b) the total amount capitalized on the balance sheet of that Person with respect to Capital Leases. "Funding Loss" means any loss, expense, or reduction in yield that any Lender reasonably incurs because (a) Borrower fails or refuses (for any reason whatsoever other than a default by Agent or that Lender claiming that loss, expense, or reduction in yield) to take any LIBOR-Rate Borrowing that it has requested under this agreement, or (b) Borrower prepays or pays any LIBOR-Rate Borrowing or converts any LIBOR-Rate Borrowing to a Borrowing of another Type, in each case, other than on the last day of the applicable Interest Period. "GAAP" means generally accepted accounting principles of the Accounting Principles Board of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board that are applicable from time to time. "Goodrich" means Goodrich Petroleum Corporation, a Delaware corporation. "Hazardous Substance" means (a) any substance that is reasonably expected to require, removal, remediation, or other response under any Environmental Law, (b) any substance that is designated, defined or classified as a hazardous waste, hazardous material, pollutant, contaminant, explosive, corrosive, flammable, infectious, carcinogenic, mutagenic, radioactive, dangerous, or toxic or hazardous 6 substance under any Environmental Law, including, without limitation, any hazardous substance within the meaning of (S) 101(14) of CERCLA, (c) petroleum, oil, gasoline, natural gas, fuel oil, motor oil, waste oil, diesel fuel, jet fuel, and other petroleum hydrocarbons, (d) asbestos and asbestos-containing materials in any form, (e) polychlorinated biphenyls, (f) urea formaldehyde foam, or (g) any substance the presence of which on any Real Property (including, without limitation, the Leases and the Mineral Interests) either (i) poses or threatens to pose a hazard to the health or safety of persons or to the environment or (ii) could constitute a health or safety hazard to persons or the environment if it emanated or migrated from the Real Property (including, without limitation, the Leases and the Mineral Interests). "Interest Expense" means -- for any Person, for any period, and without duplication -- all interest on Debt, whether paid in cash or accrued as a liability and payable in cash during that period, including, without limitation, the interest component of Capital Leases and any premium or penalty for repayment, redemption, or repurchase of Debt. "Interest Period" is determined under Section 3.9. "Issuing Lender" means Agent, or any of its Affiliates, that issues an LC under this agreement. "Laws" means all applicable statutes, laws, treaties, ordinances, rules, regulations, orders, writs, injunctions, decrees, judgments, opinions, and interpretations of any Tribunal. "LC" means a documentary or standby letter of credit issued for the account of Borrower by an Issuing Lender under this agreement and under an LC Agreement. "LC Agreement" means a letter of credit application and agreement (in form and substance satisfactory to Agent) submitted and executed by Borrower to the Issuing Lender for an LC for the account of Borrower. "LC Exposure" means, without duplication, the sum of (a) the total face amount of all undrawn and uncancelled LCs plus (b) the total unpaid reimbursement obligations of Borrower under drawings under any LC. "LC Request" means a request substantially in the form of Exhibit D-3. "LC Subfacility" means a subfacility of the Revolving Facility for the issuance of LCs, as described in Section Z3, under which the LC Exposure (a) may never collectively exceed $10,000,000 and (b) together with Principal Debt may never exceed the lesser of either (i) the total Commitments or (ii) the Borrowing Base. "Leases" shall have the meaning assigned to it in Section 7.17 hereof. "Lender Lien" means any present or future first-priority Lien (subject only to any applicable Permitted Lien) securing the Obligation and assigned, conveyed, or granted to or created in favor of Agent for the benefit of Lenders. "Lenders" means the financial institutions -- including, without limitation, Agent (possibly acting through one or more of its Affiliates for LCs) in respect of its share of Borrowings and LCs -- named on Schedule 2 or on the most-recently-amended Schedule 2, if any, delivered by Agent under this agreement, and, subject to this agreement, their respective successors and permitted assigns (but not any Participant who is not otherwise a party to this agreement). 7 "LIBOR Rate" means, for a LIBOR-Rate Borrowing and for the relevant Interest Period, the annual interest rate (rounded upward, if necessary, to the nearest 0.01%) equal to the quotient obtained by dividing (a) the rate displayed on page 3750 on the Teleratesystem Incorporated Service (or such other page as may replace such page on such service) at approximately 11:00 a.m. London time two Business Days before the first day of that Interest Period in an amount comparable to that LIBOR-Rate Borrowing and having a maturity approximately equal to that Interest Period, by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to the relevant Interest Period. "LIBOR-Rate Borrowing" means a Borrowing bearing interest at the sum of the LIBOR Rate plus the Applicable Margin. "Lien" means any lien, mortgage, security interest, pledge, assignment, charge, title retention agreement, or encumbrance of any kind and any other arrangement for a creditor's claim to be satisfied from assets or proceeds prior to the claims of other creditors or the owners. "Litigation" means any action by or before any Tribunal. "Loan Documents" means (a) this agreement, certificates and reports delivered under this agreement, and exhibits and schedules to this agreement, (b) the Notes, Collateral Documents, and all other agreements, documents, and instruments in favor of Agent or Lenders (or Agent on behalf of Lenders) ever delivered under this agreement or otherwise delivered in connection with all or any part of the Obligation (other than Assignments but including the Compass Assignment), (c) all LCs and LC Agreements, (d) the letter agreement described in Section 4.2, and (e) all renewals, extensions, and restatements of, and amendments and supplements to, any of the foregoing. "Material Adverse Event" means any circumstance or event that, individually or collectively, is reasonably expected to result in any (a) material impairment of (i) the ability of Borrower to perform any of its payment or other material obligations under any Loan Document, (ii) the Restricted Companies as a whole to perform any of their payment or other material obligations under any Loan Document, or (iii) the ability of Agent or any Lender to enforce any of those obligations or any of their respective Rights under the Loan Documents, (b) material and adverse effect on the financial condition of the Companies as a whole as represented to Lenders in the Current Financials most recently delivered before the date of this agreement or (c) Default or Potential Default. "Maximum Amount"and "Maximum Rate" respectively mean, for a Lender, the maximum nonusurious amount and the maximum non-usurious rate of interest that, under applicable Law, that Lender is permitted to contract for, charge, take, reserve, or receive on the Obligation. "Mineral Interests" shall mean all present and future rights, titles and interests that Borrower or any other Company may now have or hereafter acquire in and to all (i) oil, gas and/or mineral leases, royalty and overriding royalty interests, production payments, farm-out agreements, net profit interests and mineral fee interests, (ii) present and future unitization, communication and pooling arrangements (and all properties covered and units created thereby), whether arising by contract or operation of law, which now or hereafter include all or any part of the foregoing; and (iii) lands now or hereafter subject to any of the foregoing. "Mortgaged Properties" shall mean all of Mineral Interests described in the Collateral Documents and all related personal property and rights to payments or proceeds thereon or therefrom, and all other properties in which Borrower or any other Company has heretofore granted or purported to grant 8 or hereinafter grants or purports to grant to Agent, for the benefit of the Lenders, a Lender Lien (including, without limitation, those assigned to Agent by Prior Agent and the Prior Lenders pursuant to, among other things, the Compass Assignment) in accordance with Section 5.2 hereof, in order to secure the Notes and the Obligation. "Multiemployer Plan" means a multiemployer plan as defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code to which any Company (or any Person that, for purposes of Title IV of ERISA, is a member of Borrower's controlled group or is under common control with Borrower within the meaning of Section 414 of the Code) is making, or has made, or is accruing, or has accrued, an obligation to make contributions. "Net Income" of any Person means that Person's profit or loss after deducting its Tax expense. "Notes" means one of the promissory notes substantially in the form of Exhibit A. "Obligation" means all present and future (a) Debts, liabilities, and obligations of any Company to Agent or any Lender and related to any Loan Document, whether principal, interest, fees, costs, attorneys' fees, or otherwise, (b) any Debts, liabilities, or obligations owed by any Company to any Lender or its one or more Affiliates under any Swap Agreement, and (c) renewals, extensions, and modifications of any of the foregoing. "OSHA" means the Occupational Safety and Health Act of 1970, 29 U.S.C. (S) 651 et seq. "Participant" is defined in Section 14.10(b). "PBGC" means the Pension Benefit Guaranty Corporation. "Permitted Debt' means Debt described on Schedule 9.2. "Permitted Liens" means the Liens described on Schedule 9.4. "Person" means any individual, entity, or Tribunal. "Potential Default" means any event's occurrence or any circumstance's existence that would -- upon any required notice, time lapse, or both -- become a Default. "Predecessor" means any Person for whose obligations and liabilities any Company is reasonably expected to be liable as the result of any merger, de facto merger, stock purchase, asset purchase or divestiture, combination, joint venture, investment, reclassification, or other similar business transaction. "Principal Debt" means, at any time, the unpaid principal balance of all Borrowings. "Pro Rata" and "Pro Rata Part" mean, at any time and for any Lender, the proportion (stated as a percentage) that (i) its Commitment bears to the total Commitments of all Lenders, and (ii) if the Commitments have terminated, the Commitment Usage owed to it bears to the total Commitment Usage owed to all Lenders. "Real Property" means any land, buildings, fixtures, and other improvements to land now or in the future directly or indirectly owned by any Restricted Company, leased to or otherwise operated by any Restricted Company, or subleased by any Restricted Company to any other Person. 9 "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposal, migrating, or other movement into the air, ground or surface water, or soil. "Representatives" means representatives, officers, directors, employees, accountants, attorneys, and agents. "Reserve Report" means each report delivered to the Agent by the Borrower pursuant to Section 8.1(c). "Reserve Requirement" means, for any LIBOR-Rate Borrowing and for the relevant Interest Period, the total reserve requirements (including all basic, supplemental, emergency, special, marginal, and other reserves required by applicable Law) applicable to eurocurrency fundings or liabilities as of the first day of that Interest Period. "Responsible Officer" means Borrower's chairman, president, chief executive officer, or chief financial officer. "Restricted Company" means Goodrich, Borrower and each other Subsidiary of Goodrich other than any Subsidiary that has no assets except its corporate name and conducts no operations. "Revolving Facility" means the revolving credit facility in the amount of the total Commitments of the Lenders to make advances and issue letters of credit in accordance with the terms and conditions of this agreement and includes the LC Subfacility. "Rights" means rights, remedies, powers, privileges, and benefits. "Solvent" means, as to any Person, that (a) the aggregate fair market value of its assets exceeds its liabilities, (b) it has sufficient cash flow to enable it to pay its Debts as they mature, and (c) it does not have unreasonably small capital to conduct its businesses. "Stated-Termination Date" means November 8, 2004. "Subsidiary" of any Person means any entity of which more than 50% (in number of votes) of the stock (or equivalent interests) is owned of record or beneficially, directly or indirectly, by that Person. "Swap Agreement" means any present or future, whether master or single, agreement, document, or instrument providing for - or constituting an agreement to enter into -- an interest-rate, basis, credit default, or commodity swap; forward-rate arrangement; commodity option; equity or equity-index swap or option; bond or interest-rate option; forward-foreign-exchange arrangement; rate-cap, -collar, or -floor arrangement; currency- or cross-currency-swap arrangement; swaption; currency-option; or any similar arrangement. "Tangible-Net Worth" means -- at any time and for any Person -- the sum of (i) its stockholders' equity, plus (ii) amounts excluded from stockholders' equity under GAAP relating to the establishment of an employee stock ownership plan, minus (iii) the total (without duplication of deductions already made in arriving at stockholders' equity) of the book value of all assets that would be treated as intangible assets under GAAP, including, without limitation, goodwill, trademarks, trade names, copyrights, patents, and unamortized debt discount and expense. 10 "Taxes" means, for any Person, taxes, assessments, or other governmental charges or levies imposed upon it, its income, or any of its properties, franchises, or assets. "Termination Date" means the earlier of either (a) the Stated-Termination Date or (b) the effective date that Lenders' commitments to lend and issue LCs under this agreement are fully canceled or terminated. "Tribunal" means any (a) local, state, territorial, federal, or foreign judicial, executive, regulatory, administrative, legislative, or governmental agency, board, bureau, commission, department, or other instrumentality, (b) private arbitration board or panel, or (c) central bank. "Type" means any type of Borrowing determined with respect to the applicable interest option. 1.2 Time References. Unless otherwise specified, in the Loan Documents (a) time references (e.g., 11:00 a.m.) are to time in New York, New York, and (b) in calculating a period from one date to another, the word "from" means "from and including" and the word "to" or "until" means "to but excluding." 1.3 Other References. Unless otherwise specified, in the Loan Documents (a) where appropriate, the singular includes the plural and vice versa, and words of any gender include each other gender, (b) heading and caption references may not be construed in interpreting provisions, (c) monetary references are to currency of the United States of America, (d) section, paragraph, annex, schedule, exhibit, and similar references are to the particular Loan Document in which they are used, (e) references to "telecopy," "facsimile," "fax," or similar terms are to facsimile or telecopy transmissions, (f) references to "including" mean including without limiting the generality of any description preceding that word, (g) the rule of construction that references to general items that follow references to specific items are limited to the same type or character of those specific items is not applicable in the Loan Documents, (h) references to any Person include that Person's heirs, personal representatives, successors, trustees, receivers, and permitted assigns, (i) references to any Law include every amendment or supplement to it, rule and regulation adopted under it, and successor or replacement for it, and (j) references to any Loan Document or other document include every renewal and extension of it, amendment and supplement to it, and replacement or substitution for it. 1.4 Accounting Principles. Unless otherwise specified, in the Loan Documents (a) GAAP determines all accounting and financial terms and compliance with financial covenants, (b) GAAP in effect on the date of this agreement determines compliance with financial covenants, (c) otherwise, all accounting principles applied in a current period must be comparable in all material respects to those applied during the preceding comparable period, and (d) while Goodrich has any consolidated Subsidiaries (i) all accounting and financial terms and compliance with reporting covenants must be on a consolidating and consolidated basis, as applicable, and (ii) compliance with financial covenants must be on a consolidated basis. SECTION 2. COMMITMENT. Subject to the provisions in the Loan Documents, each Lender severally but not jointly agrees to extend credit to Borrower under the Revolving Facility in accordance with the following provisions. 11 2.1 Revolving Facility. Each Lender severally but not jointly agrees to lend to Borrower that Lender's Commitment Percentage of requested Borrowings under the Revolving Facility which Borrower may borrow, repay, and reborrow under this agreement subject to the following conditions: (a) Each Borrowing may only occur on a Business Day on or after the Closing Date and before the Termination Date; (b) Each Borrowing may only be $500,000 or a greater integral multiple of $100,000 if a Base-Rate Borrowing or $1,000,000 or a greater integral multiple of $500,000 if a LIBOR-Rate Borrowing; (c) The Commitment Usage may never exceed at any time, the lesser of either the total Commitments or the Borrowing Base; and (d) Subject to the other terms and conditions of this Agreement, that portion of the Existing Indebtedness consisting of advances outstanding under the Prior Credit Agreement shall be and be deemed to constitute a Base-Rate Borrowing hereunder effective as of the Closing Date. 2.2 Borrowing Procedure. The following procedures apply to Borrowings: (a) Borrowing Request. Borrower may request a Borrowing by making or delivering a Borrowing Request (that may be telephonic if confirmed immediately in writing by 2:00 p.m. on the same Business Day) to Agent, which is irrevocable and binding on Borrower, stating the Type, amount, and Interest Period for each Borrowing and which must be received by Agent no later than 11:00 a.m. on the (i) third Business Day before the date on which funds are requested (the "Borrowing Date") for any LIBOR-Rate Borrowing, or (ii) Borrowing Date for any Base-Rate Borrowing. Agent shall promptly notify each Lender of any Borrowing Request. (b) Funding. Each Lender shall remit its Commitment Percentage of each requested Borrowing to Agent's principal office in New York, New York, in funds that are available for immediate use by Agent by 1:00 p.m. on the applicable Borrowing Date. Subject to receipt of those funds, Agent shall (unless to its actual knowledge any of the applicable conditions precedent have not been satisfied by Borrower or waived by the requisite Lenders under Section 14.8) make those funds available to Borrower by (at Borrower's option) (i) wiring the funds to or for the account of Borrower at the direction of Borrower or (ii) depositing the funds in an account designated by Borrower. (c) Funding Assumed. Absent contrary written notice from a Lender, Agent may assume that each Lender has made its Commitment Percentage of the requested Borrowing available to Agent on the applicable Borrowing Date, and Agent may, in reliance upon such assumption (but shall not be required to), make available to Borrower a corresponding amount. If a Lender fails to make its Commitment Percentage of any requested Borrowing available to Agent on the applicable Borrowing Date, Agent may recover the applicable amount on demand, (i) from that Lender together with interest, commencing on the Borrowing Date and ending on (but excluding) the date Agent recovers the amount from that Lender, at an annual interest rate equal to the Federal-Funds Rate, or (ii) if that Lender fails to pay its amount upon demand, then from Borrower. No Lender is responsible for the failure of any other Lender to make its Commitment Percentage of any Borrowing available as required by Section 2.2(b); however, failure of any Lender to make its Commitment Percentage of any Borrowing so available does not excuse any other Lender from making its Commitment Percentage of any Borrowing so available. 12 2.3 Letters of Credit. (a) Conditions. Subject to the terms and conditions of this agreement Issuing Lender agrees to issue LCs upon Borrower's making or delivering an LC Request and delivering an LC Agreement, both of which must be received by the Issuing Lender no later than the third Business Day before the Business Day on which the requested LC is to be issued, so long as (i) no LC may expire after the earlier to occur of the first anniversary of its issuance date or three Business Days before the Termination Date, (ii) the LC Exposure (after giving effect to such requested LC) would not exceed $10,000,000, and (iii) the limitations in Sections 21(c) are not exceeded. (b) Participation. Immediately upon Issuing Lender's issuance of any LC, Issuing Lender shall be deemed to have sold and transferred to each other Lender, and each other Lender shall be deemed irrevocably and unconditionally to have purchased and received from Issuing Lender, without recourse or warranty, an undivided interest and participation to the extent of such Lender's Commitment Percentage in the LC and all applicable Rights of Issuing Lender in the LC - other than Rights to receive certain fees provided in Section 4.3 to be for the Issuing Lender's sole account. (c) Reimbursement Obligation. To induce Issuing Lender to issue and maintain LCs, and to induce Lenders to participate in issued LCs, Borrower agrees to pay or reimburse Issuing Lender (i) on the first Business Day after an Issuing Lender notifies Agent and Borrower that it has made payment under an LC, the amount paid by Issuing Lender and (ii) within five Business Days after demand, the amount of any additional fees Agent customarily charges for amending LCs Agreements, for honoring drafts, and for taking similar action in connection with letters of credit. If Borrower has not reimbursed Issuing Lender for any drafts paid by the date on which reimbursement is required under this section, then Agent is irrevocably authorized to fund Borrower's reimbursement obligations as a Base-Rate Borrowing under the Revolving Facility if proceeds are available under the Revolving Facility and if the conditions in this agreement for such a Borrowing (other than any notice requirements or minimum funding amounts) have, to Agent's knowledge, been satisfied. The proceeds of that Borrowing shall be advanced directly to Issuing Lender to pay Borrower's unpaid reimbursement obligations. If funds cannot be advanced under the Revolving Facility, then Borrower's reimbursement obligation shall constitute a demand obligation. Borrower's obligations under this section are absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim, or defense to payment that Borrower may have at any time against Issuing Lender or any other Person. From the date that Issuing Lender pays a draft under a LC until Borrower either reimburses or is obligated to reimburse Issuing Lender for that draft under this section, the amount of that draft bears interest payable to Issuing Lender at the rate then applicable to Base-Rate Borrowings. From the due date of the respective amounts due under this section, to the date paid (including any payment from proceeds of a Base-Rate Borrowing), unpaid reimbursement amounts accrue interest that is payable on demand at the Default Rate. (d) General. Issuing Lender shall promptly notify Agent and Borrower of the date and amount of any draft presented for honor under any LC (but failure to give notice will not affect Borrower's obligations under this agreement). Issuing Lender shall pay the requested amount upon presentment of a draft unless presentment on its face does not comply with the terms of the applicable LC. When making payment, Issuing Lender may disregard (i) any default or potential default that exists under any other agreement and (ii) obligations under any other agreement that have or have not been performed by the beneficiary or any other Person (and Issuing Lender is not liable for any of those obligations). Borrower's reimbursement obligations to Issuing Lender and Lenders, and each Lender's obligations to Issuing Lender, under this section are absolute and unconditional irrespective of, and Issuing Lender is not responsible for, (i) the validity, enforceability, sufficiency, accuracy, or genuineness of documents or endorsements (even if they are in any respect invalid, unenforceable, insufficient, 13 inaccurate, fraudulent, or forged), (ii) any dispute by any Company with or any Company's claims, setoffs, defenses, counterclaims, or other Rights against Issuing Lender, any Lender, or any other Person, or (iii) the occurrence of any Potential Default or Default. However, nothing in this agreement constitutes a waiver of Borrower's Rights to assert any claim or defense based upon the gross negligence or willful misconduct of any Lender. The Issuing Lender shall promptly pay to Agent for Agent to promptly distribute reimbursement payments received from Borrower to all Lenders according to their Pro Rata Part of the Revolving Facility. (e) Obligation of Lenders. If Borrower fails to reimburse Issuing Lender as provided in Section 2.3(c) by the date on which reimbursement is due under that section, and funds cannot be advanced under the Revolving Facility to satisfy the reimbursement obligations, then Agent shall promptly notify each Lender of Borrower's failure, of the date and amount paid, and of each Lender's Commitment Percentage of the unreimbursed amount. Each Lender shall promptly and unconditionally make available to Agent in immediately available funds its Commitment Percentage of the unpaid reimbursement obligation, subject to the limitations of Section 2.1(c). Funds are due and payable to Agent before the close of business on the Business Day when Agent gives notice to each Lender of Borrower's reimbursement failure (if notice is given before 1:00 p.m.) or on the next succeeding Business Day (if notice is given after 1:00 p.m.). All amounts payable by any Lender accrue interest after the due date at the Federal-Funds Rate from the day the applicable draft or draw is paid by Agent to (but not including) the date the amount is paid by the Lender to Agent. Upon receipt of those funds, Agent shall make them available to the Issuing Lender. (f) Duties of Issuing Lender. Issuing Lender agrees with each Lender that it will exercise and give the same care and attention to each LC as it gives to its other letters of credit. Each Lender and Borrower agree that, in paying any draft under any LC, Issuing Lender has no responsibility to obtain any document (other than any documents expressly required by the respective LC) or to ascertain or inquire as to any document's validity, enforceability, sufficiency, accuracy, or genuineness or the authority of any Person delivering it. Neither Issuing Lender nor its Representatives will be liable to any Lender or any Company for any LC's use or for any beneficiary's acts or omissions. Any action, inaction, error, delay, or omission taken or suffered by Issuing Lender or any of its Representatives in connection with any LC, applicable drafts or documents, or the transmission, dispatch, or delivery of any related message or advice, if in good faith and in conformity with applicable Laws and in accordance with the standards of care specified in the Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (as amended or modified), is binding upon the Companies and Lenders and, except as provided in Section 2.4(e), does not place Issuing Lender or any of its Representatives under any resulting liability to any Company or any Lender. Agent is not liable to any Company or any Lender for any action taken or omitted, in the absence of gross negligence or willful misconduct, by Issuing Lender or its Representative in connection with any LC. (g) Cash Collateral. On the Termination Date and if requested by Determining Lenders while a Default exists, Borrower shall provide Agent, for the benefit of Lenders, cash collateral in an amount equal to the then-existing LC Exposure. (h) INDEMNIFICATION. BORROWER SHALL PROTECT, INDEMNIFY, PAY, AND SAVE AGENT, EACH LENDER, AND THEIR RESPECTIVE REPRESENTATIVES HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LIABILITIES, DAMAGES, LOSSES, COSTS, CHARGES, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) WHICH ANY OF THEM MAY INCUR OR BE SUBJECT TO AS A CONSEQUENCE OF THE ISSUANCE OF ANY LC, ANY DISPUTE ABOUT IT, OR THE FAILURE OF ISSUING LENDER TO HONOR A DRAW REQUEST UNDER ANY LC AS A RESULT OF ANY ACT OR OMISSION (WHETHER RIGHT OR WRONG) OF ANY PRESENT OR FUTURE TRIBUNAL. HOWEVER, 14 NO PERSON IS ENTITLED TO INDEMNITY UNDER THE FOREGOING FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. (i) LC Agreements. Although referenced in any LC, terms of any particular agreement or other obligation to the beneficiary are not incorporated into this agreement in any manner. The fees and other amounts payable with respect to each LC are as provided in this agreement, drafts under each LC are part of the Obligation, only the events specified in this agreement as a Default shall constitute a default under any LC, and the terms of this agreement control any conflict between the terms of this agreement and any LC Agreement. 2.4 Borrowing Notices and LC Requests. Each Borrowing Request (whether telephonic or written) and LC Request constitutes a representation and warranty by Borrower that as of the Borrowing Date or the date of issuance of the requested LC, as the case may be, that all of the conditions precedent in Section 6 have been satisfied. 2.5 Termination. Borrower may -- upon giving at least five Business Days prior written and irrevocable notice to Agent -- terminate all or part of the Revolving Facility. Each partial termination must be in an amount of not less than $1,000,000 or a greater integral multiple of $1,000,000 and must be ratable in accordance with each Lender's Commitment Percentage. At the time of any termination, Borrower shall pay to Agent, for the account of each Lender, as applicable, the amount of any Borrowing Base Deficiency then existing or which would result after giving effect to such termination, all accrued and unpaid fees under this agreement and, the interest attributable to the amount of that reduction, and any related Funding Loss. Any part of the Commitments for the Revolving Facility that are terminated may not be reinstated. 2.6 Borrowing Base Determinations. (a) The Borrowing Base as of the Closing Date is acknowledged by the Borrower, the Agent and the Lenders to be $25,000,000.00. (b) The Borrowing Base shall be redetermined by the Agent semi-annually through the Termination Date, within ninety (90) days after each December 31 and June 30, with the first such Borrowing Base redetermination under this Agreement to be made on or before March 31, 2002, for the Mineral Interests as of December 31, 2001, on the basis of information supplied by the Borrower in compliance with the provisions of this Agreement, including, without limitation, the Reserve Reports, and all other information available. Notwithstanding the foregoing, the Agent may at its discretion (and at the request of the determining Lenders shall) make redeterminations of the Borrowing Base upon the occurrence of any sale, transfer, release or other disposition or loss or relinquishment of any Collateral having an aggregate value for all such sales or dispositions since the most recent determination of the Borrowing Base hereunder which exceeds $2,500,000, provided, that nothing in this provision shall be deemed to authorize any sale of any property prohibited pursuant to this agreement or any other Loan Document. In addition to the determinations of the Borrowing Base required pursuant to this Section 2.6(b) hereof, one additional special determination thereof may be requested during any calendar year by either Borrower or the Determining Lenders. Upon any such special determination of the Borrowing Base, if requested by Agent, Borrower shall submit both (i) a current report of a firm of independent petroleum engineers acceptable to Agent, prepared in accordance with customary standards and procedures of the petroleum industry which report shall (A) evaluate the Mineral Interests subject to such redetermination (in the same manner as provided in this Section 2.6 for other such redeterminations) and (B) be dated within sixty (60) days of such requested redetermination, and (ii) title opinions, environmental reports and other information reasonably requested by and in form and substance 15 acceptable to Agent, for those additional Mineral Interests which Borrower desires to be considered within the Borrowing Base. Adjustments to the Borrowing Base based upon the addition of Mineral Interests shall not be effective prior to the date of filing and recording of such Collateral Documents as required by Agent. (c) Upon each Borrowing Base redetermination, the Agent shall notify each Lender of its recommendation for such redetermined Borrowing Base and the Lenders shall have ten (10) Business Days to approve or reject such recommendation by written notice to Agent. The proposed Borrowing Base must be approved by the Determining Lenders; provided, however, that no proposed increase in the Borrowing Base shall be effective unless approved by all of the Lenders. In the event that the Determining Lenders or all of the Lenders, as applicable, cannot agree as to the amount of the redetermined Borrowing Base, the Borrowing Base shall be and be deemed to be the lowest amount determined by any Lender. The Agent shall notify the Borrower verbally (confirming such notice promptly in writing) of such determination by the Lenders, and the Borrowing Base so communicated to the Borrower shall become effective upon such verbal notification and shall remain in effect until the next subsequent Borrowing Base redetermination in accordance with the terms hereof. (d) The Borrowing Base shall represent the determination by Agent and the Lenders, in their sole discretion and in accordance with their standard engineering and lending policies and practices customary for loans of this nature, of the value, for loan purposes, of the Mortgaged Properties, which Borrower acknowledges may require new and independent credit approvals by each Lender. Furthermore, the Borrower acknowledges that the determination of the Borrowing Base contains an equity cushion (market value in excess of loan value), which is acknowledged by the Borrower to be essential for the adequate protection of the Lenders. SECTION 3. TERMS OF PAYMENT. 3.1 Notes and Payments. (a) Notes. Principal Debt is evidenced by the Notes, one payable to each Lender in amount equal to its Pro Rata Part of $50,000,000. Borrower understands, acknowledges and agrees that the execution and delivery by Borrower of each Lender's Note in such original principal amount does not imply or infer, and shall not be construed to create, any obligation or commitment on the part of any Lender to make any advances or issue or participate in any LC's in excess of, in the aggregate, the lesser of the Borrowing Base or the Commitments; the amount represented by such Lender's Note being for ease of administration only in the event that the Lenders and the Borrower may hereafter agree, in writing, to increase the Borrowing Base in accordance with the terms and conditions hereof. (b) Payment. Borrower must make each payment and prepayment on the Obligation to Agent's principal office in New York, New York in immediately available funds by 1:00 p.m. on the day due; otherwise, but subject to Section 3.8, those funds continue to accrue interest as if they were received on the next Business Day. Agent shall promptly pay to each Lender the part of any payment or prepayment to which that Lender is entitled under this agreement on the same day Agent receives the funds from Borrower. (c) Payment Assumed. Unless Agent has received notice from Borrower prior to the date on which any payment is due under this agreement that Borrower will not make that payment in full, Agent may assume that Borrower has made the full payment due and Agent may, in reliance upon that assumption, cause to be distributed to each Lender on that date the amount then due to each Lender. If and to the extent Borrower does not make the full payment due to Agent, each Lender shall repay to 16 Agent on demand the amount distributed to that Lender by Agent together with interest for each day from the date that Lender received payment from Agent until the date that Lender repays Agent (unless such repayment is made on the same day as such distribution), at an interest rate equal to the Federal-Funds Rate. 3.2 Interest and Principal Payments. (a) Interest. Accrued interest on each LIBOR-Rate Borrowing is due and payable on the last day of its respective Interest Period. If any Interest Period for a LIBOR-Rate Borrowing is greater than three months, then accrued interest is also due and payable on the date three months after the commencement of the Interest Period. Accrued interest on each Base-Rate Borrowing is due and payable on the last day of each March, June, September, and December -- commencing on the first of those dates that follows the Closing Date -- and on the Termination Date. (b) Revolving Facility Principal. The Principal Debt under the Revolving Facility is due and payable on the Termination Date. Before that date, Borrower may at any time prepay, without penalty and in whole or in part, the Principal Debt under the Revolving Facility so long as (i) each voluntary partial prepayment must be in a principal amount not less than $500,000 or a greater integral multiple of $100,000 and (ii) Borrower shall pay any related Funding Loss upon demand. Conversions under Section 3.10 are not prepayments. (c) Revolving Facility-Mandatory Repayments. At any time a Borrowing-Base Deficiency exists, Borrower shall make prepayments to Agent (with any related Funding Loss) of the Principal Debt under the Revolving Facility in six (6) monthly installments each in the amount of one-sixth (1/6th) of such Borrowing Base Deficiency so that such Borrowing Base Deficiency no longer exists by the end of the sixth month after notice from the Agent of the existence of such Borrowing Base Deficiency. 3.3 Interest Options. Except that the LIBOR Rate may not be selected when a Default or Potential Default exists and except as otherwise provided in this agreement, Borrowings bear interest at an annual rate equal to the lesser of either (a) the Base Rate plus the Applicable Margin or the LIBOR Rate plus the Applicable Margin (in each case as designated or deemed designated by Borrower), as the case may be, or (b) the Maximum Rate. Each change in the Base Rate and Maximum Rate is effective, without notice to Borrower or any other Person, upon the effective date of change. 3.4 Quotation of Rates. Borrower may call Agent before delivering a Borrowing Request to receive an indication of the interest rates then in effect, but the indicated rates do not bind Agent or Lenders or affect the interest rate that is actually in effect when Borrower makes a Borrowing request or on the Borrowing Date. 3.5 Default Rate. If permitted by Law, from and after the occurrence of any Default, or at any time during which a Borrowing Base Deficiency exists, all Principal Debt, reimbursement obligations in connection with LCs, and other amounts constituting the Obligation shall bear interest at the Default Rate until paid, regardless whether payment is made before or after entry of a judgment. 3.6 Interest Recapture. If the designated interest rate applicable to any Borrowing exceeds the Maximum Rate, the interest rate on that Borrowing is limited to the Maximum Rate, but any subsequent reductions in the designated rate shall not reduce the interest rate thereon below the Maximum Rate until the total amount of accrued interest equals the amount of interest that would have accrued if that designated rate had always been in effect. If at maturity (stated or by acceleration), or at final 17 payment of the Notes, the total interest paid or accrued is less than the interest that would have accrued if the designated rates had always been in effect, then, at that time and to the extent permitted by Law, Borrower shall pay an amount equal to the difference between (a) the lesser of the amount of interest that would have accrued if the designated rates had always been in effect and the amount of interest that would have accrued if the Maximum Rate had always been in effect, and (b) the amount of interest actually paid or accrued on the Notes. 3.7 Interest Calculations. Interest will be calculated on the basis of actual number of days (including the first day but excluding the last day) elapsed but computed as if each calendar year consisted of 360 days (unless the calculation would result in an interest rate greater than the Maximum Rate or in the case of interest on Base-Rate Borrowings in which event interest will be calculated on the basis of a year of 365 or 366 days, as the case may be). All interest rate determinations and calculations by Agent are conclusive and binding absent manifest error. 3.8 Maximum Rate. Regardless of any provision contained in any Loan Document, no Lender is entitled to contract for, charge, take, reserve, receive, or apply, as interest on all or any part of the Obligation, any amount in excess of the Maximum Rate, and, if Lenders ever do so, then any excess shall be treated as a partial prepayment of principal and any remaining excess shall be refunded to Borrower. In determining if the interest paid or payable exceeds the Maximum Rate, Borrower and Lenders shall, to the maximum extent permitted under applicable Law, (a) treat all Borrowings as but a single extension of credit (and Lenders and Borrower agree that is the case and that provision in this agreement for multiple Borrowings is for convenience only), (b) characterize any nonprincipal payment as an expense, fee, or premium rather than as interest, (c) exclude voluntary prepayments and their effects, and (d) amortize, prorate, allocate, and spread the total amount of interest throughout the entire contemplated term of the Obligation. However, if the Obligation are paid in full before the end of their full contemplated term, and if the interest received for its actual period of existence exceeds the Maximum Amount, Lenders shall refund any excess (and Lenders may not, to the extent permitted by Law, be subject to any penalties provided by any Laws for contracting for, charging, taking, reserving, or receiving interest in excess of the Maximum Amount). If the Laws of the State of Texas are applicable for purposes of determining the "Maximum Rate" or the "Maximum Amount," then those terms mean the "indicated (weekly) ceiling" from time to time in effect as determined in accordance with Section 303.301 of the Texas Finance Code, as amended. Borrower agrees that Chapter 346 of the Texas Finance Code, as amended (which regulates certain revolving credit loan accounts and revolving triparty accounts), does not apply to the Obligation. 3.9 Interest Periods. When Borrower requests any LIBOR-Rate Borrowing, Borrower may elect the applicable interest period (each an "Interest Period"), which may be, at Borrower's option, one, two, three, or six months for LIBOR- Rate Borrowings, subject to Section 14.1 and the following conditions: (a) the initial Interest Period for a LIBOR-Rate Borrowing commences on the applicable Borrowing Date or conversion date, and each subsequent Interest Period applicable to any Borrowing commences on the day when the next preceding applicable Interest Period expires; (b) if any Interest Period for a LIBOR-Rate Borrowing begins on a day for which no numerically corresponding Business Day in the calendar month at the end of the Interest Period exists, then the Interest Period ends on the last Business Day of that calendar month; (c) if Borrower is required to pay any of a LIBOR-Rate Borrowing before the end of its Interest Period in order to comply with the payment provisions of the Loan Documents, Borrower shall also pay any related Funding Loss; and (d) no more than five Interest Periods may be in effect at one time. 3.10 Conversions. Subject to the dollar limits of Section 2.1(b) and provided that Borrower may not convert to or select a new Interest Period for a LIBOR-Rate Borrowing at any time when a 18 Default or Potential Default exists, Borrower may (a). convert a LIBOR-Rate Borrowing on the last day of the applicable Interest Period to a Base-Rate Borrowing, (b) convert a Base-Rate Borrowing at any time to a LIBOR-Rate Borrowing, and (c) elect a new Interest Period for a LIBOR-Rate Borrowing. That election may be made by telephonic request to Agent no later than 10:00 a.m. on the third Business Day before the conversion date or the last day of the Interest Period, as the case may be (for conversion to a LIBOR-Rate Borrowing or election of a new Interest Period), and no later than 10:00 a.m. on the last day of the Interest Period (for conversion to a Base-Rate Borrowing). Borrower shall provide a Conversion Notice to Agent no later than two days after the date of the conversion or election. Absent Borrower's telephonic request for conversion or election of a new Interest Period or if a Default or Potential Default exists, then, a LIBOR-Rate Borrowing shall be deemed converted to a Base-Rate Borrowing effective when the applicable Interest Period expires. 3.11 Order of Application. (a) No Default. If no Default or Potential Default exists, any payment shall be applied to the Obligation -- except as otherwise specifically provided in the Loan Documents -- in the order and manner as Borrower directs. (b) Default. If a Default or Potential Default exists or if Borrower fails to give direction, any payment (including proceeds from the exercise of any Rights) shall be applied in the following order: (i) To all fees and expenses for which Agent or Lenders have not been paid or reimbursed in accordance with the Loan Documents (and if such payment is less than all unpaid or unreimbursed fees and expenses, then the payment shall be paid against unpaid and unreimbursed fees and expenses in the order of incurrence or due date); (ii) to accrued interest on the Principal Debt; (iii) to any LC reimbursement obligations that are due and payable and that remain unfunded by any Borrowing under the Revolving Facility; (iv) to the remaining Principal Debt in the order as Determining Lenders may elect (but Determining Lenders agree to apply proceeds in an order that will minimize any Funding Loss); (v) to the remaining Obligation in the order and manner Determining Lenders deem appropriate; and (vi) as a deposit with Agent, for the benefit of Lenders, as security for and payment of any subsequent LC reimbursement obligations. (c) Pro Rata. Each payment or prepayment shall be distributed to each Lender in accordance with its Pro Rata Part of that payment or prepayment. 3.12 Sharing of Payments. Etc. If any Lender obtains any payment or prepayment with respect to the Obligation (whether voluntary, involuntary, or otherwise, including, without limitation, as a result of exercising its Rights under Section 3.13) that exceeds the part of that payment or prepayment that it is then entitled to receive under the Loan Documents, then that Lender shall purchase from the other Lenders participations that will cause the purchasing Lender to share the excess payment or prepayment ratably with each other Lender. If all or any portion of any excess payment or prepayment is subsequently recovered from the purchasing Lender, then the purchase shall be rescinded and the purchase price restored to the extent of the recovery. Borrower agrees that any Lender purchasing a participation from another Lender under this section may, to the fullest extent permitted by Law, exercise all of its Rights of payment (including the Right of offset) with respect to that participation as fully as if that Lender were the direct creditor of Borrower in the amount of that participation. 3.13 Offset. If a Default exists, each Lender is entitled to exercise (for the benefit of all Lenders in accordance with Section 3.12) the Rights of offset and banker's Lien against each and every account and other property, or any interest therein, that any Company may now or hereafter have with, or 19 which is now or hereafter in the possession of, that Lender to the extent of the full amount of the Obligation owed (directly or participated) to it. 3.14 Booking Borrowings. To the extent permitted by Law, any Lender may make, cant', or transfer its Borrowings at, to, or for the account of any of its branch offices or the office or branch of any of its Affiliates. However, no Affiliate or branch is entitled to receive any greater payment under Section 3.16 than the transferor Lender would have been entitled to receive with respect to those Borrowings, and a transfer may not be made if, as a direct result of it, Section 3.15 or 3.17 would apply to any of the Obligation. If any of the conditions of Sections 3.16 or 3.17 ever apply to a Lender, that Lender shall carry or transfer its Borrowings at, to, or for the account of any of its branch offices or the office or branch of any of its Affiliates so long as the transfer is consistent with the other provisions of this section, does not create any burden or adverse circumstance for that Lender that would not otherwise exist, and eliminates the conditions of Sections 3.16 or 3.17 as applicable. 3.15 Basis Unavailable for L103OR Rate. If, on or before any date when a LIBOR Rate is to be determined for a Borrowing, Agent reasonably determines that the basis for determining the applicable rate is not available, then Agent shall promptly notify Borrower and Lenders of that determination (which is conclusive and binding on Borrower absent manifest error) and the applicable Borrowing shall bear interest at the sum of the Base Rate plus the Applicable Margin. Until Agent notifies Borrower that those circumstances no longer exist, Lenders' commitments under this agreement to make, or to convert to, L1BOR-Rate Borrowings, as the case may be, are suspended. 3.16 Additional Costs. Each Lender severally and not jointly agrees to notify Agent, the other Lenders, and Borrower within 180 days after it has actual knowledge that any circumstances exist that would give rise to any payment obligation by Borrower under clauses (a) through (c) below. Although no Lender shall have any liability to Agent, any other Lender, or any Company for its failure to give that notice, Borrower is not obligated to pay any amounts under those clauses that arise, accrue, or are imposed more than 180 days before that notice to the extent it is applicable to those amounts. Any Lender demanding payment of any additional costs under this section must generally be making similar demand for similar additional costs under credit agreements to which it is party that contain similar provisions to this section. (a) Reserves. With respect to any or LIBOR-Rate Borrowing (i) if any present or future Law imposes, modifies, or deems applicable (or if compliance by any Lender with any requirement of any Tribunal results in) any requirement that any reserves (including, without limitation, any marginal, emergency, supplemental, or special reserves) be maintained (other than any reserve included in the Reserve Requirement), and if (ii) those reserves reduce any sums receivable by that Lender under this agreement or increase the costs incurred by that Lender in advancing or maintaining any portion of any LIBOR-Rate Borrowing, then (iii) that Lender (through Agent) shall deliver to Borrower a certificate setting forth in reasonable detail the calculation of the amount necessary to compensate it for its reduction or increase (which certificate is conclusive and binding absent manifest error), and (iv) Borrower shall pay that amount to that Lender within five Business Days after demand. The provisions of and undertakings and indemnification in this clause (a) survive the satisfaction and payment of the Obligation and termination of this agreement. (b) Capital Adequacy. With respect to any Commitment, Borrowing or LC if any present or future Law regarding capital adequacy or compliance by Agent (as issuer of LCs) or any Lender with any request, directive, or requirement now existing or hereafter imposed by any Tribunal regarding capital adequacy, or any change in its written policies or in the risk category of this transaction, reduces the rate of return on its capital as a consequence of its obligations under this agreement to a level 20 below that which it otherwise could have achieved (taking into consideration its policies with respect to capital adequacy) by an amount deemed by it to be material (and it may, in determining the amount, utilize reasonable assumptions and allocations of costs and expenses and use any reasonable averaging or attribution method in apportioning such costs to its customers generally), then (unless the effect is already reflected in the rate of interest then applicable under this agreement) Agent or that Lender (through Agent) shall notify Borrower and deliver to Borrower a certificate setting forth in reasonable detail the calculation of the amount necessary to compensate it (which certificate is conclusive and binding absent manifest error), and Borrower shall pay that amount to Agent or that Lender within five Business Days after demand. The provisions of and undertakings and indemnification in this clause (b) shall survive the satisfaction and payment of the Obligation and termination of this agreement. (c) Taxes. Subject to Section 3.19, any Taxes payable by Agent or any Lender or ruled (by a Tribunal) payable by Agent or any Lender in respect of this agreement or any other Loan Document shall, if permitted by Law, be paid by Borrower, together with interest and penalties, if any except for Taxes payable on or measured by the overall net income of Agent or that Lender (or Agent or that Lender, as the case may be, together with any other Person with whom Agent or that Lender files a consolidated, combined, unitary, or similar Tax return) and except for interest and penalties incurred as a result of the gross negligence or willful misconduct of Agent or any Lender). Agent or that Lender (through Agent) shall notify Borrower and deliver to Borrower a certificate setting forth in reasonable detail the calculation of the amount of payable Taxes, which certificate is conclusive and binding (absent manifest error), and Borrower shall pay that amount to Agent for its account or the account of that Lender, as the case may be within five Business Days after demand. If Agent or that Lender subsequently receives a refund of the Taxes paid to it by Borrower, then the recipient shall promptly pay the refund to Borrower. 3.17 Change in Laws. If any Law makes it unlawful for any Lender to make or maintain LIBOR-Rate Borrowings, then that Lender shall promptly notify Borrower and Agent, and (a) as to undisbursed funds, that requested Borrowing shall be made as a Base-Rate Borrowing, and (b) as to any outstanding Borrowing (i) if maintaining the Borrowing until the last day of the applicable Interest Period is unlawful, the Borrowing shall be converted to a Base-Rate Borrowing as of the date of notice, in which event Borrower will not be required to pay any related Funding Loss, or (ii) if not prohibited by Law, the Borrowing shall be converted to a Base-Rate Borrowing as of the last day of the applicable Interest Period, or (iii) if any conversion will not resolve the unlawfulness, Borrower shall promptly prepay the Borrowing, without penalty but with related Funding Loss. 3.18 Funding Loss. Borrower shall indemnify each Lender against, and pay to it upon demand, any Funding Loss of that Lender. When any Lender demands that Borrower pay any Funding Loss, that Lender shall deliver to Borrower and Agent a certificate setting forth in reasonable detail the basis for imposing Funding Loss and the calculation of the amount, which calculation is conclusive and binding absent manifest error. The provisions of and undertakings and indemnification in this section survive the satisfaction and payment of the Obligation and termination of this agreement. 3.19 Foreign Lenders. Participants, and Assignees. Each Lender, Participant (by accepting a participation interest under this agreement), and Assignee (by executing an Assignment) that is not organized under the Laws of the United States of America or one of its states (a) represents to Agent and Borrower that (i) no Taxes are required to be withheld by Agent or Borrower with respect to any payments to be made to it in respect of the Obligation and (ii) it has furnished to Agent and Borrower two duly completed copies of either U.S. Internal Revenue Service Form W-8BEN or W-8ECI, or any other form acceptable to Agent and Borrower that entitles it to a complete exemption from U.S. federal withholding Tax on all interest payments under the Loan Documents, and (b) covenants to (i) provide 21 Agent and Borrower a new Form W-8BEN or W-8ECI, or other form acceptable to Agent upon the expiration or obsolescence according to Law of any previously delivered form, duly executed and completed by it, entitling it to a complete exemption from U.S. federal withholding Tax on all interest and fee payments under the Loan Documents, and (ii) comply from time to time with all Laws with regard to the withholding Tax exemption. If any of the foregoing is not true at any time or the applicable forms are not provided, then Borrower and Agent (without duplication) may deduct and withhold from interest and fee payments under the Loan Documents any Tax at the maximum rate under the Code or other applicable Law, and amounts so deducted and withheld shall be treated as paid to that Lender for all purposes under the Loan Documents. SECTION 4. FEES. 4.1 Treatment of Fees. The fees described in this Section 4 (a) are not compensation for the use, detention, or forbearance of money, (b) are in addition to, and not in lieu of, interest and expenses otherwise described in this agreement, (c) are payable in accordance with Section 3.1, (d) are nonrefundable, and (e) to the fullest extent permitted by Law, bear interest, if not paid when due, at the Default Rate. 4.2 Fees to Agent and Affiliates. Borrower shall pay to Agent, and its Affiliates as Agent may designate, the fees and other amounts described in the letter agreement (as it may be renewed, extended, or modified) of even date herewith between Borrower and Agent. Those fees are solely for the account of Agent and its Affiliates except to the extent that Agent may unilaterally agree in writing with any Lender in respect of the sharing of such fees. 4.3 LC Fees. As an inducement for the issuance (including, without limitation, the extension) of each LC, Borrower agrees to pay to the Issuing Lender: (a) For the account of each Lender according to each Lender's Commitment Percentage on the day the fee is payable for a standby LC, an issuance fee equal to the greater of (i) $500.00 or (ii) a per annum rate equal to the Applicable Margin for LIBOR-Rate Borrowings in effect on the date of issuance, payable quarterly in arrears, of the average-face amount of that LC during each applicable quarterly period. (b) For the account of the Issuing Lender a fronting fee of 0.125% of the face amount of the LC , payable on the date of issuance. 4.4 Commitment Fee. From and after the Closing Date, Borrower shall pay to Agent a commitment fee for Lenders according to each Lender's Commitment Percentage. The fee is payable as it accrues on the last day of each March, June, September, and December - commencing on the first of those dates that follows the date of this agreement -- and on the Termination Date. Each payment of the fee is equal to the following, determined for the calendar quarter (or portion of a calendar quarter commencing on the date of this agreement or ending on the Termination Date) preceding and including the date it is due: From the Closing Date until the Termination Date, the product of (i) the Applicable Percentage times (ii) the amount by which (x) the lesser of the Borrowing Base or the total Commitments exceeds (y) the sum of the average-daily Principal Debt under the Notes plus the average-daily LC Exposure, times (iii) a fraction with the number of days in the applicable quarter or portion of it as the numerator and 360 as the denominator. 22 SECTION 5. SECURITY. 5.1 Guaranty. Borrower shall cause Goodrich and all of Goodrich's present and future Subsidiaries -- whether now existing or in the future formed or acquired as permitted by the Loan Documents -- that are Restricted Companies to unconditionally guarantee the full payment and performance of the Obligation by execution of a written guaranty agreement in form and substance satisfactory to Agent. 5.2 Collateral. Borrower shall cause full payment and performance of the Obligation to be secured by Lender Liens on all of the items and types of property -- (together with the additional collateral described in Sections 2.3(g) and 5.3, if any, and the cash and non-cash proceeds of all of the foregoing, the "Collateral") -- described in the present and future Loan Documents creating Lender Liens (said documents and any documents and instruments from time to time amending or supplementing the same are herein sometimes collectively called the "Collateral Documents"), including, without limitation all such property described in the Collateral Documents listed on Schedule 6 to this agreement. 5.3 Collateral Account. In order to secure further the performance by Borrower of the Obligation and to effect and facilitate Agent's right of offset, immediately following Agent's request, Borrower shall, and shall cause the other Restricted Companies to, execute such forms, authorizations, documents and instruments, and do such other things, as Agent shall request, in order to require that pipeline companies, operators of the Mortgaged Properties and others (collectively, the "Purchasers") purchasing (or acting as agents for, or making payments on behalf of, those purchasing) the oil, gas and other minerals produced or to be produced from, or relating to, the Mineral Interests deliver to a post office box number specified by Agent all royalties, production payments, checks, cash, proceeds and monies now or hereafter payable by the Purchasers (or any of them) on account of oil, gas or other minerals produced from or relating to the Mineral Interests or otherwise with respect to the Mineral Interests. Borrower agrees that all such royalties, payments and monies delivered to such post office box shall be deposited by Agent in a cash collateral account at Agent styled "Goodrich Petroleum Company, L.L.C. Production Account." After the occurrence of a Default, Borrower shall, upon receipt, deposit in the Goodrich Petroleum Company, L.L.C. Production Account all such royalties, payments and monies which any Restricted Company receives directly from the Purchasers. Each Restricted Company hereby irrevocably authorizes and directs Agent to charge from time to time after the occurrence of a Default, the Goodrich Petroleum Company, L.L.C. Production Account and any other accounts of such Restricted Company at Agent or any Lender for amounts due to the Lenders hereunder and under the Notes. After the occurrence of a Default, Agent is hereby authorized, in its own name or the name of any Restricted Company, to notify any or all parties obligated to such Restricted Company with respect to the Mineral Interests to make all payments due or to become due thereon directly to the Agent, or such other person or officer as Agent may require whereupon the power and authority of the Borrower to collect the same in the ordinary course of its business shall be deemed to be immediately revoked and terminated. With or without such general notification, after the occurrence of a Default, Agent may take or bring in any Restricted Company's name or that of the Agent all steps, actions, suits or proceedings deemed by the Agent necessary or desirable to effect possession or collection of payments, may complete any contract or agreement of such Restricted Company in any way related to any of the Mineral Interests, may make allowances or adjustments related to the Mineral Interests, may compromise any claims related to the Mineral Interests or may issue credit in its own name or the name of such Restricted Company. Regardless of any provision hereof, however, Agent shall never be liable for its failure to collect or for its failure to exercise diligence in the collection, possession, or any transaction concerning, all or part of the Mineral Interests or sums due or paid thereon, nor shall it or they be under any obligation whatsoever to anyone by virtue of its security interests and liens relating to the Mortgaged Properties. 23 The Agent is hereby authorized and empowered on behalf of such Restricted Company to endorse the name of any Restricted Company upon any check, draft, instrument, receipt, instruction or other document or items, including, but not limited to, all items evidencing payment upon any indebtedness of any Person to such Restricted Company coming into the Agent's possession, and to receive and apply the proceeds therefrom in accordance with the terms hereof. The Agent is hereby granted an irrevocable power of attorney, which is coupled with an interest, to execute all checks, drafts, receipts, instruments, instructions or other documents, agreements or items on behalf of any Restricted Company, either before or after demand of payment on the Notes, as shall be deemed by the Agent to be necessary or advisable, in the sole discretion of the Agent, to protect its security interests and liens in the Mineral Interests or the repayment of the Obligation, and the Agent shall not incur any liability in connection with or arising from its exercise of such power of attorney. Borrower acknowledges that all funds so transferred into the Goodrich Petroleum Company, L.L.C. Production Account shall be the property of the Restricted Companies only and not subject to any claim by any party other than Agent, for the benefit of the Lenders. 5.4 Further Assurances. Borrower covenants and agrees that the Lender Liens otherwise described in Section 5.2 and, when required, Section 2.3(g) and 5.3 must be created and perfected as a condition to funding any Borrowings or the issuance of any LC. Furthermore, Borrower shall -- and shall cause each other appropriate Company to -- perform the acts, duly authorize, execute, acknowledge, deliver, file, and record any additional writings, and pay all filings fees and costs as Agent or Determining Lenders may reasonably deem appropriate or necessary to perfect and maintain the Lender Liens and preserve and protect the Rights of Agent and Lenders under any Loan Document. 5.5 Release of Collateral. (a) Whenever no Lender has any commitment to extend credit under any Loan Document and the Obligation has been fully paid and performed, Agent shall, upon Borrower's written request and at Borrower's cost and expense, cause the Lender Liens on all Collateral to be released. (b) In connection with any sale or other disposition of assets permitted by Section 9.10, Agent shall, upon Borrower's request and at Borrower's cost and expense, release the Lender Liens on the assets sold or disposed of. SECTION 6. CONDITIONS PRECEDENT. No Lender is obligated to fund the initial Borrowing or issue any LC unless Agent has received all of the items described in Part A on Schedule 6. In addition, no Lender is obligated to fund (as opposed to continue or convert) any Borrowing or issue any LC unless on the applicable Borrowing Date, or issue date (and after giving effect to the requested Borrowing or LC), as the case may be: (a) Agent (and the Issuing Lender, if applicable) timely receives a Borrowing Request or LC Request (together with the applicable LC Agreement), as the case may be; (b) the Issuing Lender receives any applicable LC fee then due and payable; (c) all of the representations and warranties of the Companies in the Loan Documents are true and correct in all material respects (unless they speak to a specific date or are based on facts which have changed by transactions contemplated or expressly permitted by this agreement); (d) no Material Adverse Event, Default, or Potential Default exists; (e) no Borrowing-Base Deficiency will exist after giving effect to the Borrowing or LC issuance; and (f) no limitation in Section 2.1 or 2.3 is exceeded. Each Borrowing Request and LC Request, however delivered, constitutes Borrower's representation and warranty that the conditions in clauses (c) through (0 above are satisfied. Upon Agent's or any Lender's reasonable request, Borrower shall deliver to Agent or such Lender evidence substantiating any of the matters in the Loan Documents that are necessary to enable Borrower to qualify for the Borrowing or LC, as the case may be. Each condition precedent in this 24 agreement (including, without limitation, those on Schedule 6) is material to the transactions contemplated by this agreement, and time is of the essence with respect to each condition precedent. SECTION 7. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Agent and Lenders as follows: 7.1 Purpose and Regulation U. (a) Borrower will use LCs for general corporate purposes and the proceeds of the Revolving Facility for (i) refinancing the Existing Indebtedness, and (ii) the Restricted Companies' working capital, for acquisition and development of Mineral Interests and for other general corporate purposes. (b) No Company is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. No part of the proceeds of any LC draft or drawing or Borrowing will be used, directly or indirectly, for a purpose that violates any Law, including, without limitation, Regulation U. 7.2 Corporate Existence. Good Standing, and Authority. Each Restricted Company is duly organized, validly existing, and in good standing under the Laws of its jurisdiction of incorporation. Each Restricted Company is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature and extent of its business and properties require due qualification and good standing (each of which jurisdictions is identified on Schedule 6). Each Restricted Company possesses all requisite authority and power to conduct its business as is now being conducted and as proposed under the Loan Documents to be conducted and to own and operate its assets as now owned and operated and as proposed to be owned and operated under the Loan Documents. 7.3 Subsidiaries and Names. Schedule 7.3 -- as supplemented from time to time by written notice from Borrower to Agent and Lenders specifically referring to that schedule and this section and reflecting changes to that schedule as a result of transactions permitted by the Loan Documents -- describes (a) all of Goodrich's direct and indirect Subsidiaries, (b) all Restricted Companies, (c) every name or trade name used by each Restricted Company during the five-year period before the date of this agreement, and (d) every change of each Subsidiary's name and jurisdiction of organization or formation during the four- month period before the date of this agreement. All of the outstanding shares of capital stock (or similar voting interests) of Borrower's Subsidiaries are (a) duly authorized, validly issued, fully paid, and nonassessable, (b) owned of record and beneficially as described in that schedule or those writings, free and clear of any Liens, except Permitted Liens, and (c) not subject to any wan- ant, option, or other acquisition Right of any Person or subject to any transfer restriction except restrictions imposed by securities Laws and general corporate Laws. 7.4 Authorization and Contravention. The execution and delivery by each Restricted Company of each Loan Document to which it is a party and the performance by it of its obligations under those Loan Documents (a) are within its corporate power, (b) have been duly authorized by all necessary corporate action, (c) require no action by or filing with any Tribunal (except any action or filing that has been taken or made on or before the Closing Date), (d) do not violate any provision of its charter or bylaws, and (e) do not violate any provision of Law applicable to it or any material agreement to which it is a party except violations that individually or collectively are not a Material Adverse Event. 25 7.5 Binding Effect. Upon execution and delivery by all parties to it, each Loan Document will constitute a legal and binding obligation of each Restricted Company party to it, enforceable against it in accordance with that Loan Document's terms except as that enforceability may be limited by Debtor Laws and general principles of equity. 7.6 Financials and Existing Debt. The Current Financials were prepared in accordance with GAAP and present fairly, in all material respects, the Companies' consolidated financial condition, results of operations, and cash flows as of, and for the portion of the fiscal year ending on their dates (subject only to normal year-end adjustments for interim statements). All material liabilities of the Companies as of those dates are reflected in those Current Financials or in the notes to them or have otherwise been disclosed to Lenders in writing. Except for transactions directly related to, specifically contemplated by, or expressly permitted by the Loan Documents (a) no material adverse changes have occurred in the Companies' consolidated financial condition from that shown in the Current Financials, and (b) no Company has incurred any material liability except Debt that is not prohibited by the Loan Documents. 7.7 [Reserved] 7.8 Solvency. On each Borrowing Date and the date any LC is issued, each Restricted Company is -- and after giving effect to the requested Borrowing or LC will be -- Solvent. 7.9 Litigation. Except as disclosed on Schedule 7.9 and matters covered (subject to reasonable and customary deductible and retention) by insurance or indemnification agreements (a) no Restricted Company is subject to, or aware of the threat of, any Litigation that is reasonably likely to be determined adversely to any Restricted Company and, if so adversely determined, is a Material Adverse Event, and (b) no outstanding and unpaid judgments against any Restricted Company exist. 7.10 Taxes. Except where not a Material Adverse Event (a) all Tax returns of each Restricted Company required to be filed have been filed (or extensions have been granted) before delinquency, and (b) all Taxes imposed upon each Restricted Company that are due and payable have been paid before delinquency except as being contested as permitted by Section 8.5. 7.11 Environmental Matters. Except as disclosed on Schedule 7.11: (a) No consent or other approval of -- or declaration or other filing with - -- any Tribunal is required under any Environmental Law in connection with any transaction contemplated by the Loan Documents. (b) Except where adequately covered by an Environmental Indemnity Agreement or where not a Material Adverse Event, none of the following are present at any Real Property (including, without limitation, the Leases and the Mineral Interests) of any Restricted Company in violation of any Environmental Law: (i) Any asbestos or asbestos-containing material; (ii) any underground or aboveground storage tank or tank system subject to regulation under any Environmental Law; or (iii) any electrical or other fixtures or equipment containing polychlorinated biphenyls. (c) Except where adequately covered by an Environmental Indemnity Agreement or where not a Material Adverse Event, no unreported Release of any Hazardous Substance has occurred at or in the vicinity to any Real Property (including, without limitation, the Leases and the Mineral Interests) (i) in a quantity that requires any report or other notice to any Tribunal under any Environmental Law or (ii) that has resulted or that threatens to result in the presence of any Hazardous Substance in the 26 environment in a quantity, concentration, state, or other condition that exceeds any applicable standard for the protection of human health or the environment under any Environmental Law. (d) Except where not a Material Adverse Event, no Real Property (including, without limitation, the Leases and the Mineral Interests) has been used for the storage (other than short-term storage not requiring an Environmental Permit), treatment, or disposal of any Hazardous Substance in any amounts that are reasonably likely to result in any Environmental Liabilities or violation of any Environmental Law while owned or operated by any Company or any Predecessor. (e) Except where adequately covered by an Environmental Indemnity Agreement or where not a Material Adverse Event, no Restricted Company or Predecessor is -- or has received any notice from any Tribunal during the last five years that it is -- potentially liable for any removal, remediation, or other response costs under any Environmental Law as the result of the Release or threatened Release of any Hazardous Substance. (f) No Company knows of any material error or omission in any Environmental Report delivered to Agent or any Lender. 7.12 Employee Plans. Except where not a Material Adverse Event (a) no Employee Plan has incurred an "accumulated funding deficiency" (as defined in Section 302 of ERISA or Section 412 of the Code), (b) no Company has incurred liability -- except for liabilities for premiums that have been paid or that are not past due -- under ERISA to the PBGC in connection with any Employee Plan, (c) no Company has withdrawn in whole or in part from participation in a Multiemployer Plan, (d) no Company has engaged in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code), (e) no "reportable event" (as defined in Section 4043 of ERISA) has occurred, excluding events for which the notice requirement is waived under applicable PBGC regulations, (f) no Company or Affiliate of any Company has any liability under or is subject to any Lien under ERISA or the Code to or on account of any employee benefit plan, program, scheme, or arrangement established or maintained by any Company or Affiliate of any Company or to which any Company or any Affiliate of any Company contributes or had an obligation to contribute, (g) each Employee Plan complies in all material respects, both in form and operation, with ERISA and the Code, and (h) no Multiemployer Plan is in reorganization within the meaning of (S) 418 of the Code. 7.13 Properties: Liens. Each Restricted Company has indefeasible title to the Mortgaged Properties and all of its other property reflected on the Current Financials as being owned by it except for property that is obsolete or that has been disposed of in the ordinary course of business between the date of the Current Financials and the date of this agreement or, after the date of this agreement, as permitted by Section 9.10 or Section 9.11. No Lien exists on any property (including, without limitation, the Mortgaged Properties) of any Company except Permitted Liens. No Restricted Company is party or subject to any agreement, instrument, or order which in any way restricts any Restricted Company's ability to allow Liens to exist upon any of its assets except relating to Permitted Liens. The provisions of each Collateral Document are effective to create in favor of the Agent for the ratable benefit of the Lenders, a legal, valid and enforceable Lender Lien in all right, title and interest of the Restricted Companies in the Collateral described therein, which Lender Liens shall constitute fully perfected firstpriority Liens on all right, title and interest of the Restricted Companies in the Collateral described therein, subject only to Permitted Liens. No orders of, proceedings pending before, or other requirements of, the Federal Energy Regulatory Commission or any other Tribunal exist which could result in the Restricted Companies being required to refund any material portion of the proceeds received or to be received from the sale of hydrocarbons constituting part of the Mortgaged Properties. No Restricted Company (a) is obligated in any material respect by virtue of any prepayment made under any contract 27 containing a "take-or-pay" or "prepayment" provision or under any similar agreement to deliver hydrocarbons produced from or allocated to any of the Mortgaged Properties at some future date without receiving full payment therefor at the time of delivery, and (b) has produced gas, in any material amount, subject to, and is, nor is any of the Mortgaged Properties, subject to balancing rights of third parties or subject to balancing duties under governmental requirements, except as to such matters for which such Restricted Company has established monetary reserves adequate in an amount to satisfy such obligations and has segregated such reserves from other accounts. 7.14 Government Regulations. No Restricted Company is subject to regulation under the Investment Company Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended. 7.15 Transactions with Affiliates. Except for transactions with other Restricted Companies and as otherwise disclosed on Schedule 7.15, no Restricted Company is a party to a material transaction with any of its Affiliates except transactions in the ordinary course of business and upon fair and reasonable terms not materially less favorable than it could obtain or could become entitled to in an arm's-length transaction with a Person that was not its Affiliate. 7.16 Debt. No Restricted Company has any Debt except Permitted Debt. 7.17 Leases. Except where not a Material Adverse Event (a) each Restricted Company enjoys peaceful and undisturbed possession of all leases necessary for the operation of its properties and assets, none of which contains any unusual or burdensome provisions which might materially affect or impair the operation of those properties and assets, and (b) all material leases under which any Restricted Company is a lessee are in full force and effect, and no default -- or event that, with notice, time lapse, or both, would become a default -- exists. The leases which underlie or constitute part of the Mineral Interests (the "Leases") are in full force and effect, and no Restricted Company nor any other person has defaulted on any of its obligations thereunder so as to impair the value of such Leases. 7.18 Labor Matters. Except where not a Material Adverse Event (a) no actual or threatened strikes, labor disputes, slow downs, walkouts, work stoppages, or other concerted interruptions of operations that involve any employees employed at any time in connection with the business activities or operations at the Real Property exist, (b) hours worked by and payment made to the employees of any Restricted Company or any Predecessor have not been in violation of the Fair Labor Standards Act or any other applicable Laws pertaining to labor matters, (c) all payments due from any Restricted Company for employee health and welfare insurance, including, without limitation, workers compensation insurance, have been paid or accrued as a liability on its books, (d) the business activities and operations of each Company are in compliance with OSHA and other applicable health and safety Laws. 7.19 Intellectual Property. Except where not a Material Adverse Event (a) each Restricted Company owns or has the right to use all material licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications and trade names necessary to continue to conduct its businesses as presently conducted by it and proposed to be conducted by it immediately after the date of this agreement, (b) each Restricted Company is conducting its business without infringement or claim of infringement of any license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property right of others, and (c) no infringement or claim of infringement by others of any material license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property of any Restricted Company exists. 28 7.20 Full Disclosure. Each material fact or condition relating to the Loan Documents or any Restricted Company's financial condition, business, or property has been disclosed in writing to Agent. All information previously furnished to Agent by or at the direction of a Responsible Officer or the General Counsel of or the attorneys for Borrower in connection with the Loan Documents was -- and all information furnished to Agent in the future by or at the direction of a Responsible Officer or the General Counsel of or the attorneys for Borrower will be -- true and accurate in all material respects or based on reasonable estimates on the date the information is stated or certified. 7.21 Estimated Oil and Gas Reserves. Borrower has heretofore delivered to Agent copies of all requested reports (prepared by independent consulting engineers), which have been obtained by the Restricted Companies and concern the estimated oil and gas reserves and future net revenues attributable to the Mineral Interests. The statements of fact contained in said reports with respect to the character and ownership of the Mineral Interests (including, without limitation, the revenue interest and working interest of the Restricted Companies stated therein) and the other factual data furnished by the Restricted Companies as a basis for the estimates set forth therein are true and correct and do not omit any material fact necessary to make said statements not misleading. 7.22 Working Interest. The Restricted Companies own a "working interest" in each of the Mortgaged Properties which is not greater than the interest specified in the description of such property in the Collateral Documents, with the term "working interest", as used herein, meaning the right to explore for, drill and produce oil, gas or other minerals, whether such right is created by lease or otherwise, and being equivalent to the proportionate part of the cost of exploration, development and marketing of oil, gas and other minerals borne by the Restricted Companies with respect to each respective property. 7.23 Net Revenue Interest. The Restricted Companies own a "net revenue interest" in each of the Mortgaged Properties which is not less than the interest specified in the description of such property in the Collateral Documents, with the term "net revenue interest", as used herein, meaning the proportionate share of the production of oil, gas or other minerals to which the Restricted Companies are entitled after deduction of all royalties, overriding royalties and other interests payable from or measured by production. 7.24 Burdensome Contracts. No Restricted Company is a party to, or bound by, nor are any of the Mineral Interests or Mortgaged Properties subject to, any contract, agreement or other arrangement which would result in a Material Adverse Event. 7.25 Regulatory Defects. As of the date hereof, Borrower has advised Agent, in writing, of all regulatory defects of which the Restricted Companies have been advised or have actual knowledge with respect to the ownership or operation of the Mortgaged Properties. No such regulatory defect results in a Material Adverse Event or affects the Restricted Companies intended operation of any of the Mineral Interests or the value of the sale of production therefrom. 7.26 Agreements Affecting Mineral Interests. Borrower has advised Agent of, and delivered (to the extent requested by Agent) true and correct copies to Agent of, all material operating agreements, pooling or unitization agreements, sales or processing contracts, restrictions, preferential purchase right agreements, farm-out, drilling and/or development agreements, pipeline transportation agreements, gas purchase or other marketing agreements, Swap Agreements and other material agreements which pertain to the Mineral Interests, the operation thereof or the disposition of production attributable thereto. 7.27 Locations of Business. Offices. The principal place of business and chief executive office of the each Restricted Company is located at the address of the Borrower, set forth next to its name 29 on the signature pages hereof or at such other location as the Borrower may have, by proper written notice hereunder, advised the Agent and the Lenders, provided that such other location of the Borrower or other Restricted Company is within a state in which appropriate financing statements from the Borrower or other Restricted Company, as applicable, in favor of the Agent have been filed. SECTION 8. AFFIRMATIVE COVENANTS. For so long as any Lender is committed to lend or issue LCs under this agreement and until the Obligation has been fully paid and performed, Borrower covenants and agrees with Agent and Lenders that, without first obtaining Agent's written notice of Determining Lenders' consent to the contrary: 8.1 Certain Items Furnished. Borrower shall furnish or cause to be furnished, the following to each Lender: (a) Annual Financials, Etc. Promptly after preparation but no later than 120 days after the last day of each fiscal year of Goodrich, Financials showing the Companies' consolidated financial condition and results of operations as of, and for the year ended on, that last day, accompanied by (i) the opinion, without material qualification, of [KMPG] or other firm of nationally-recognized independent certified public accountants reasonably acceptable to Determining Lenders, based on an audit using generally accepted auditing standards, that the Financials were prepared in accordance with GAAP and present fairly, in all material respects, the Companies' consolidated financial condition and results of operations, and (ii) a Compliance Certificate. (b) Quarterly Financials, Etc. Promptly after preparation but no later than 45 days after the last day of each of the first three fiscal quarters of Goodrich each year, Financials showing the Companies' consolidated financial condition and results of operations for that fiscal quarter and for the period from the beginning of the current fiscal year to the last day of that fiscal quarter, accompanied by (i) a Compliance Certificate. (c) Reserve Report(s). (1) The Borrower shall deliver to the Agent and each Lender no later than March 1 of each year during the term of this agreement, engineering reports in form and substance acceptable to the Lenders prepared and certified by Coutret and Associates or such other nationallyrecognized or regionally-recognized independent consulting petroleum engineers acceptable to the Lenders setting forth (i) the proven producing, non-producing and undeveloped oil and gas reserves (separately classified as such) attributable to the Mineral Interests as of December 31 of the preceding year, (ii) the aggregate present value determined on the basis of stated pricing assumptions, of the future net income with respect to such Mineral Interests, discounted at a stated per annum discount rate, (iii) projections of the annual rate of production, gross income and net income with respect to such reserves, and (iv) information with respect to any "take or pay," "prepayment" and gas balancing liabilities of the Restricted Companies. (2) The Borrower shall deliver to the Agent and each Lender no later than September 1 of each year during the term of this agreement, a supplement to the most recent year-end Reserve Report, satisfactory to the Agent, prepared by or under the supervision of the chief petroleum engineer of the Borrower and containing an update through June 30 of such year of the information described in Subsection 8.1(c)(1)(i)-(iv) to reflect changes from the most recent year-end Reserve Report delivered pursuant to Subsection 8.1(c)(1). 30 (3) Each of the reports provided pursuant to this Section shall be submitted to the Agent and each Lender together with a certificate of a Responsible Officer certifying that such report is true and correct in all material respects and stating the value of the Mortgaged Properties as a percentage of all Mineral Interests based on the information contained therein, and with additional data as the Agent or any Lender may reasonably request concerning pricing, quantities of production from the Mortgaged Properties, purchasers of production and engineering and geological data. (d) Production Information; Hedging Reports. Contemporaneously with the delivery of each Compliance Certificate pursuant to Section 8.1(a) and (b), a production and operations report for the relevant quarterly period in the form of Exhibit B hereto, and a detailed summary of the material terms of each Swap Agreement to which any Company is a party, in form and substance satisfactory to Agent, and including, without limitation, the term, notional amounts, fixed and floating prices and payors, credit support, and the current mark-to-market value of each transaction and accompanied by copies of all transaction confirmations, modifications or other documentation executed or delivered in connection therewith during such quarterly period, each duly completed and certified by a Responsible Officer. (e) Other Reports. Promptly after preparation and distribution, accurate and complete copies of all reports and other material communications about material financial matters or material corporate plans or projections by or for any Company for distribution to any Tribunal or any existing or potential creditor (i) including, without limitation, each Form 10-K, 10-Q, and S-8 filed with the Securities and Exchange Commission but (ii) excluding (A) credit, trade, and other reports prepared and distributed in the ordinary course of business, and (B) information otherwise furnished to Agent and Lenders under this agreement. Promptly upon Agent's request therefor, copies of (i) any statements or other reports describing reserves, future income or value attributable to any of the Mineral Interests and monthly production reports filed with the Minerals Management Service by the operator of any of the Mortgaged Properties; (ii) all material operating agreements, pooling or unitization agreements, sales or processing contracts, restrictions, preferential purchase right agreements, drilling and/or development agreements, pipeline transportation agreements and other material agreements which pertain to the Mineral Interests, the operation thereof or the disposition of production attributable thereto; and (iii) all reports, forms and other documents and data submitted by Borrower to the United States Department of the Interior Bureau of Land Management Minerals Management Service, the Louisiana Oil Conservation Commission, United States Department of Energy, United States Federal Energy Regulatory Commission, the Texas Railroad Commission or other Tribunal, concerning the operation of, drilling of wells on, sale of production from, or the prices received for the sale of production from, the Mineral Interests. (f) Employee Plans. As soon as possible and within 30 days after Borrower knows that any event which would constitute a reportable event under Section 4043(b) of Title IV of ERISA with respect to any Company's employee pension or other benefit plan subject to ERISA has occurred, or that the PBGC has instituted or will institute proceedings under ERISA to terminate that plan, deliver a certificate of a Responsible Officer of Borrower setting forth details as to that reportable event and the action which the Companies propose to take with respect to it, together with a copy of any notice of that reportable event which may be required to be filed with the PBGC, or any notice delivered by the PBGC evidencing its intent to institute those proceedings or any notice to the PBGC that the plan is to be terminated, as the case may be. For all purposes of this section, Borrower is deemed to have all knowledge or knowledge of all facts attributable to the plan administrator under ERISA. (g) Other Notices. Promptly after Borrower has knowledge of, but in any event prior to five days after the occurrence of any of the following events, notice of (i) the existence and status of any Litigation that is reasonably likely to be adversely determined and, if determined adversely to any 31 Company, would be a Material Adverse Event, (ii) any change in any material fact or circumstance represented or wan-anted by any Company in any Loan Document, (iii) a Default or Potential Default, specifying the nature thereof and what action the Companies have taken, are taking, or propose to take or (iv) claims made against any Restricted Company by any Person in excess of $100,000, other than for accounts payable in the ordinary course of business. (h) Part B on Schedule 6. Promptly as they become available (subject to the other requirements of this agreement), the items, if any, described in Part B on Schedule 6. (i) Other Information. Promptly when reasonably requested by Agent or any Lender, such information (not otherwise required to be furnished under this agreement) about any Company's business affairs, assets, and liabilities. 8.2 Use of Credit. Borrower shall use LCs and the proceeds of Borrowings only for the purposes represented in this agreement. 8.3 Books and Records. Each Company shall maintain books, records, and accounts necessary to prepare Financials in accordance with GAAP. 8.4 Inspections. Upon reasonable request, each Company shall allow Agent or any Lender (or their respective Representatives) to inspect any of its properties, to review reports, files, and other records and to make and take away copies, to conduct tests or investigations, and to discuss any of its affairs, conditions, and finances with its other creditors, directors, officers, employees, or representatives from time to time, during reasonable business hours. Any reviews and investigations shall be limited to matters relevant to the present or future financial condition of the Companies and their compliance with -or ability to comply with - the Loan Documents. 8.5 Taxes. Each Restricted Company shall promptly pay when due any and all Taxes except Taxes that are being contested in good faith by lawful proceedings diligently conducted, against which reserve or other provision required by GAAP has been made, and in respect of which levy and execution of any Lien has been and continues to be stayed. 8.6 Payment of Obligation. Each Restricted Company shall promptly pay (or renew and extend) all of its material obligations as they become due (unless the obligations are being contested in good faith by appropriate proceedings). 8.7 Expenses. Within five (5) Business Days of demand by Agent, Borrower shall pay (a) all costs, fees, and expenses paid or incurred by Agent incident to any Loan Document (including, without limitation, the reasonable fees and expenses of Agent's counsel in connection with the negotiation, preparation, delivery, and execution of the Loan Documents and any related amendment, waiver, or consent), (b) all other out-of-pocket costs and expenses paid or incurred by the Agent in connection with the normal, ongoing administration, of this agreement and the other Loan Documents, including, without limitation, independent insurance reviews, environmental assessments or third party engineering support, and (c) all reasonable costs and expenses incurred by Agent or any Lender in connection with the enforcement of the obligations of any Restricted Company under the Loan Documents or the exercise of any Rights under the Loan Documents (including, without limitation, reasonable allocated costs of inhouse counsel, other reasonable attorneys' fees, and court costs), all of which are part of the Obligation, bearing interest, if not paid when due at the Default Rate until paid. 32 8.8 Maintenance of Existence. Assets, and Business. Each Restricted Company shall (a) except in connection with dispositions permitted under Section 9.10 and mergers and consolidations permitted under Section 9.11, maintain its corporate existence and good standing in its state of incorporation as of the Closing Date, and (b) (i) maintain its authority to transact business and good standing in all other states where required or necessary for its business, (ii) maintain all licenses, permits, and franchises (including, without limitation, Environmental Permits) necessary for its business, and (iii) keep all of its assets that are useful in and necessary to its business in good working order and condition (ordinary wear and tear excepted) and make all necessary repairs and replacements. 8.9 Insurance. Each Restricted Company shall, at its cost and expense, maintain with financially sound, responsible, and reputable insurance companies or associations -- or, as to workers' compensation or similar insurance, with an insurance fund or by self-insurance authorized by the jurisdictions in which it operates -- insurance concerning its properties and businesses against casualties, risks and contingencies and of types and in amounts (and with co-insurance and deductibles) as is customary in the case of similar businesses. Each such policy of insurance shall name Agent as an additional insured and loss payee thereunder and shall be non-cancelable except upon thirty (30) days prior written notice to Agent. 8.10 Environmental Matters. Each Restricted Company shall (a) operate and manage its businesses, processes, and other activities in compliance with all Environmental Laws, Environmental Permits, and Environmental Indemnity Agreements and in a manner to avoid incurring Environmental Liabilities, to prevent any Release of Hazardous Substances, and to minimize the risk of loss or damage in the event of any Release of Hazardous Substances, (b) keep each Environmental Indemnity Agreement in full force and effect according to its terms, take all steps that may be necessary or appropriate to timely assert and receive payment or all claims under it, and (to the extent that the material remediation or indemnity protections or benefits provided by it would be jeopardized) not consent to any modification or amendment of any Environmental Indemnity Agreement or waive, compromise, settle, or otherwise release or discharge any obligation or indemnity of any indemnitor or other obligor under it, and (c) continuously and diligently carry out such removal, remedial, or other response actions as may be necessary or appropriate (A) in respect of each matter (whether or not disclosed on Schedule 7.11) that constitutes non- compliance with any Environmental Law and (B) to prevent or minimize potential Environmental Liabilities from any of those matters (whether or not disclosed on Schedule 7.11) or any Release of Hazardous Substances. 8.11 Subsidiaries. In respect of each applicable present and future Subsidiary of Goodrich (whether as a result of acquisition, creation, or otherwise), Borrower shall cause such Subsidiary to promptly and fully comply with Section 5 and its assets, capital stock or other equity securities to become subject to Lender Liens pursuant to the Collateral Documents. 8.12 Indemnification. (a) BORROWER AND (PURSUANT TO ITS GUARANTY) EACH OTHER RESTRICTED COMPANY SHALL, JOINTLY AND SEVERALLY INDEMNIFY AGENT AND LENDERS AND THEIR RESPECTIVE PARENTS, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES, REPRESENTATIVES, AGENTS, SUCCESSORS, ASSIGNS, AND ATTORNEYS (COLLECTIVELY, THE "INDEMNIFIED PARTIES"), PROTECT AND DEFEND (WITH COUNSEL ACCEPTABLE TO DETERMINING LENDERS) AGAINST, HOLD THEM HARMLESS FROM AND AGAINST, AND ON DEMAND PAY OR REIMBURSE THEM FOR ANY AND ALL LIABILITIES, OBLIGATION, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, AND PROCEEDINGS AND ALL COSTS, EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL REASONABLE ATTORNEYS' FEES AND LEGAL EXPENSES WHETHER OR NOT SUIT IS BROUGHT), AND 33 DISBURSEMENTS OF ANY KIND OR NATURE (THE "INDEMNIFIED LIABILITIES") THAT MAY AT ANY TIME BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE INDEMNIFIED PARTIES, IN ANY WAY RELATING TO OR ARISING OUT OF (I) ANY LOAN DOCUMENT, (II) ANY TRANSACTION CONTEMPLATED BY ANY LOAN DOCUMENT, (III) ANY COLLATERAL, (IV) ANY REAL PROPERTY (INCLUDING, WITHOUT LIMITATION, THE LEASES AND MINERAL INTERESTS) OR OIL AND GAS PROPERTY, (V) ANY ENVIRONMENTAL LIABILITY IN ANY WAY RELATED TO ANY COMPANY, PREDECESSOR, COLLATERAL, REAL PROPERTY (INCLUDING, WITHOUT LIMITATION, THE LEASES AND MINERAL INTERESTS) OIL AND GAS PROPERTY, OR ANY ACT, OMISSION, STATUS, OWNERSHIP, OR OTHER RELATIONSHIP, CONDITION, OR CIRCUMSTANCE CONTEMPLATED BY, CREATED UNDER, OR ARISING PURSUANT TO OR IN CONNECTION WITH ANY LOAN DOCUMENT, OR (VI) ANY INDEMNIFIED PARTY'S SOLE OR CONCURRENT ORDINARY NEGLIGENCE. (b) THE FOREGOING PROVISIONS (I) ARE NOT LIMITED IN AMOUNT, EVEN IF THAT AMOUNT EXCEEDS THE AMOUNT OF THE OBLIGATION, (II) INCLUDE, WITHOUT LIMITATION, REASONABLE FEES AND EXPENSES OF ATTORNEYS AND OTHER COSTS OR EXPENSES OF LITIGATION OR OF PREPARING FOR LITIGATION, DAMAGES OR INJURY TO PERSONS, PROPERTY, OR NATURAL RESOURCES ARISING UNDER ANY STATUTORY OR COMMON LAW, PUNITIVE DAMAGES, FINES, AND OTHER PENALTIES, AND LOSS OF VALUE OF ANY REAL PROPERTY OR COLLATERAL, (III) ARE NOT AFFECTED BY ANY ACT OR OMISSION OF ANY TRIBUNAL OR OTHER THIRD PARTY, OR THE SOURCE OR ORIGIN OF ANY HAZARDOUS SUBSTANCE, AND (IV) ARE NOT AFFECTED BY ANY INDEMNIFIED PARTY'S INVESTIGATION, ACTUAL OR CONSTRUCTIVE KNOWLEDGE, COURSE OF DEALING, OR WAIVER. (c) However, no Indemnified Party has the right to be indemnified under the Loan Documents for its own fraud, gross negligence, or willful misconduct. (d) The provisions of and undertakings and indemnification in this section survive the foreclosure of any Lender Lien or any transfer in lieu of that foreclosure, the sale or other transfer of any Collateral or real property to any Person, the satisfaction of the obligation, the termination of the Loan Documents, and the release of any or all Lender Liens. 8.13 Operations and Properties. Each Company will act prudently and in accordance with customary industry standards in managing or operating its assets, properties, business and investments. Each Company will keep in good working order and condition, ordinary wear and tear excepted, all of its assets and properties which are necessary to the conduct of its business, including without limitation all wells and equipment necessary or useful in the operation of the Mineral Interests. 8.14 Leases. Each Company will pay and discharge promptly, or cause to be paid and discharged promptly, all rentals, delay rentals, royalties, overriding royalties, payments out of production and other indebtedness or obligations accruing under, and perform or cause to be performed each and every act, matter or thing required by each and all of, the Leases and all other agreements and contracts constituting or affecting the Mineral Interests, and do all other things necessary to keep unimpaired its rights thereunder and prevent any forfeiture thereof or default thereunder, and operate or cause to be operated such properties in a diligent, careful and efficient manner and in compliance with all applicable proration and conservation laws and all applicable rules and regulations of every Tribunal, whether state, federal, municipal or other jurisdiction, from time to time constituted to regulate the development and operations of oil and gas properties and the production and sale of oil, gas and other hydrocarbons therefrom. 34 8.15 Development and Maintenance. Each Company will explore, develop and maintain (or cause to be explored, developed and maintained) the Leases, wells, units and acreage to which the Mineral Interests pertain in a prudent manner, and as may be reasonably necessary for the prudent and economical operation of (and in an effort to maximize the production capacity of and ultimate recovery of hydrocarbons from) such Leases, wells, units and acreage. 8.16 Maintenance of Liens. Each Company shall perform all such acts and execute all such documents as Agent may reasonably request in order to enable Agent to report, file and record every instrument that Agent may deem necessary in order to perfect and maintain the Lender Liens in the Mortgaged Properties and otherwise to preserve and protect the rights of the Agent and the Lenders in and to the Collateral. SECTION 9. NEGATIVE COVENANTS. For so long as any Lender is committed to lend or issue LCs under this agreement and until the Obligation has been fully paid and performed, Borrower covenants and agrees with Agent and Lenders that, without first obtaining Agent's written notice of Determining Lenders' consent to the contrary: 9.1 Payroll Taxes. No Company may use any proceeds of any Borrowing to pay the wages of employees unless a timely payment to or deposit with the United States of America of all amounts of Tax required to be deducted and withheld with respect to such wages is also made. 9.2 Debt. No Restricted Company may: (a) Have any Debt except Permitted Debt. (b) Pay or cause to be paid any principal of, or any interest on, any of its Debt except (i) the Obligation, and (ii) scheduled payments (but not prepayments) on any of its other Permitted Debt if no Default or Potential Default exists. 9.3 Letters of Credit. No Restricted Company may have issued for its account - or otherwise become obligated for any reimbursement obligations for -- any letter of credit except LCs. 9.4 Liens. No Restricted Company may (a) create, incur, or suffer or permit to be created or incurred or to exist any Lien upon any of its assets except Permitted Liens or (b) enter into or permit to exist any arrangement or agreement that directly or indirectly prohibits any Restricted Company from creating or incurring any Lien on any of its assets except the Loan Documents. 9.5 Employee Plans. No Restricted Company may permit any of the events or circumstances described in Section 7.12 to exist or occur. 9.6 Transactions with Affiliates. No Restricted Company may enter into any material transaction with any of its Affiliates except (a) those described on Schedule 7.15, (b) transactions between one or more Restricted Companies, (c) transactions permitted under Section 9.8, and (d) transactions in the ordinary course of business and upon fair and reasonable terms not materially less favorable than it could obtain or could become entitled to in an arm's-length transaction with a Person that was not its Affiliate. 9.7 Compliance with Laws and Documents. No Restricted Company may (a) violate the provisions of any Laws (including, without limitation, Environmental Laws) applicable to it or of any material agreement to which it is a party if that violation alone, or when aggregated with all other 35 violations, would be a Material Adverse Event, (b) violate in any material respect any provision of its charter or bylaws, or (c) repeal, replace, or amend any provision of its charter or bylaws if that action would be a Material Adverse Event. 9.8 Loans. Advances, and Investments. No Restricted Company may make any loan, advance, extension of credit, or capital contribution to, make any investment in, or purchase or commit to purchase any stocks or other securities or evidences of Debt of, or interests in, any other Person except those described on Schedule 9.8. 9.9 Distributions. No Restricted Company may declare, make, or pay any Distribution except Distributions paid in the form of additional common stock, and distributions to any other Restricted Company; provided, however, that so long as no Potential Default or Borrowing Base Deficiency exists or would result therefrom, Goodrich may pay regularly scheduled dividends, in cash, on the Existing Preferred Stock. 9.10 Disposition of Assets. No Restricted Company may sell, assign, lease, transfer, or otherwise dispose of any of its assets except (a) sales and dispositions of oil and gas production in the ordinary course of business for a fair and adequate consideration, (b) sales of assets which are obsolete or are no longer in use and which are not significant to the continuation of that Restricted Company's business, (c) sales and dispositions from any Restricted Company to any other Restricted Company, (d) dispositions of equipment where substantially similar equipment has been or is being acquired, (e) dispositions of other assets for an aggregate consideration not to exceed, in any fiscal year, $2,500,000.00, provided, however, that if any Borrowing Base Deficiency exists at the time of such disposition, 100% of the proceeds therefrom shall be applied to reduce the Principal Debt. 9.11 Mergers. Consolidations, and Dissolutions. No Restricted Company may merge or consolidate with any other Person or dissolve except: (a) if no Default or Potential Default exists or will exist as a result of it, any merger or consolidation between Restricted Companies (so long as, if Borrower is involved, it is the survivor); and (b) dissolution of any Subsidiary of a Restricted Company if substantially all of its assets have been conveyed to any Restricted Company. 9.12 Assignment. No Restricted Company may assign or transfer any of its Rights, duties, or obligations under any of the Loan Documents. 9.13 Fiscal Year and Accounting Methods. No Restricted Company may change its fiscal year for accounting purposes or any material aspect of its method of accounting except (i) for changes which do not affect, change or alter the calculation of any of the financial or accounting terms (or any component thereof) described in any of the financial covenants provided in Section 10 of this agreement, or (ii) to conform any new Subsidiary's accounting methods to Goodrich's accounting methods. 9.14 New Businesses. No Restricted Company may engage in any business except the businesses in which it is presently engaged and any other reasonably related business. 9.15 Government Relations. No Restricted Company may conduct its business in a way that it becomes regulated under the Investment Company Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended. 36 9.16 Strict Compliance. No Restricted Company may indirectly do anything that it may not directly do under any covenant in any Loan Document. 9.17 Alteration of Material Agreements. No Restricted Company will consent to or permit any material alterations, amendments, modifications, releases, waivers or terminations of any material agreement to which it is a party. 9.18 Operating Agreements. No Restricted Company shall enter into any operating agreement or material amendment of any existing operating agreement after the date hereof covering any of the Mortgaged Properties, except for those containing terms and provisions customary in the industry consistent with past practice and with respect to which prompt written notice thereof is given to Agent. 9.19 Burdensome Contracts. No Restricted Company shall enter into, become bound by, or subject the Mortgaged Properties to any contract or agreement which is burdensome on any Restricted Company or materially and adversely affects the operation of the Mortgaged Properties. 9.20 Hedging. Borrower will not, and Borrower will not permit any other Restricted Company to, enter into Swap Agreements which would cause the volume of (a) (i) the aggregate notional volume of oil which is subject thereto at any time to exceed seventy-five percent (75%) of the Restricted Companies' anticipated production of oil from proved, developed producing reserves during the entire term (which shall not exceed three (3) years) thereof, and (ii) the notional volume of oil with respect to which a settlement is required on a particular settlement date under such Swap Agreement to exceed seventy-five percent (75%) of the Restricted Companies' anticipated production of oil from proved, developed producing reserves for the period (a "Settlement Period") from the immediately preceding settlement date thereunder (or the commencement thereof in the event there is no prior settlement date) to such settlement date, and (b) (i) the aggregate notional volume of gas which is subject thereto at any time to exceed seventy-five percent (75%) of the Restricted Companies' anticipated production of gas from proved, developed production reserves during the entire term (which shall not exceed three (3) years thereof, and (ii) the notional volume of gas with respect to which a settlement is required on a particular settlement date thereunder to exceed seventy-five percent (75%) of the Restricted Companies' anticipated production of gas from proved, developed reserves for any Settlement Period. SECTION 10. FINANCIAL COVENANTS. For so long as any Lender is committed to lend or issue LCs under this agreement and until the Obligation has been fully paid and performed, Borrower covenants and agrees with Agent and Lenders that, without first obtaining Agent's written notice of Determining Lenders' consent to the contrary, it may not directly or indirectly permit: 10.1 Current Ratio. The ratio -- determined as of the last day of each fiscal quarter of Goodrich, commencing with the quarter ending December 31, 2001 - -- of the Companies' consolidated current assets to current liabilities to ever be less than 1.00 to 1.00. 10.2 Interest Coverage. The ratio -- determined as of the last day of each fiscal quarter of Goodrich for the four (4) consecutive fiscal quarters then ended, commencing with the quarter ending December 31, 2001 -- of the Companies' EBITDAX to Interest Expense to ever be less than 3.00 to 1.00: 10.3 Tangible-Net Worth. The Companies' Tangible-Net Worth -- determined as of the last day of each fiscal quarter of Goodrich, commencing with the quarter ending December 31, 2001 -- to ever be less than the sum of (a) $40,000,000 plus (b) 50% of the Companies' cumulative Net Income (without deduction for losses) after June 30, 2001, plus (c) 100% of the net (i.e., gross less usual and customary 37 underwriting, placement, and other related costs and expenses) proceeds of the issuance of any equity securities by Goodrich after the date of this agreement. SECTION 11. DEFAULT. The term "Default" means the occurrence of any one or more of the following: 11.1 Payment of Obligation. Borrower's failure or refusal to pay (a) principal of any Note or any LC Exposure or any part thereof on or before the date due or (b) any other part of the Obligation on or before one Business Day after the date due. 11.2 Covenants. Any Company's failure or refusal to punctually and properly perform, observe, and comply with any covenant (other than covenants to pay the Obligation) applicable to it: (a) In Sections 8.1(f), 8.2 or 9; or (b) In any other provision of any Loan Document, and that failure or refusal continues for fifteen (15) days after the earlier of either any Company knowing of it or any Company is notified of it by Agent or any Lender. 11.3 Debtor Relief. Any Restricted Company (a) is not Solvent, (b) fails to pay its Debts generally as they become due, (c) voluntarily seeks, consents to, or acquiesces in the benefit of any Debtor Relief Law, or (d) becomes a party to or is made the subject of any proceeding provided for by any Debtor Relief Law - except as a creditor or claimant - that could suspend or otherwise adversely affect the Rights of Agent or any Lender granted in the Loan Documents (unless, if the proceeding is involuntary, the applicable petition is dismissed within 60 days after its filing). 11.4 Judgments and Attachments. Where the amounts in controversy or of any judgments, as the case may be, exceed -- from and after the Closing Date and individually or collectively for all of the Restricted Companies -$1,000,000, the Restricted Companies fail (a) to have discharged, within 60 days after its commencement, any attachment, sequestration, or similar proceeding against any assets of any Restricted Company or (b) to pay any money judgment against any Restricted Company within ten days before the date on which any Restricted Company's assets may be lawfully sold to satisfy that judgment. 11.5 Government Action. Where the fair value of the assets involved exceed - -- from and after the Closing Date and individually or collectively for all of the Restricted Companies -- $1,000,000, (a) a final non-appealable order is issued by any Tribunal (including, but not limited to, the United States Justice Department) seeking to cause any Company to divest a significant portion of its assets under any antitrust, restraint of trade, unfair competition, industry regulation, or similar Laws, or (b) any Tribunal condemns, seizes, or otherwise appropriates, or takes custody or control of all or any substantial portion of any Restricted Company's assets. 11.6 Misrepresentation. Any representation or warranty made by any Company in any Loan Document at any time proves to have been materially incorrect when made. 11.7 Change of Control. Any Change of Control occurs. 11.8 Other Funded Debt. In respect of any Funded Debt (other than the Obligation) (a) any Restricted Company fails to make any payment when due beyond any applicable grace or cure period, or (b) any default or other event or condition occurs or exists beyond the applicable grace or cure period, the effect of which is to cause or to permit any holder of that Funded Debt to cause - -- whether or not it elects 38 to cause -- any of that Funded Debt to become due before its stated maturity or regularly scheduled payment dates, or (c) any of that Funded Debt is declared to be due and payable or required to be prepaid by any Restricted Company before its stated maturity. 11.9 SEC Reporting Requirements. Any Restricted Company fails to comply with any applicable reporting requirements of the Securities Exchange Act of 1934, as amended, for which the failure to report would constitute a Material Adverse Event. 11.10 Validity and Enforceability. Once executed, this agreement, any Note, any LC Agreement, any Guaranty, any Collateral Document ceases to be in full force and effect in any material respect or is declared to be null and void or its validity or enforceability is contested in writing by any Restricted Company party to it or any Restricted Company party to it denies in writing that it has any further liability or obligations under it except in accordance with that document's express provisions or as the appropriate parties under Section 14.8 below may otherwise agree in writing. 11.11 LCs. Agent is served with, or becomes subject to, a court order, injunction, or other process or decree restraining or seeking to restrain it from paying any amount under any LC and either (a) a drawing has occurred under the LC, and Borrower has refused to reimburse the Issuing Lender for payment, or (b) the expiration date of the LC has occurred, but the Right of the beneficiary to draw under the LC has been extended past the expiration date in connection with the pendency of the related court action or proceeding, and Borrower has failed to deposit with Agent cash collateral in an amount equal to the Issuing Lender's maximum exposure under the LC. SECTION 12. RIGHTS AND REMEDIES. 12.1 Remedies Upon Default. (a) Debtor Relief. If a Default exists under Section 11.3, the commitment to extend credit under this agreement automatically terminates, the entire unpaid balance of the Obligation automatically becomes due and payable without any action of any kind whatsoever. (b) Other Defaults. If any Default exists, subject to the terms of Section 13.5(b), Agent may (with the consent of, and must, upon the request of, Determining Lenders), do any one or more of the following: (i) If the maturity of the Obligation has not already been accelerated under Section 12.1(a), declare the entire unpaid balance of all or any part of the Obligation immediately due and payable, whereupon it is due and payable; (ii) terminate the commitments of Lenders to extend credit under this agreement; (iii) reduce any claim to judgment; (iv) demand payment of an amount equal to the LC Exposure then existing and retain as collateral for the LC Exposure any amounts received from any Company, from any property of any Company, through offset, or otherwise; and (v) exercise any and all other legal or equitable Rights afforded by the Loan Documents, by applicable Laws, or in equity. (c) Offset. If a Default exists, to the extent permitted by applicable Law, each Lender may exercise the Rights of offset and banker's lien against each and every account and other property, or any interest therein, which any Restricted Company may now or hereafter have with, or which is now or hereafter in the possession of, that Lender to the extent of the full amount of the Obligation owed to that Lender. (d) Production Proceeds. Notify any and all purchasers of production and take all other actions specified in Section 5.3 of this agreement. 39 12.2 Company Waivers. To the extent .permitted by Law, Borrower and (pursuant to its Guaranty) each other Restricted Company waives presentment and demand for payment, protest, notice of intention to accelerate, notice of acceleration, and notice of protest and nonpayment, and agrees that its liability with respect to all or any part of the Obligation is not affected by any renewal or extension in the time of payment of all or any part of the Obligation, by any indulgence, or by any release or change in any security for the payment of all or any part of the Obligation. 12.3 Performance by Agent. If any Company's covenant, duty, or agreement is not performed in accordance with the terms of the Loan Documents, Agent may, while a Default exists, at its option (but subject to the approval of Determining Lenders), perform or attempt to perform that covenant, duty, or agreement on behalf of that Company (and any amount expended by Agent in its performance or attempted performance is payable by the Companies, jointly and severally, to Agent on demand, becomes part of the Obligation, and bears interest at the Default Rate from the date of Agent's expenditure until paid). However, Agent does not assume and shall never have, except by its express written consent, any liability or responsibility for the performance of any Company's covenants, duties, or agreements. 12.4 Not in Control. Nothing in any Loan Documents gives or may be deemed to give to Agent or any Lender the Right to exercise control over any Company's Real Property (including, without limitation, the Leases and the Mineral Interests), other assets, affairs, or management or to preclude or interfere with any Company's compliance with any Law or require any act or omission by any Company that may be harmful to Persons or property. Any "Material Adverse Event" or other materiality or substantiality qualifier of any representation, warranty, covenant, agreement, or other provision of any Loan Document is included for credit documentation purposes only and does not imply or be deemed to mean that Agent or any Lender acquiesces in any non-compliance by any Company with any Law, document, or otherwise or does not expect the Companies to promptly, diligently, and continuously carry out all appropriate removal, remediation, compliance, closure, or other activities required or appropriate in accordance with all Environmental Laws. Agent's and Lenders' power is limited to the Rights provided in the Loan Documents. All of those Rights exist solely -- and may be exercised in manner calculated by Agent or Lenders in their respective good faith business judgment - to preserve and protect the Collateral and to assure payment and performance of the Obligation. 12.5 Course of Dealing. The acceptance by Agent or Lenders of any partial payment on the Obligation is not a waiver of any Default then existing. No waiver by Agent, Determining Lenders, or Lenders of any Default is a waiver of any other then-existing or subsequent Default. No delay or omission by Agent, Determining Lenders, or Lenders in exercising any Right under the Loan Documents impairs that Right or is a waiver thereof or any acquiescence therein, nor will any single or partial exercise of any Right preclude other or further exercise thereof or the exercise of any other Right under the Loan Documents or otherwise. 12.6 Cumulative Rights. All Rights available to Agent, Determining Lenders, and Lenders under the Loan Documents are cumulative of and in addition to all other Rights granted to Agent, Determining Lenders, and Lenders at law or in equity, whether or not the Obligation are due and payable and whether or not Agent, Determining Lenders, or Lenders have instituted .any suit for collection, foreclosure, or other action in connection with the Loan Documents. 12.7 Application of Proceeds. Any and all proceeds ever received by Agent or Lenders from the exercise of any Rights pertaining to the Obligation shall be applied to the Obligation according to Section 3. 40 12.8 Certain Proceedings. Borrower shall promptly execute and deliver, or cause the execution and delivery of, all applications, certificates, instruments, registration statements, and all other documents and papers Agent or Determining Lenders reasonably request in connection with the obtaining of any consent, approval, registration (other than securities Law registrations), qualification, permit, license, or authorization of any Tribunal or other Person necessary or appropriate for the effective exercise of any Rights under the Loan Documents. Because Borrower agrees that Agent's and Determining Lenders' remedies at Law for failure of Borrower to comply with the provisions of this section would be inadequate and that failure would not be adequately compensable in damages, Borrower agrees that the covenants of this section may be specifically enforced. 12.9 Expenditures by Lenders. Any sums spent by Agent or any Lender in the exercise of any Right under any Loan Document is payable by the Companies to Agent within five Business Days after demand, becomes part of the Obligation, and bears interest at the Default Rate from the date spent until the date repaid. 12.10 Diminution in Value of Collateral. Neither Agent nor any Lender has any liability or responsibility whatsoever for any diminution in or loss of value of any collateral now or in the future securing payment or performance of any of the Obligation (other than diminution in or loss of value caused by its own gross negligence or willful misconduct). SECTION 13. AGENT AND LENDERS. 13.1 Agent. (a) Appointment. Each Lender appoints Agent (and Agent accepts appointment) as its nominee and agent, in its name and on its behalf. (i) To act as its nominee and on its behalf in and under all Loan Documents; (ii) to arrange the means whereby its funds are to be made available to Borrower under the Loan Documents; (iii) to take any action that it properly requests under the Loan Documents (subject to the concurrence of other Lenders as may be required under the Loan Documents); (iv) to receive all documents and items to be furnished to it under the Loan Documents; (v) to be the secured party, mortgagee, beneficiary, recipient, and similar party in respect of any collateral for the benefit of Lenders; (vi) to promptly distribute to it all material information, requests, documents, and items received from Borrower under the Loan Documents; (vii) to promptly distribute to it its ratable part of each payment or prepayment (whether voluntary, as proceeds of collateral upon or after foreclosure, as proceeds of insurance thereon, or otherwise) in accordance with the terms of the Loan Documents; and (viii) to deliver to the appropriate Persons requests, demands, approvals, and consents received from it. However, Agent may not be required to take any action that exposes it to personal liability or that is contrary to any Loan Document or applicable Law. (b) Successor. Agent may voluntarily resign as the Agent hereunder upon thirty (30) days notice to Borrower and the Lenders. If the initial or any successor Agent ever resigns, then Determining Lenders shall (which, if no Default or Potential Default exists, is subject to Borrower's approval that may not be unreasonably withheld) appoint the successor Agent from among Lenders (other than the resigning Agent). If Determining Lenders fail to appoint a successor Agent within thirty (30) days after the resigning Agent has given notice of resignation, then the resigning Agent may, on behalf of Lenders, appoint a successor Agent, which must be a commercial bank having a combined capital and surplus of at least $1,000,000,000 (as shown on its most recently published statement of condition). Upon its acceptance of appointment as successor Agent, the successor Agent succeeds to and becomes vested with all of the Rights of the prior Agent, and the prior Agent is discharged from its duties and obligations of Agent under the Loan Documents (but, when used in connection with LCs issued and 41 outstanding before the appointment of the successor Agent, "Agent" shall continue to refer solely to the prior Agent -- but, any LCs issued or renewed after the appointment of any successor Agent shall be issued or renewed by the successor Agent), and each Lender shall execute the documents that any Lender, the resigning Agent, or the successor Agent reasonably request to reflect the change. After any Agent's resignation as Agent under the Loan Documents, the provisions of this section inure to its benefit as to any actions taken or not taken by it while it was Agent under the Loan Documents. (c) Rights as Lender. Agent, in its capacity as a Lender, has the same Rights under the Loan Documents as any other Lender and may exercise those Rights as if it were not acting as Agent. The term "Lender", unless the context otherwise indicates, includes Agent. Agent's resignation does not impair or otherwise affect any Rights that it has or may have in its capacity as an individual Lender. Each Lender and Borrower agree that Agent is not a fiduciary for Lenders or for Borrower but is simply acting in the capacity described in this agreement to alleviate administrative burdens for Borrower and Lenders, that Agent has no duties or responsibilities to Lenders or Borrower except those expressly set forth in the Loan Documents, and that Agent in its capacity as a Lender has the same Rights as any other Lender. (d) Other Activities. Agent or any Lender may now or in the future be engaged in one or more loan, letter of credit, leasing, or other financing transactions with Borrower, act as trustee or depositary for Borrower, or otherwise be engaged in other transactions with Borrower (collectively, the "other activities") not the subject of the Loan Documents. Without limiting the Rights of Lenders specifically set forth in the Loan Documents, neither Agent nor any Lender is responsible to account to the other Lenders for those other activities, and no Lender shall have any interest in any other Lender's activities, any present or future guaranties by or for the account of Borrower that are not contemplated by or included in the Loan Documents, any present or future offset exercised by Agent or any Lender in respect of those other activities, any present or future property taken as security for any of those other activities, or any property now or hereafter in Agent's or any other Lender's possession or control that may be or become security for the obligations of Borrower arising under the Loan Documents by reason of the general description of indebtedness secured or of property contained in any other agreements, documents, or instruments related to any of those other activities (but, if any payments in respect of those guaranties or that property or the proceeds thereof is applied by Agent or any Lender to reduce the Obligation, then each Lender is entitled to share ratably in the application as provided in the Loan Documents). 13.2 Expenses. Each Lender shall pay its Pro Rata Part of any reasonable expenses (including, without limitation, court costs, reasonable attorneys' fees and other costs of collection) incurred by Agent (while acting in such capacity) in connection with any of the Loan Documents if Agent is not reimbursed from other sources within 30 days after incurrence. Each Lender is entitled to receive its Pro Rata Part of any reimbursement that it makes to Agent if Agent is subsequently reimbursed from other sources. 13.3 Proportionate Absorption of Losses. Except as otherwise provided in the Loan Documents, nothing in the Loan Documents gives any Lender any advantage over any other Lender insofar as the Obligation is concerned or relieves any Lender from ratably absorbing any losses sustained with respect to the Obligation (except to the extent unilateral actions or inactions by any Lender result in Borrower or any other obligor on the Obligation having any credit, allowance, setoff, defense, or counterclaim solely with respect to all or any part of that Lender's Pro Rata Part of the Obligation). 13.4 Delegation of Duties: Reliance. Lenders may perform any of their duties or exercise any of their Rights under the Loan Documents by or through Agent, and Lenders and Agent may perform any of their duties or exercise any of their Rights under the Loan Documents by or through their respective Representatives. Agent, Lenders, and their respective Representatives (a) are entitled to rely upon (and 42 shall be protected in relying upon) any written or oral statement believed by it or them to be genuine and correct and to have been signed or made by the proper Person and, with respect to legal matters, upon opinion of counsel selected by Agent or that Lender (but nothing in this clause (a) permits Agent to rely on (i) oral statements if a writing is required by this agreement or (ii) any other writing if a specific writing is required by this agreement), (b) are entitled to deem and treat each Lender as the owner and holder of its portion of the Obligation for all purposes until, written notice of the assignment or transfer is given to and received by Agent (and any request, authorization, consent, or approval of any Lender is conclusive and binding on each subsequent holder, assignee, or transferee of or Participant in that Lender's portion of the Obligation until that notice is given and received), (c) are not deemed to have notice of the occurrence of a Default unless a responsible officer of Agent, who handles matters associated with the Loan Documents and transactions thereunder, has actual knowledge or Agent has been notified by a Lender or Borrower, and (d) are entitled to consult with legal counsel (including counsel for Borrower), independent accountants, and other experts selected by Agent and are not liable for any action taken or not taken in good faith by it in accordance with the advice of counsel, accountants, or experts. 13.5 Limitation of Agent's Liability. (a) Exculpation. Neither Agent nor any of its Representatives will be liable for any action taken or omitted to be taken by it or them under the Loan Documents in good faith and believed by it or them to be within the discretion or power conferred upon it or them by the Loan Documents or be responsible for the consequences of any error of judgment (except for fraud, gross negligence, or willful misconduct), and neither Agent nor any of its representatives has a fiduciary relationship with any Lender by virtue of the Loan Documents (but nothing in this agreement negates the obligation of Agent to account for funds received by it for the account of any Lender). (b) Indemnity. Unless indemnified to its satisfaction against loss, cost, liability, and expense, Agent may not be compelled to do any act under the Loan Documents or to take any action toward the execution or enforcement of the powers thereby created or to prosecute or defend any suit in respect of the Loan Documents. If Agent requests instructions from Lenders, or Determining Lenders, as the case may be, with respect to any act or action in connection with any Loan Document, Agent is entitled to refrain (without incurring any liability to any Person by so refraining) from that act or action unless and until it has received instructions. In no event, however, may Agent or any of its Representatives be required to take any action that it or they determine could incur for it or them criminal or onerous civil liability. Without limiting the generality of the foregoing, no Lender has any right of action against Agent as a result of Agent's acting or refraining from acting under this agreement in accordance with instructions of Determining Lenders. (c) Reliance. Agent is not responsible to any Lender or any Participant for, and each Lender represents and warrants that it has not relied upon Agent in respect of, (i) the creditworthiness of any Company and the risks involved to that Lender, (ii) the effectiveness, enforceability, genuineness, validity, or the due execution of any Loan Document (except by Agent), (iii) any representation, warranty, document, certificate, report, or statement made therein (except by Agent) or furnished thereunder or in connection therewith, (iv) the adequacy of any collateral now or hereafter securing the Obligation or the existence, priority, or perfection of any Lien now or hereafter granted or purported to be granted on the collateral under any Loan Document, or (v) observation of or compliance with any of the terms, covenants, or conditions of any Loan Document on the part of any Company. EACH LENDER AGREES TO INDEMNIFY AGENT AND ITS REPRESENTATIVES AND HOLD THEM HARMLESS FROM AND AGAINST (BUT LIMITED TO SUCH LENDER'S COMMITMENT PERCENTAGE OF) ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, REASONABLE 43 EXPENSES, AND REASONABLE DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER THAT MAY BE IMPOSED ON, ASSERTED AGAINST, OR INCURRED BY THEM IN ANY WAY RELATING TO OR ARISING OUT OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THEM UNDER THE LOAN DOCUMENTS IF AGENT AND ITS REPRESENTATIVES ARE NOT REIMBURSED FOR SUCH AMOUNTS BY ANY COMPANY. ALTHOUGH AGENT AND ITS REPRESENTATIVES HAVE THE RIGHT TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN ORDINARY NEGLIGENCE, AGENT AND ITS REPRESENTATIVES DO NOT HAVE THE RIGHT TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN FRAUD, GROSS NEGLIGENCE, OR WILLFUL MISCONDUCT. 13.6 Default. While a Default exists, Lenders agree to promptly confer in order that Determining Lenders or Lenders, as the case may be, may agree upon a course of action for the enforcement of the Rights of Lenders. Agent is entitled to act or refrain from taking any action (without incurring any liability to any Person for so acting or refraining) unless and until it has received instructions from Determining Lenders. In actions with respect to any Company's property, Agent is acting for the ratable benefit of each Lender. 13.7 Collateral Matters. (a) Each Lender authorizes and directs Agent to enter into the Loan Documents for the Lender Liens and agrees that any action taken by Agent concerning any Collateral (with the consent or at the request of Determining Lenders) in accordance with any Loan Document, that Agent's exercise (with the consent or at the request of Determining Lenders) of powers concerning the Collateral in any Loan Document, and that all other reasonably incidental powers are authorized and binding upon all Lenders. (b) Agent is authorized on behalf of all Lenders, without the necessity of any notice to or further consent from any Lender, from time to time before a Default or Potential Default, to take any action with respect to any Collateral or Loan Documents related to Collateral that may be necessary to perfect and maintain perfected the Lender Liens upon the Collateral. (c) Except to use the same standard of care that it ordinarily uses for collateral for its sole benefit, Agent has no obligation whatsoever to any Lender or to any other Person to assure that the Collateral exists or is owned by any Company or is cared for, protected, or insured or has been encumbered or that the Lender Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority. (d) Agent shall exercise the same care and prudent judgment with respect to the Collateral and the Loan Documents as it normally and customarily exercises in respect of similar collateral and security documents. (e) Lenders irrevocably authorize Agent, at its option and in its discretion, to release any Lender Lien upon any Collateral (i) upon full payment of the Obligation, (ii) constituting property being disposed of as permitted under any Loan Document, (iii) constituting property in which no Company owned any interest at the time the Lender Lien was granted or at any time after that, (iv) constituting property leased to any Company under a lease that has expired or been terminated in a transaction permitted under the Loan Documents or is about to expire and that has not been, and is not intended by that Company to be, renewed, (v) consisting of an instrument evidencing Debt pledged to Agent (for the benefit of Lenders), if the underlying Debt has been paid in full, or (vi) if approved, authorized, or ratified in writing by Lenders. Upon request by Agent at any time, Lenders shall confirm in writing Agent's authority to release particular types or items of Collateral under this clause (e). 44 13.8 Limitation of Liability. No Lender or any Participant will incur any liability to any other Lender or Participant except for acts or omissions in bad faith, and neither Agent nor any Lender or Participant will incur any liability to any other Person for any act or omission of any other Lender or any Participant. 13.9 Relationship of Lenders. The Loan Documents do not create a partnership or joint venture among Agent and Lenders or among Lenders. 13.10 Benefits of Agreement. None of the provisions of this section inure to the benefit of any Company or any other Person except Agent and Lenders. Therefore, no Company or any other Person is responsible or liable for, entitled to rely upon, or entitled to raise as a defense -- in any manner whatsoever -- the failure of Agent or any Lender to comply with these provisions. SECTION 14. MISCELLANEOUS. 14.1 Nonbusiness Days. Any payment or action that is due under any Loan Document on a non-Business Day may be delayed until the next-succeeding Business Day (but interest shall continue to accrue on any applicable payment until payment is in fact made) unless the payment concerns a LIBOR-Rate Borrowing, in which case if the next-succeeding Business Day is in the next calendar month, then such payment shall be made on the next-preceding Business Day. 14.2 Communications. Unless otherwise specifically provided, whenever any Loan Document requires or permits any consent, approval, notice, request, or demand from one party to another, communication must be in writing (which may be by telex or fax) to be effective and shall be deemed to have been given (a) if by telex, when transmitted to the appropriate telex number and the appropriate answer back is received, (b) if by fax, when transmitted to the appropriate fax number (and all communications sent by fax must be confirmed promptly thereafter by telephone; but any requirement in this parenthetical shall not affect the date when the fax shall be deemed to have been delivered), (c) if by mail, on the third Business Day after it is enclosed in an envelope and properly addressed, stamped, sealed, and deposited in the appropriate official postal service, or (d) if by any other means, when actually delivered. Until changed by notice pursuant to this agreement, the address (and fax number) for Borrower and Agent is stated beside their respective signatures to this agreement and for each Lender is stated beside its name on Schedule 2. 14.3 Form and Number of Documents. The form, substance, and number of counterparts of each writing to be furnished under this agreement must be satisfactory to Agent and its counsel. 14.4 Exceptions to Covenants. No Company may take or fail to take any action that is permitted as an exception to any of the covenants contained in any Loan Document if that action or omission would result in the breach of any other covenant contained in any Loan Document. 14.5 Survival. All covenants, agreements, undertakings, representations, and warranties made in any of the Loan Documents survive all closings under the Loan Documents and, except as otherwise indicated, are not affected by any investigation made by any party. 14.6 Governing Law. Unless otherwise stated in any Loan Document, the laws of the State of Texas and of the United States of America govern the Rights and duties of the parties to the Loan Documents and the validity, construction, enforcement, and interpretation of the Loan Documents. 45 14.7 Invalid Provisions. Any provision in any Loan Document held to be illegal, invalid, or unenforceable is fully severable; the appropriate Loan Document shall be construed and enforced as if that provision had never been included; and the remaining provisions shall remain in full force and effect and shall not be affected by the severed provision. Agent, Lenders, and each Company party to the affected Loan Document agree to negotiate, in good faith, the terms of a replacement provision as similar to the severed provision as may be possible and be legal, valid, and enforceable. 14.8 Amendments. Consents, Conflicts, and Waivers. (a) Determining Lenders. Unless otherwise specifically provided (i) the provisions of this agreement may be amended, modified, or waived, only by an instrument in writing executed by Borrower, Agent, and Determining Lenders and supplemented only by documents delivered or to be delivered in accordance with the express terms of this agreement, and (ii) the other Loan Documents may only be the subject of an amendment, modification, or waiver that has been approved by Determining Lenders and Borrower. (b) All Lenders. Any amendment to or consent or waiver under this agreement or any Loan Document that purports to accomplish any of the following must be by an instrument in writing executed by Borrower and Agent and executed (or approved, as the case may be) by each Lender: (i) Extends the due date or decreases the amount of any scheduled payment or amortization of the Obligation beyond the date specified in the Loan Documents; (ii) decreases any rate or amount of interest, fees, or other sums payable to Agent or Lenders under this agreement (except such reductions as are contemplated by this agreement); (iii) changes the definition of "Commitment," "Commitment Percentage," "Determining Lenders," and "Pro Rata Part" or the definition of "Borrowing Base" (iv) increases any one or more Lender's Commitment; (v) waives compliance with, amends, or fully or partially releases -except as expressly provided by the Loan Documents or when a Company merges into another Person or dissolves when specifically permitted in the Loan Documents -- any Guaranty or Collateral; (vi) changes the requirement that any increase of the Borrowing Base be approved and consented to by all of the Lenders; or (vii) changes this clause (b) or any other matter specifically requiring the consent of all Lenders under this agreement. (c) Agency Fees. Any amendment or consent or waiver with respect to fees payable solely to Agent under a separate letter agreement must be executed in writing only by Agent and Borrower. (d) Conflicts. Any conflict or ambiguity between the terms and provisions of this agreement and terms and provisions in any other Loan Document is controlled by the terms and provisions of this agreement. (e) Waivers. No course of dealing or any failure or delay by Agent, any Lender, or any of their respective Representatives with respect to exercising any Right of Agent or any Lender under this agreement operates as a waiver thereof. A waiver must be in writing and signed by Agent and Lenders (or Determining Lenders, if permitted under this agreement) to be effective, and a waiver will be effective only in the specific instance and for the specific purpose for which it is given. 14.9 Multiple Counterparts. Any Loan Document may be executed in a number of identical counterparts with the same effect as if all signatories had signed the same document. All counterparts must be construed together to constitute one and the same instrument 46 14.10 Parties. (a) Parties Bound. Each Loan Document binds and inures to the parties to it, any intended beneficiary of it, and each of their respective successors and permitted assigns. No Company may assign or transfer any Rights or obligations under any Loan Document without first obtaining all Lenders' consent, and any purported assignment or transfer without Lenders' consent is void. No Lender may transfer, pledge, assign, sell any participation in, or otherwise encumber its portion of the Obligation except as permitted by clauses (b) or (c) below. (b) Participations. Any Lender may (subject to the provisions of this section, in accordance with applicable Law, in the ordinary course of its business, and at any time) sell to one or more Persons (each a "Participant") participating interests in its portion of the Obligation. The selling Lender remains a "Lender" under the Loan Documents, the Participant does not become a "Lender" under the Loan Documents, and the selling Lender's obligations under the Loan Documents remain unchanged. The selling Lender remains solely responsible for the performance of its obligations and remains the holder of its share of the Principal Debt for all purposes under the Loan Documents. Borrower and Agent shall continue to deal solely and directly with the selling Lender in connection with that Lender's Rights and obligations under the Loan Documents, and each Lender must retain the sole right and responsibility to enforce due obligations of the Companies. Participants have no Rights under the Loan Documents except as provided below. Subject to the following, each Lender may obtain (on behalf of its Participants) the benefits of Section 3 with respect to all participations in its part of the Obligation outstanding from time to time so long as Borrower is not obligated to pay any amount in excess of the amount that would be due to that Lender under Section 3 calculated as though no participations have been made. No Lender may sell any participating interest under which the Participant has any Rights to approve any amendment, modification, or waiver of any Loan Document except as to matters in Section 14.8(b)(i) and (ii). (c) Assignments. Each Lender may make assignments to the Federal Reserve Bank. Each Lender may also assign to one or more assignees (each an "Assignee") all or any part of its Rights and obligations under the Loan Documents so long as (i) the assignor Lender and Assignee execute and deliver to Agent and Borrower for their consent and acceptance (that may not be unreasonably withheld in any instance and is not required if the Assignee is an Affiliate of the assigning Lender, and the consent of Borrower is also not required at any time after the occurrence and during the continuance of any Default or Potential Default) an assignment and assumption agreement in substantially the form of Exhibit F (an "Assignment") and pay to Agent a processing fee of $3,500, (ii) the assignment must be for a minimum total Commitment of $5,000,000 and the assigning Lender (if not assigning its entire Commitment) must retain a minimum total Commitment of $5,000,000, and (iii) the conditions for that assignment set forth in the applicable Assignment are satisfied. The Effective Date in each Assignment must (unless a shorter period is agreeable to Borrower and Agent) be at least five Business Days after it is executed and delivered by the assignor Lender and the Assignee to Agent and Borrower for acceptance. Once that Assignment is accepted by Agent and Borrower, and subject to all of the following occurring, then, on and after the Effective Date stated in it (i) the Assignee automatically becomes a party to this agreement and, to the extent provided in that Assignment, has the Rights and obligations of a Lender under the Loan Documents, (ii) the assignor Lender, to the extent provided in that Assignment, is released from its obligations to fund Borrowings under this agreement and its reimbursement obligations under this agreement and, in the case of an Assignment covering all of the remaining portion of the assignor Lender's Rights and obligations under the Loan Documents, that Lender ceases to be a party to the Loan Documents, (iii) Borrower shall execute and deliver to the assignor Lender and the Assignee the appropriate Notes in accordance with this agreement following the transfer, (iv) upon delivery of the Notes under clause (iii) preceding, the assignor Lender shall return to Borrower all Notes previously 47 delivered to that Lender under this agreement, and (v) Schedule 2 is automatically deemed to be amended to reflect the name, address, telecopy number, and Commitment of the Assignee and the remaining Commitment (if any) of the assignor Lender, and Agent shall prepare and circulate to Borrower and Lenders an amended Schedule 2 reflecting those changes. 14.11 VENUE, SERVICE OF PROCESS, AND JURY TRIAL. BORROWER AND (PURSUANT TO ITS GUARANTY) EACH RESTRICTED COMPANY, IN EACH CASE FOR ITSELF AND ITS SUCCESSORS AND ASSIGNS, IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS IN TEXAS, (B) WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION THAT IT MAY NOT OR IN THE FUTURE HAVE TO THE LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH ANY LOAN DOCUMENT AND THE OBLIGATION BROUGHT IN THE COURTS OF THE STATE OF TEXAS, OR IN THE UNITED STATES COURTS LOCATED IN THE SOUTHERN DISTRICT OF TEXAS, (C) WAIVES ANY CLAIMS THAT ANY LITIGATION BROUGHT IN ANY OF THE FOREGOING COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, (D) CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THOSE COURTS IN ANY LITIGATION BY THE MAILING OF COPIES OF THAT PROCESS BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, BY HAND DELIVERY, OR BY DELIVERY BY A NATIONALLY-RECOGNIZED COURIER SERVICE, AND SERVICE SHALL BE DEEMED COMPLETE UPON DELIVERY OF THE LEGAL PROCESS AT ITS ADDRESS FOR PURPOSES OF THIS AGREEMENT, (E) AGREES THAT ANY LEGAL PROCEEDING AGAINST ANY PARTY TO ANY LOAN DOCUMENT ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE OBLIGATION MAY BE BROUGHT IN ONE OF THE FOREGOING COURTS, AND (F) WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUR OF ANY LOAN DOCUMENT. THE SCOPE OF EACH OF THE FOREGOING WAIVERS IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. BORROWER AND (PURSUANT TO ITS GUARANTY) EACH OTHER RESTRICTED COMPANY ACKNOWLEDGES THAT THESE WAIVERS ARE A MATERIAL INDUCEMENT TO AGENT'S AND EACH LENDER'S AGREEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT AGENT AND EACH LENDER HAS ALREADY RELIED ON THESE WAIVERS IN ENTERING INTO THIS AGREEMENT, AND THAT AGENT AND EACH LENDER WILL CONTINUE TO RELY ON EACH OF THESE WAIVERS IN RELATED FUTURE DEALINGS. BORROWER AND (PURSUANT TO ITS GUARANTY) EACH OTHER RESTRICTED COMPANY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THESE WAIVERS WITH ITS LEGAL COUNSEL, AND THAT IT KNOWINGLY AND VOLUNTARILY AGREES TO EACH WAIVER FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THE WAIVERS IN THIS SECTION ARE IRREVOCABLE, MEANING THAT THEY MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THESE WAIVERS APPLY TO ANY FUTURE RENEWALS, EXTENSIONS, AMENDMENTS, MODIFICATIONS, OR REPLACEMENTS IN RESPECT OF THE APPLICABLE LOAN DOCUMENT. IN CONNECTION WITH ANY LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14.12 ENTIRETY. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN BORROWER, LENDERS, AND AGENT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW. 48 EXECUTED as of the date first stated above. Address for notices: Goodrich Petroleum Company L.L.C. 815 Walker Street By: /s/ Robert C. Turnham, Jr. Houston, TX 77002 ----------------------------------- Attention: Mr. Robert C. Turnham Name: Robert C. Turnham, Jr. Fax: 713-780-9254 Title: Executive Vice President and Chief Operating Officer BNP Paribas, as Agent and a Lender 1200 Smith Street, Suite 3100 By: /s/ Betsy Jocher Houston, Texas 77002 ------------------------------------ Attention: Brian M. Malone Name: Betsy Jocher Fax: 713-659-6915 ---------------------------------- Title: Vice President --------------------------------- By: /s/ Larry Robinson ------------------------------------ Name: Larry Robinson ---------------------------------- Title: Vice President --------------------------------- [SIGNATURE PAGE TO CREDIT AGREEMENT] 49 SCHEDULE 2 LENDERS AND COMMITMENTS Lender Commitment Commitment Percentage - -------------------------------------------------------------------------------- BNP Paribas 100% $50,000,000.00 Address: 1200 Smith Street, Suite 3100 Houston, Texas 77002 Schedule 2 SCHEDULE 6 CLOSING DOCUMENTS Unless otherwise specified, all dated either the Closing Date or a date no earlier than 30 days before the Closing Date (a "Current Date"). PART A. BY CLOSING DATE - ----------------------- Responsible Party H&B 1. (a) Assignment of Notes, Documents and Liens (the "Assignment") executed by Prior Agent and Prior Lenders in favor of Agent, for the benefit of the Lenders, for filing in the following offices: FILING OFFICE FILE DATE FILE NUMBER ------------------------------------------------------- Calcasieu Parish, LA Cameron Parish, LA Jefferson Parish, LA Lafourche Parish, LA Ouachita Parish, LA Plaquemines Parish, LA St. Landry Parish, LA Terreboone Parish, LA Webster Parish, LA Borden County, TX Cherokee County, TX Dawson County, TX Hemphill County, TX Howard County, TX Limestone County, TX Nueces County, TX San Patricio County, TX Shelby County, TX Smith County, TX Wharton County, TX (b) All original notes evidencing the Existing Indebtedness, endorsed to Agent. H&B 2. Credit Agreement (the "Credit Agreement") dated as of the Closing Date, between Goodrich Petroleum Company, L.L.C., a Louisiana limited liability company ("Borrower"), certain Lenders, and BNP Paribas, as Agent -- the defined terms in which have the same meanings when used in this schedule -- to which must be attached: Schedule 2 - Lenders and Commitments Schedule 6 - Closing Documents Schedule 7.3 - Companies and Names Schedule 7.9 - Litigation Schedule 7.11 - Environmental Matters Schedule 7.15 - Affiliate Transactions SCHEDULE 6 - PAGE 1 Schedule 9.2 - Permitted Debt Schedule 9.4 - Permitted Liens Schedule 9.8 - Permitted Loans, Advances, and Investments Exhibit A - Revolving Note Exhibit B - Form of Production Report Exhibit C-1 - Borrowing Request Exhibit C-2 - Conversion Notice Exhibit C-3 - LC Request Exhibit C-4 - Compliance Certificate Exhibit D - Opinion of Counsel to Companies Exhibit E - Assignment and Assumption Agreement H&B 3. Note dated the Closing Date, executed by Borrower, substantially in the form of Exhibit A to the Credit Agreement, one each payable to a Lender in the stated principal amount beside its name below: BNP Paribas $50,000,000.00 H&B 4. Guaranty Agreement dated the Closing Date in favor of Agent and the Lenders, executed by the following Restricted Companies: Goodrich Petroleum Corporation Goodrich Petroleum Company - Lafitte, L.L.C. H&B 5. (a) Restated Mortgage, Security Agreement, Financing Statement and Assignment of Production (the "Amended Louisiana Mortgage") dated as of the Closing Date, executed by certain Restricted Companies, in Agent's favor, creating, ratifying and reaffirming the Lender Liens in the Mortgaged Properties located in Louisiana described in the Compass Assignment that are included as Collateral, and in form and substance satisfactory to Agent for filing in the following offices: COMPANY FILING OFFICE FILE FILE DATE NUMBER ------------------------------------------------------------------- Goodrich Petroleum Company, Calcasieu Parish, LA L.L.C. Cameron Parish, LA Jefferson Parish, LA Lafourche Parish, LA Ouachita Parish, LA Plaquemines Parish, LA St. Landry Parish, LA Terreboone Parish, LA Webster Parish, LA Goodrich Petroleum Company - Jefferson Parish, LA Lafitte, L.L.C. (b) UCC-1 Financing Statements covering the personal property Collateral included in the Amended Louisiana Mortgage reflecting certain Restricted Companies as SCHEDULE 6 - PAGE 2 debtors and Agent as secured party, in form and substance satisfactory to Agent, for filing with the following filing offices: COMPANY FILING OFFICE FILE FILE DATE NUMBER -------------------------------------------------------------------- Goodrich Petroleum Company, L.L.C. Plaquemines Parish, LA Goodrich Petroleum Company - Lafitte, L.L.C. Jefferson Parish, LA H&B 6. (a) Restated Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production (the "AMENDED TEXAS MORTGAGE"), dated as of the Closing Date, executed by the Borrower, in Agent's favor, creating, ratifying and reaffirming the Lender Liens in the Mortgaged Properties located in Texas described in the Compass Assignment that are included as Collateral, and in form and substance satisfactory to Agent for filing in the following offices: COMPANY FILING OFFICE FILE FILE DATE NUMBER -------------------------------------------------------------------- Goodrich Petroleum Company, Borden County, TX L.L.C. Cherokee County, TX Dawson County, TX Hemphill County, TX Howard County, TX Limestone County, TX Nueces County, TX San Patricio County, TX Shelby County, TX Smith County, TX Wharton County, TX (b) UCC-1 Financing Statement covering the personal property Collateral included in the Amended Texas Mortgage reflecting Borrower as debtor and Agent as secured party, in form and substance satisfactory to Agent, for filing with the following filing offices: COMPANY FILING OFFICE FILE FILE DATE NUMBER -------------------------------------------------------------------- Goodrich Petroleum Company, L.L.C. Plaquemines, Parish, LA H&B 7. General Security Agreements (the "Security Agreements") dated as of the Closing Date, executed by each of the Restricted Companies in favor of Agent and granting to Agent, for the benefit of the Lenders, Lender Liens on the personal property described therein. H&B 8. UCC-1 Financing Statements covering the Collateral included in the Security Agreements, reflecting each of the Restricted Companies, as debtors and Agent, as SCHEDULE 6 - PAGE 3 secured party, in form and substance satisfactory to Agent, for filing with the following offices: COMPANY FILING OFFICE FILE FILE DATE NUMBER ---------------------------------------------------------------------- Goodrich Petroleum Corporation Secretary of State, Delaware Goodrich Petroleum Company, L.L.C. Plaquemines Parish, LA Goodrich Petroleum Company - Lafitte, L.L.C. Jefferson Parish, LA H&B 9. ASSIGNMENTS OF FINANCING STATEMENTS from Prior Agent to Agent as requested by Agent. B'er 10. ENVIRONMENTAL REPORTS acceptable to Agent. B'er 11. COPIES OF all documents described on Schedule 7.9 to the Credit Agreement. B'er 12. COPIES OF all environmental indemnity agreements, risk management and insurance policies. B'er 13. COPIES OF all documents described on Schedule 7.15 to the Credit Agreement. B'er 14. COPIES OF title opinions, reports, in form and substance satisfactory to Agent, for the Mortgaged Properties. B'er 15. BORROWING REQUEST for the initial Borrowing. B'er 16. ENGINEERING REPORT dated as of September 1, 2001. B'er 17. COMPLIANCE CERTIFICATE dated as of the Closing Date. B'er 18. EVIDENCE acceptable to Agent that the Existing Indebtedness has been paid in full or is being paid in full with the funding of the initial Borrowing. B'er 19. EVIDENCE acceptable to Agent that all existing letters of credit, if any, issued for the account of Borrower and any other Restricted Company under the Prior Credit Agreement have been or are on the Closing Date being replaced and superseded by LCs under the Credit Agreement. B'er 20. EVIDENCE acceptable to Agent of the payment of all fees under Section 4 of the Credit Agreement due on the Closing Date. HP&W 21. CORPORATE CHARTER for each Restricted Company certified as of a Current Date, by the filing officer indicated below: SCHEDULE 6 - PAGE 4 COMPANY JURISDICTION ---------------------------------------------------------------------- Goodrich Petroleum Company, L.L.C. SECRETARY OF STATE, LOUISIANA Goodrich Petroleum Corporation SECRETARY OF STATE, DELAWARE Goodrich Petroleum Company - Lafitte, L.L.C. SECRETARY OF STATE, LOUISIANA HP&W 22. OFFICERS' CERTIFICATE for the following Restricted Companies dated as of the Closing Date, executed by its President or Vice President and Secretary or any Assistant Secretary as to resolutions of its directors or managers authorizing the Credit Agreement and the transactions contemplated in it and the execution and delivery of the Loan Documents to which it is a party, the incumbency of its officers, its Bylaws or operating agreement, and its corporate charter or articles or organization: (a) Goodrich Petroleum Corporation (b) Goodrich Petroleum Company, L.L.C. (c) Goodrich Petroleum Company - Lafitte, L.L.C. HP&W 23. CERTIFICATES OF EXISTENCE, AUTHORITY, AND GOOD STANDING OR SIMILAR STATUS for the following entities and jurisdictions as of the following dates: COMPANY JURISDICTION DATE/COMMENTS ---------------------------------------------------------------------- Goodrich Petroleum Corporation Secretary of State, Delaware Goodrich Petroleum Company, Secretary of State, Texas L.L.C. Secretary of State, Louisiana Goodrich Petroleum Company - Lafitte, L.L.C. Secretary of State, Louisiana HP&W 24. OPINION dated as of the Closing Date, from HP&W counsel to the Companies, addressed to Agent and Lenders, and substantially covering all of the matters described on of Exhibit D to the Credit Agreement. H&B 25 Fee Letter Agreement described in Section 4.2 of the Credit Agreement, executed by Borrower and Agent. H&B 26. Letter(s) in Lieu of Transfer Orders to purchasers of production, executed by Borrower in favor of Agent. B'er 27 UCC search results, in form and substance satisfactory to Agent, for the Borrower, as debtor, from each of the filing offices listed in (5) and (6) above. 28. Such other documents and items as Agent may reasonably request. SCHEDULE 6 - PAGE 5 PART B. WITHIN 30 DAYS AFTER CLOSING DATE - ----------------------------------------- 1. Evidence satisfactory to the Agent that the following Louisiana state tax liens have been released of record and the Company shall have no further liability with respect thereto: (a) Notice of State Tax Assessment and Lien against Goodrich Petroleum, as Debtor, in favor of State of Louisiana, as Creditor, dated May 16, 2001, filed June 7, 2001 under MOB 260, Folio 433, Entry Number 270681. (b) Notice of State Tax Assessment and Lien against Goodrich Petroleum, as Debtor, in favor of State of Louisiana, as Creditor, dated May 16, 2001, filed June 8, 2001 under MOB 317, Folio 1022, Entry Number 168. (c) Notice of State Tax Assessment and Lien against Goodrich Petroleum Co., as Debtor, in favor of State of Louisiana, as Creditor, dated May 16, 2001, filed June 8, 2001 under MOB 317, Folio 1023, Entry Number 169. 2. Evidence satisfactory to the Agent that the Act of Mortgage, Pledge, Assignment of Production and Security Agreement effective as of September 23, 1999 by Goodrich Petroleum Company-Lafitte, L.L.C., as Mortgagor, to Hambrecht & Quist Guaranty Finance, L.L.C., as Noteholder Agent, as Mortgagee has been released of record and the Company shall have no further liability with respect thereto. Schedule 6 - Page 6 SCHEDULE 7.3 ------------ COMPANIES AND NAMES -------------------
Company Restricted Incorporated/ Qualified Other Names Name Outstanding Shareholders/ (Yes/No) Organized to do Used in Change Capital Members Business Past 5 in Last 4 Stock Years Months - ------------------------------------------------------------------------------------------------------------------------------------ Goodrich Petroleum Corporation Yes Delaware Louisiana None None 17,773,060 Various Texas Common (public) 791,968 Preferred Series A Goodrich Petroleum Company, L.L.C. Yes Louisiana Texas Goodrich None 1,000,000 units Goodrich Michigan Petroleum of Series A Petroleum Company of Common Unit Corporation Louisiana (Nevada corporation) GPC, Inc. of Louisiana (Nevada corporation) Goodrich Petroleum Company -Lafitte, L.L.C. Yes Louisiana None None None 1,000,000 Goodrich units Petroleum of Series A Company, Common Unit L.L.C. Drilling & Workover,Inc. No Louisiana None None None 100% Goodrich Petroleum Company, L.L.C. LECE, Inc. No Texas None None None 100% Goodrich Petroleum Company, L.L.C. BKWC Limited Partnership No Delaware None None None Not Various applicable (LECE, Inc., is the general partner)
Schedule 7.3 SCHEDULE 7.9 LITIGATION 1. OGTI, Inc. and Katco, Inc. v. Coastal Oil and Gas, et al., No. 93-14243, Civil District Court, Division B, Orleans Parish, Louisiana. OGTI/Katco seek damages from a number of defendants, including a subsidiary of the Company, in an undetermined amount for environmental cleanup costs related to naturally occurring radioactive materials (NORMS) associated with drill pipe which was disposed of by OGTI/Katco on behalf of the defendants. This action has been settled in principal and settlement documents are being finalized for execution. The Company's share of the cash settlement amount is $46,400.00. In addition, the Company will pay its share of the cost to remediate the OGTI/Katco site (Company's share estimated to be approximately $28,000. It is anticipated that the settlement will be concluded and the case dismissed by the end of November, 2001. 2. Gulf Coast Vacuum Services Superfund Site. This is an action by the U.S. Environmental Protection Agency (EPA) seeking to recover from potentially responsible parties the costs required to clean up "hazardous substances" at an oil field waste disposal site in the State of Louisiana. Total cleanup costs have been estimated to be $15.4 million using a bioremediation method and $38 million if an incineration method is used. Pursuant to a consent decree, the Company has agreed to pay 3.09% of the costs expended up to $16.4 million, 1.94% of the costs expended from $16.4 million to $23 million, and 1.37% of the costs expended in excess of $23 million. The Company continues to pay its share of such costs as assessments are issued. 3. Monterey Pipeline Company. By letter dated May 10, 1988, from the Federal Energy Regulatory Commission (FERC), the Company was advised of a potential refund obligation owed to Monterey Pipeline Company in the total amount of $111,999.22, including principal and interest. The Company contested the claim and commenced discussions with Monterey for a resolution of the claim. Monterey failed to respond to the Company's proposals and no action has occurred with respect to the claim since December, 1990. 4. Leroy Mier vs. Ace Transport, Inc. et al., No. 96-12908, Civil District Court for the Parish of Orleans, Section F. Leroy Mier was a truck driver for Ace Transport, and others, and claims that he was exposed to NORM contamination from the early 1970's through March, 1992. Mier has developed nonHodgkins lymphoma and has sued approximately 40 defendants, including Hawthorne Oil & Gas Corp., a predecessor of American National Petroleum Company, which in turn is a predecessor of Goodrich Petroleum Company of Louisiana. Early discovery has revealed that Mier's only contact with Hawthorne was related to the collection of saltwater from a Hawthorne wellsite in February, 1992, less than 30 days prior to Mier's diagnosis of lymphoma. The Company intends to vigorously defend this action and is in the process of evaluating possible insurance coverage for this claim. Given the multiplicity of other defendants, the apparent de minimis contact with Hawthorne and the fact that such contact was very late in the exposure period, our impression SCHEDULE 7.9 - PAGE 1 reaction is that the Company's potential for exposure is quite small. This matter is still in the discovery stage, and management intends to defend this matter vigorously. 5. Ena Thibodeaux Broussard et al. vs. LLOG Exploration Co., No 69189, Fifteenth Judicial District Court, Vermilion Parish, Louisiana. This action was commenced by Broussard et al. against LLOG Exploration. The plaintiffs claim to be owners of unleased interests in the Siph 3 RA SU A Unit in the Tigre Lagoon Field, Vermilion Parish, Louisiana. The plaintiffs claim that they have received no payment for their share of production from the unit well and that they have not been provided with any drilling or completion cost data. The plaintiffs sued LLOG as the current operator of the unit. In response, LLOG filed a third party demand against Goodrich Petroleum Company of Louisiana and against Unit Petroleum Company, claiming that Goodrich's predecessor, American National Petroleum Company, and Unit Petroleum were prior operators of the well in question, and that, if LLOG has any liability to the plaintiffs, Goodrich and Unit Petroleum are liable to LLOG. There has been no activity on this case since November, 1997. Given the inactivity on this case, we have not evaluated this matter from the standpoint of liability or the potential exposure for damages. In the event this case is re-activated, management will defend it vigorously. 6. Richard Golden King vs. The Board of Commissioners of the Orleans Levee District et al., No. 37-085, 25th Judicial District Court, Plaquemines Parish, Louisiana. The plaintiff, King, filed suit against the Orleans Levee District, Patrick Petroleum Corporation of Michigan (a predecessor of Goodrich), Chevron Oil Company and Bass Oil Company, claiming to be the owner of royalty interests underlying the Bohemia Spillway in Plaquemines Parish, Louisiana. King contends that, between the period from January 1, 1985 through February and April, 1992, royalties were paid to the Orleans Levee District that should have been paid to him, and the petition seeks recovery of those royalties. The suit was originally filed in February, 1993, but King did not serve any of the defendants until February and March, 1998. Goodrich filed an exception of prematurity, contending that it was entitled to notice of the claim prior to the commencement of the lawsuit. This case has been dormant since July, 1998. Management intends to defend this action vigorously. 7. Harrison Lands, L.L.C. et al. vs. Goodrich Petroleum Company of Louisiana, No. 84767, 17th Judicial District Court, Lafourche Parish, Louisiana. In January, 1998, Goodrich acquired a natural gas pipeline from Southern Natural Gas Company, in the Lake Enfermer area of Lafourche Parish, Louisiana, and commenced flowing gas through the pipeline in July, 1998. The plaintiffs are owners of portions of the land through which the pipeline is situated, and have claimed that the servitude agreements for the pipeline have expired. Accordingly, the plaintiffs claim that Goodrich has no right to the continued use and operation of the pipeline. Goodrich contends that the servitude agreements have not expired and that it has the right to continue to use and operate the pipeline. This case is in the discovery stage and no trial date has been set, at this time. Management intends to vigorously defend its rights to the pipeline. 8. Alonzo Fuller, Sr. et al. vs. Exxon Corporation et al., No. 99-0774-RV-S, United States District Court, Southern District of Alabama, Southern Division. This action was filed on August 19, 1999, in state court in Clarke County, Alabama and then removed to federal court, as indicated in the caption above. The plaintiffs in this action purport to SCHEDULE 7.9 - PAGE 2 represent the heirs and assigns of the lessors under a 1949 mineral lease to Humble Oil and Refining Company. The plaintiffs seek to establish a class action on behalf of themselves and the other owners of mineral interests under the lease. The plaintiffs claim that the lease covers 46.5 acres of land, but that the various defendants have paid royalties to the lessors as though the lease covers only 15.5 acres. The defendants are purportedly the parties who operated various wells affecting the lease. The plaintiffs' claims are quite old and it is anticipated that the statute of limitations has run. The case is currently in the discovery stage, and management intends to defend this action vigorously. 9. Goodrich Petroleum Corporation, Goodrich Petroleum Company L.L.C. and Goodrich Petroleum Company-Lafitte, L.L.C. vs. Stone Energy Corporation No. 2000-06437, in the 125th Judicial District Court, Harris County, Texas. This action was commenced by the Company and its subsidiaries on February 8, 2000. This action arises out of a May 20, 1999 letter agreement between Goodrich Petroleum Corporation (the "Company") and Goodrich Petroleum Company, L.L.C. ("Goodrich-Louisiana"), on the one hand, and Stone Energy Corporation, on the other. The interests of the Company and Goodrich-Louisiana were later transferred to Goodrich Petroleum Company- Lafitte, L.L.C. ("Goodrich-Lafitte"). The Letter Agreement represents the agreement between the parties to jointly acquire the Lafitte Field from Texaco Exploration and Production, Inc. ("Texaco"), with Stone owning a 51% interest and Goodrich-Lafitte owning a 49% interest, and to jointly develop that field. The Company and its subsidiaries allege that Stone fraudulently induced the execution of the Letter Agreement in that Stone's actions indicate that Stone has never intended to share the benefits of the field with Goodrich-Lafitte. The suit further alleges that Stone breached various contractual and other obligations by failing to provide to Goodrich-Lafitte its 49% undivided interest in 3-D Seismic data acquired by the parties from Texaco. Finally, the suit alleges that Stone has tortiously interfered with the Company's relationship with Texaco and has published false and defamatory statements regarding the Company and its subsidiaries. In the suit, the Company and its subsidiaries seek the rescission of the May 20, 1999 Letter Agreement, restoring the Company to full ownership of the Lafitte Field, compensatory and punitive damages, and specific performance of Stone's obligations regarding the 3-D seismic data. Counsel of record for the Company and its subsidiaries is Richard P. Keeton, Mayor, Day, Caldwell & Keeton, 700 Louisiana, Suite 1900, Houston, Texas 77002, (713) 225-7000. 10. Armelise Planting Company vs. BP Amoco Corporation et al., No. 25826, 23rd Judicial District Court, Assumption Parish, Louisiana. This suit was filed against Patrick Petroleum Corporation (a predecessor of the Company) and sixty-four other defendants who allegedly participated in oil and gas activities on the plaintiff's property over a period of time spanning sixty years. The plaintiff alleges that the activities of the defendants damaged its property and caused other related injuries. The plaintiff seeks an undisclosed sum in ordinary damages, punitive damages, the cost to restore the property, and the diminution of the property's value. Discovery has just commenced in this case and management intends to defend it vigorously. 11. Taylor Energy Company Taylor Energy Company has made a request that the Company participate in the defense of an action entitled "Mary Michael Martin Morrill vs. Shell Oil Company et al., No. 25212, 23rd Judicial District Court, St. James Parish, Louisiana. The Company is not a party to this action. SCHEDULE 7.9 - PAGE 3 The substance of the claim in that action is that the prior operators of oil and gas activities on the lands belonging to the plaintiffs failed to properly clean and restore the premises. During the period from 1982 to 1989, American National Petroleum Company ("ANPC," a predecessor of the Company) owned a one-half interest in the subject field, with Taylor Energy owning the other one-half interest. In 1989, ANPC conveyed its interest in the field to Taylor Energy and, in that conveyance, ANPC assumed responsibility for the condition of the properties. Accordingly, the Company does not believe that it has any responsibility or liability for Taylor Energy's request. At this point, the Company has rejected Taylor Energy's request, and there has been no further communication from Taylor Energy. SCHEDULE 7.9 - PAGE 4 SCHEDULE 7.11 ENVIRONMENTAL MATTERS NONE. Schedule 7.11 SCHEDULE 7.15 AFFILIATE TRANSACTIONS NONE. Schedule 7.15 SCHEDULE 9.2 PERMITTED DEBT 1. The following existing Debt of the Restricted Companies, other than the Existing Indebtedness, together with all renewals and extensions but not principal increases of the following: a. Production Payments due to Texaco Exploration and Production, Inc. in connection with the Companies' acquisition of the interest in the Lafitte Field, Jefferson Parish, Louisiana. b. Accrued abandonment costs related to the Companies' activities in the Burrwood-West Delta Field and the Lafitte Field in Louisiana. 2. The Obligation. 3. Debt owed to other Restricted Companies. 4. Debt arising under Swap Agreements permitted pursuant to Section 9.20. 5. Trade payables, accrued taxes and other liabilities that do not constitute Funded Debt and that are not past due. 6. Endorsements of negotiable instruments in the ordinary course of business, and guarantees by any Restricted Company of any other Restricted Company's Permitted Debt. 7. In addition to the above, purchase-money Debt and capital-lease obligations incurred by any Restricted Company to acquire assets that never exceed, in the aggregate, $500,000.00 outstanding for all of the Restricted Companies; provided that no such Debt shall exceed 75% of the fair market value of the assets being so acquired or leased at the time such Debt is incurred. SCHEDULE 9.2 9. Liens that secure any of the Permitted Debt described as Item 7 on Schedule 9.2 so long as those Liens never cover any assets except the assets acquired with that Permitted Debt and do not cover any other Collateral. 10. Liens of operators and non-operators under joint operating agreements arising in the ordinary course of the business of the Restricted Companies to secure amounts owing, which amounts are not yet due or are being contested in good faith. 11. Liens under production sales agreements, division orders, operating agreements and other agreements customary in the oil and gas business for processing, producing and selling hydrocarbons. SCHEDULE 9.4 - PAGE 2 SCHEDULE 9.4 PERMITTED LIENS 1. The following existing Liens on assets of the Restricted Companies, together with all renewals and extensions but not principal increases of the following: None. 2. Lender Liens. 3. Any interest or title of a lessor in assets being leased under an operating lease that does not constitute Debt. 4. Pledges or deposits -- that may not cover any Collateral except cash proceeds of Collateral arising in the ordinary course of business -- made to secure payment of workers' compensation, unemployment insurance, or other forms of governmental insurance or benefits or to participate in any fund in connection with workers' compensation, unemployment insurance, pensions, or other social security programs. 5. Good-faith pledges or deposits -- that may not cover any Collateral except cash proceeds of Collateral arising in the ordinary course of business -- (a) for 10% or less (or more if for the purchase of equipment) of the amounts due under -- and made to secure -- any Restricted Company's performance of bids, tenders, contracts (except for the repayment of borrowed money), or leases, or (b) made to secure statutory obligations, surety or appeal bonds, or indemnity, performance, or other similar bonds benefiting any Restricted Company in the ordinary course of its business. 6. Zoning, easements, rights of way and similar restrictions on the use of real property that do not materially impair the use of the real property and that are not violated by existing or proposed structures or land use. 7. If no Lien has been filed in any jurisdiction or agreed to, (a) claims and Liens for Taxes not yet due and payable, (b) mechanic's Liens and materialman's Liens for services or materials for which payment is not yet due and payable, and (c) landlord's Liens for rental not yet due and payable. 8. The following -- if the validity or amount is being contested in good faith and by appropriate and lawful proceedings diligently conducted, reserve or other appropriate provision (if any) required by GAAP has been made, levy and execution continue to be stayed, they do not individually or collectively detract materially from the value of the property of the Person in question or materially impair the use of that property in the operation of its business, and (other than ad valorem Tax Liens given statutory priority) they are subordinate to the Lender Liens to the extent that they cover any Collateral: (a) Claims and Liens for Taxes due and payable; (b) claims and Liens upon, and minor defects of title to, real or personal property, including any attachment of personal or real property or other legal process before adjudication of a dispute on the merits, which are customarily accepted in the oil and gas financing industry; (c) claims and Liens of mechanics, materialmen, warehousemen, carriers, landlords, or other like Liens; and (d) adverse judgments or orders on appeal for the payment of money. SCHEDULE 9.4 - PAGE 1 SCHEDULE 9.8 PERMITTED LOANS, ADVANCES, AND INVESTMENTS 1. The following (i.e., "Government Securities") if due within one year after issuance: (a) Readily marketable direct full faith and credit obligations of the United States of America or obligations guaranteed by the full faith and credit of the United States of America; and (b) readily marketable obligations of an agency or instrumentality of, or corporation owned, controlled or sponsored by, the United States of America that are generally considered in the securities industry to be implicit obligations of the United States of America. 2. Readily marketable direct obligations of any state of United States of America given on the date of such investment a credit rating of at least Aa by Moody's Investors Service, Inc. or AA by Standard & Poor's Corporation, in each case due within one year from the making of the investment. 3. Certificates of deposit issued by, bank deposits in, eurodollar deposits through, bankers' acceptances of, and repurchase agreements covering Government Securities executed by, any (a) Lender or (b) bank incorporated under the Laws of the United States of America or any of its states and given on the date of the investment a short-term certificate of deposit credit rating of at least P-2 by Moody's Investors Service, Inc., or A-2 by Standard & Poor's Corporation, in each case due within one year after the date of the making of the investment. 4. Certificates of deposit issued by, bank deposits in, eurodollar deposits through, bankers' acceptances of, and repurchase agreements covering Government Securities executed by, any branch or office located in the United States of America of a bank incorporated under the Laws of any jurisdiction outside the United States of America having on the date of the investment a short-term certificate of deposit credit rating of a least P-2 by Moody's Investors Service, Inc., or A-2 by Standard & Poor's Corporation, in each case due within on year after the date of the making of the investment. 5. Repurchase agreements covering Government Securities executed by a broker or dealer registered under Section 15(b) of the Securities Exchange Act of 1934 having on the date of the investment capital of at least $100,000,000, due within 30 days after the date of the making of the investment, so long as the maker of the investment receives written confirmation of the transfer to it of record ownership of the Government Securities on the books of a "primary dealer" in the Government Securities as soon as practicable after the making of the investment. 6. Readily marketable commercial paper of corporations doing business in and incorporated under the Laws of the United States of America or any State thereof or of any corporation that is the holding company for a bank described in Items 3 and 4 above given on the date of the investment a credit rating of at least P-1 by Moody's Investors Service, Inc., or A-1 by Standard & Poor's Corporation, in each case due within 90 days after the date of the making of the investment. 7. "Money market preferred stock" issued by a corporation incorporated under the Laws of the United States of America or any of its states given on the date of the investment a credit rating of at least Aa by Moody's Investors Services, Inc., and AA by Standard & Poor's Corporation, in each case having an investment period not exceeding 50 days, so long as (a) the amount of all the SCHEDULE 9.8 - PAGE 3 investments issued by the same issuer does not exceed $10,000,000 and (b) the aggregate amount of all the investments does not exceed $50,000,000. 8. A readily redeemable "money market mutual fund" sponsored by a bank described in Items 3 or 4 above, or a registered broker or dealer described in Item 5 above, that has and maintains an investment policy limiting its investments primarily to instruments of the types described in Items 1 through 7 above and having on the date of those investment total assets of at least $1,000,000,000. 9. Loans or advances to any Restricted Companies' directors, officers, and employees made in the ordinary course of business that never exceed a total of $250,000.00 in the aggregate outstanding for all such loans and advances. 10. Loans or advances to or investments in Restricted Companies (provided that all such loans and advances are evidenced by a promissory note subject to Lender Liens pursuant to the Collateral Documents). 11. Other investments disclosed in writing to Agent that never exceed a total of $500,000.00 in the aggregate outstanding at any time. SCHEDULE 9.8 - PAGE 4 EXHIBIT A REVOLVING NOTE $____________ __________, 200_ FOR VALUE RECEIVED, Goodrich Petroleum Company, L.L.C., a Louisiana limited liability company ("Maker") promises to pay to the order of __________, ________ ("Payee"), that portion of the principal amount of $_______ that may from time to time be disbursed and outstanding under this note, together with interest. This note is a "Note" under the Credit Agreement (as renewed, extended, amended, or restated, the "Credit Agreement") dated as of _____________, 2001, between Maker as Borrower, Payee, certain other "Lenders," and BNP Paribas, as "Agent" for Lenders. All of the terms defined in the Credit Agreement have the same meanings when used--unless otherwise defined--in this Note. This Note incorporates by reference the principal and interest payment terms in the Credit Agreement for this Note, including, without limitation, the final maturity date for this Note, which is the Termination Date. Principal and interest are payable to the holder of this Note through Agent at its offices at 1200 Smith Street, Suite 3100, Houston, Texas 77002, or at any other address of which Agent may notify Maker in writing. This Note also incorporates by reference all other provisions in the Credit Agreement applicable to this Note--such as provisions for disbursement of principal, applicable-interest rates before and after Default, voluntary and mandatory prepayments, acceleration of maturity, exercise of rights, payment of attorney's fees, court costs, and other costs of collection, certain waivers by Maker and other obligors, assurances and security, choice of New York and United States federal law, usury savings, and other matters applicable to Loan Documents under the Credit Agreement. This Note is given by Maker in extension, renewal and modification of, and not in novation or discharge of, the obligations and indebtedness evidenced by those certain Promissory Notes dated January 31, 2001, executed by Maker and payable to the order of Prior Lenders in the original aggregate principal amount of $30,000,000, such promissory notes, among other things, having been assigned from Prior Lenders to Agent for the benefit of the Lenders pursuant to that certain Assignment of Notes, Documents and Liens dated November 9, 2001, executed by Prior Agent and Prior Lenders, as assignor in favor of Agent. Goodrich Petroleum Company, L.L.C., as Maker By: ___________________________________________ Name: _________________________________________ Title: ________________________________________ EXHIBIT A EXHIBIT B FORM OF PRODUCTION REPORT ------------------------- Section 1: Total Company Most Recent Six-Month Operations Statistics Month: - -------------------------------------------------------------------------------- Production Sales Volumes Oil (Bbls) Gas (MMcf) NGLs (Bbls) Average Realized Prices Oil ($/Bbl) Gas ($Mcf) NGLs ($Bbl) Total Sales ($000) Total LOE ($000) Total Capex ($000) Section 2: Discussion of Significant Production Variances Section 3: Discussion of Significant Operating Expenditures or Significant Changes in Total Operating Expenses Section 4: Discussion of Significant Capital Expenditures -1- Exhibit B Section 5: Significant Lease or Well Production Statistics (for each lease or well comprising over 5% of total production) Property: Month: - -------------------------------------------------------------------------------- Production Sales Volumes Oil (Bbls) Gas (MMcf) NGLs (Bbls) Water (Bbls) FTP (PSI) Production Sales Volumes Oil (Bbls) Gas (MMcf) NGLs (Bbls) Water (Bbls) FTP (PSI) Prepared: By:____________________________ Name: _________________________ Title: ________________________ Date: _________________________ -2- Exhibit B EXHIBIT C-1 BORROWING REQUEST AGENT: BNP Paribas DATE:___________, 200_ BORROWER: Goodrich Petroleum Company, L.L.C. - -------------------------------------------------------------------------------- This notice is delivered under Section 22(a) of the Credit Agreement (as renewed, extended, and amended, the "Credit Agreement") dated as of November 9, 2001, between Borrower, Agent, and certain lenders. Terms defined in the Credit Agreement have the same meanings when used -- unless otherwise defined -- in this request. Borrower requests a Borrowing under the Credit Agreement as follows: Borrowing Date(1) , 200_ Amount of Borrowing(2) $ __________ Type of Borrowing(3) For LIBOR-Rate Borrowing, the Interest Period(4) months Borrower certifies that on the above Borrowing Date -- after giving effect to the requested Borrowing -- (a) all of the representations and warranties in the Loan Documents will be true and correct in all material respects and (b) no Material Adverse Event, Default, or Potential Default will exist. Goodrich Petroleum Company, L.L.C., as Borrower By:______________________________________________ (Name)___________________________________________ (Title)__________________________________________ ___________________ (1) Business Day of request for Base-Rate Borrowing or at least third Business Day after request for LIBOR-Rate Borrowing. (2) Not less than $500,000 or a $100,000 greater multiple if a Base-Rate Borrowing, and not less than $1,000,000 or a $500,000 greater multiple if a LIBOR-Rate Borrowing. (3) LIBOR-Rate Borrowing or Base-Rate Borrowing. (4) 1, 2, 3, or 6 months. EXHIBIT C-1 EXHIBIT C-2 NOTICE OF CONVERSION AGENT: BNP Paribas DATE:___________, 200_ BORROWER: Goodrich Petroleum Company, L.L.C. This notice is delivered under Section 3.10 of the Credit Agreement (as renewed, extended, amended, or restated, the "Credit Agreement'") dated as of November 9, 2001, between Borrower, Agent, and certain lenders. Terms defined in the Credit Agreement have the same meanings when used -- unless otherwise defined -- in this notice. Borrower presently has a______________/ Borrowing (the "Existing Borrowing") under the Revolving Facility in the amount of $_____________ -- which, if a Libor-Rate Borrowing, has an Interest Period of _____________/ ending on _________________. On _______________ (the "Conversion Date"), Borrower shall partially pay, continue in full or part as the same Type of Borrowing, or convert in full or part to another Type of Borrowing and -- if applicable --with the Interest Period(d) designated below [check applicable boxes]: [ ] Amount to be paid, if any, $__________ [ ] Balance to be in the following Types of Borrowings with -- if applicable -- the following Interest Period(s): TYPE AMOUNT INTEREST PERIOD -------------------------------------------------------------- $ $ $ $ Borrower certifies that on the Conversion Date -- and after giving effect to the above action(s) -- (a) all of the representations and warranties in the Loan Documents will be true and correct in all material respects and (b) no Material Adverse Event, Default, or Potential Default will exist. Goodrich Petroleum Company, L.L.C. By:_____________________________________ (Name)__________________________________ (Title)_________________________________ EXHIBIT C-2 EXHIBIT C-3 LC REQUEST AGENT: BNP Paribas DATE:_____________, 200_ ISSUING LENDER: BORROWER: Goodrich Petroleum Company, L.L.C. This notice is delivered under Section 2.3(a) of the Credit Agreement (as renewed, extended, and amended, the "Credit Agreement") dated as of November 9, 2001, between Borrower, Agent, Issuing Lender, and certain other lenders. Terms defined in the Credit Agreement have the same meanings when used -- unless otherwise defined -- in this request. Borrower requests Issuing Lender to issue a LC under the Credit Agreement as follows: Issue Date _____________________, _________ Beneficiary ________________________________ Expiry Date ________________________________/ Face Amount ________________________________ Borrower certifies that on the above Issue Date -- after giving effect to the requested LC -- (a) all of the representations and warranties in the Loan Documents will be true and correct in all material respects and (b) no Material Adverse Event, Default, or Potential Default will exist. Goodrich Petroleum Company, L.L.C., as Borrower By:____________________________________________ (Name)_________________________________________ (Title)________________________________________ EXHIBIT C-3 EXHIBIT C-4 COMPLIANCE CERTIFICATE FOR THE FISCAL QUARTER/YEAR ENDED ________________ (the "Subject Period") AGENT: BNP Paribas DATE:______________ BORROWER: Goodrich Petroleum Company, L.L.C. This certificate is delivered under the Credit Agreement (as renewed, extended, amended, or restated, the "Credit Agreement") dated as of November 9, 2001, between Goodrich's, Agent, and certain lenders, all defined terms in which have the same meanings when used -- unless otherwise defined -- in this certificate. In my capacity as a Responsible Officer of -- and on behalf of -- Borrower, I certify to Agent and Lenders on the date of this certificate that (a) I am a Responsible Officer of Borrower, (b) Goodrich's Financial Statements attached to this certificate were prepared in accordance with GAAP and present fairly the Companies' consolidated financial condition and results of operations as of, and for the fiscal quarter or year, as the case may be, ended on, the last day of the Subject Period, (c) a review of the activities of the Companies during the Subject Period has been made under my supervision with a view to determining whether, during the Subject Period, the Companies performed and complied with all of their obligations under the Loan Documents, and, during the Subject Period, to my knowledge (i) the Companies performed, and complied with all of their obligations under the Loan Documents (except for the deviations, if any, described on a schedule to this certificate) in all material respects, and (ii) no Default (nor any Potential Default) has occurred which has not been cured or waived (except the Defaults or Potential Defaults, if any, described on the schedule to this certificate), and (d) to my knowledge, the status of compliance by the Companies with Sections 10.1, 10.2, and 10.3 of the Credit Agreement at the end of the Subject Period is as described on the schedule to this certificate. By:__________________________________ (Name)_______________________________ (Title)______________________________ EXHIBIT C-4 SCHEDULE TO COMPLIANCE CERTIFICATE ---------------------------------- (For Fiscal Quarter/Year Ended ___________________) A. Describe deviations from performance or compliance with covenants, if any, pursuant to clause (c)(i) of the attached certificate. If none, so state. B. Describe Potential Defaults and Defaults, if any, pursuant to clause (c)(ii) of the attached certificate. If none, so state. C. Reflect compliance with Sections 10.1,10.2 and 10.3 at the end of the Subject Period on a consolidated basis pursuant to clause (d) of the attached certificate. Table 1 -------
Covenant At End of Subject Period - --------------------------------------------------------------------------------------------------------------------- (S)10.1 CURRENT RATIO (a) Current assets $ (b) Current liabilities $ (c) Ratio of Line (a) to Line (b) ________ __ to 1.00 (d) Minimum 1.00 to 1.00 (S)10.2 INTEREST COVERAGE (a) Net Income for the fiscal quarter then ended $ (b) Interest expense (including capitalized interest) in that $ applicable period (c) Taxes for that applicable period $ (d) Extraordinary expense/(income) for that applicable period $
Schedule to Compliance Certificate - Page 1 of 2 (e) Depreciation, depletion and amortization for that applicable period $ (f) EBITDAX for that applicable period (sum of Lines (a)-(e)) $ (G) Ratio of Line (f) to line (b) ____to 1.00 (h) Minimum 3.00 to 1.00 (S)10.3 MINIMUM TANGIBLE NET WORTH (a) Tangible Net Worth at the end of the Subject Period $ (b) Cumulative Net Income (without deduction for losses) from June 30, 2001, through the end of the Subject Period (c) Net proceeds of the issuance of any equity securities by $ Goodrich after the Closing Date (d) Minimum Tangible Net Worth [Sum of $40,000,000 plus (50% X $ Line (b)) plus (100% X Line (c))]
Schedule to Compliance Certificate - Page 2 of 2 EXHIBIT D OPINION OF COUNSEL TO COMPANIES EXHIBIT D-1 [Letterhead of Goodrich Petroleum] November 9, 2001 BNP Paribas, as Agent 1200 Smith Street Suite 3100 Houston, Texas 77002 Re: Credit Agreement (the "Credit Agreement") between Goodrich Petroleum Company, L.L.C., as Borrower, and BNP Paribas, as Agent and as a Lender, and Certain Lenders now or hereafter a party thereto, dated November 9, 2001, relating to a revolving line of credit of up to $50,000,000.00 (the "Loan"). Ladies and Gentlemen: We have acted as counsel for Goodrich Petroleum Company, L.L.C., a Louisiana limited liability company, ("Borrower") and Goodrich Petroleum Company-Lafitte, L.L.C., a Louisiana limited liability company ("Lafitte") and Goodrich Petroleum Corporation, a Delaware corporation ("Goodrich") in connection with the transactions contemplated in the Credit Agreement. Each capitalized term that is not otherwise defined herein shall have the meaning attributed to it in the Credit Agreement. Borrower, Goodrich and Lafitte may be collectively referred to herein as "Loan Parties," or, individually as a "Loan Party." In our representation of the foregoing parties, we have examined unexecuted copies of the Loan Documents described on Exhibit A, attached hereto, and we have examined such other records, certificates of public officials, agreements, instruments, and documents as we have deemed necessary as a basis for the opinions expressed herein. Based upon our examination of the foregoing and other matters of law and fact deemed relevant by us, and subject to the limitations and qualifications herein set forth, we are of the opinion that: 1. Borrower is a limited liability company duly formed, legally existing and in good standing under the laws of the State of Louisiana. The execution and delivery by Borrower of each of the Loan Documents to which it is a party are within the limited liability power of Borrower, have been duly authorized by all necessary limited liability company action by Borrower, and do not (i) BNP Paribas, as Agent November 9, 2001 Page 2 require the consent of any Governmental Authority, (ii) contravene or conflict with any Requirement of Law or the articles of organization or operating agreement of Borrower, (iii) to the best of our knowledge, contravene or conflict with any indenture, instrument or other agreement to which Borrower is a party or by which Borrower's property is presently bound or encumbered, or (iv) result in or require the creation or imposition of any Lien upon any property of Borrower other than as contemplated in the Loan Documents. 2. Lafitte is a limited liability company duly formed, legally existing and in good standing under the laws of the State of Louisiana. The execution and delivery by Lafitte of each of the Loan Documents to which it is a party are within the limited liability power of Lafitte, have been duly authorized by all necessary limited liability company action by Lafitte, and do not (i) require the consent of any Governmental Authority, (ii) contravene or conflict with any Requirement of Law or the articles of organization or operating agreement of Lafitte, (iii) to the best of our knowledge, contravene or conflict with any indenture, instrument or other agreement to which Lafitte is a party or by which Lafitte's property is presently bound or encumbered, or (iv) result in or require the creation or imposition of any Lien upon any property of Lafitte other than as contemplated in the Loan Documents. 3. Goodrich is a corporation duly formed, legally existing and in good standing under the laws of the State of Delaware. The execution and delivery by Goodrich of each of the Loan Documents to which it is a party are within the corporate power of Goodrich, have been duly authorized by all necessary corporate action by Goodrich, and do not (i) require the consent of any Governmental Authority, (ii) contravene or conflict with any Requirement of Law or the certificate of incorporation or bylaws of Goodrich, (iii) to the best of our knowledge, contravene or conflict with any indenture, instrument or other agreement to which Goodrich-Delaware is a party or by which Goodrich's property is presently bound or encumbered, or (iv) result in or require the creation or imposition of any Lien upon any property of Goodrich other than as contemplated in the Loan Documents. 4. Each Loan Document constitutes the legal, valid and binding obligation of each Loan Party that is a party thereto, enforceable against such Loan Party in accordance with its terms. 5. The recording of the Restated Mortgage, Security Agreement, Financing Statement and Assignment of Production (the "Amended Louisiana Mortgage") in the mortgage records of each parish in the State of Louisiana in which the Borrower or Lafitte own Mortgaged Properties are the only filings or recordings necessary to perfect a Lien upon the Mortgaged Properties in favor of the Agent, to the extent that (a) the Mortgaged Properties are situated in the State of Louisiana, (b) the Mortgaged Properties are properly and adequately described in exhibits thereto, and (c) the property is a type of property upon which a Lien may be perfected by recordation in the mortgage records of a parish. BNP Paribas, as Agent November 9, 2001 Page 3 6. The filing of a UCC-1 Financing Statement in the UCC Records of Plaquemines Parish, Louisiana (with respect to Borrower) and in the UCC Records of Jefferson Parish, Louisiana (with respect to Lafitte) are the only filings or recordings necessary to perfect a Lien in favor of the Agent upon the personal property Collateral that is included in the Amended Louisiana Mortgage, to the extent that (a) exhibits attached to the UCC-1 Financing Statements adequately and properly describe the real property with which the personal property Collateral is associated, and (b) the personal property Collateral is the type of property upon which a security interest may be perfected by the filing of a financing statement. 7. The filing of a UCC-1 Financing Statement in the UCC Records of Plaquemines Parish, Louisiana (with respect to Borrower) and in the UCC Records of Jefferson Parish, Louisiana (with respect to Lafitte) are the only filings or recordings necessary to perfect a Lien in favor of the Agent upon the Collateral that is included in the Security Agreements executed by them, to the extent that such Collateral is the type of property upon which a security interest may be perfected by the filing of a financing statement. 8. To the best of our knowledge after due inquiry (such inquiry consisting solely of (a) our review as to specific matters about which we have been consulted by the Loan Parties, including our litigation docket, and (b) inquiries made by us to officers of the Loan Parties), except as disclosed in Schedule 7.9 to the Credit Agreement, no Loan Party is subject to, or under threat of, any Litigation that is reasonably likely to be determined adversely to a Loan Party, and if so adversely determined, would constitute a Material Adverse Event. 9. No Loan Party is subject to regulation under the Investment Company Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended. The opinions expressed herein are qualified and limited as follows: a. We have assumed that (i) each document submitted to us for review is accurate and complete, each such document that is an original is authentic, each such document that is a copy conforms to an authentic original, and all signatures on each such document are genuine; and (ii) each certificate from governmental officials reviewed by us is accurate, complete and authentic and all official public records are accurate and complete. b. We are licensed to practice law only in the State of Louisiana. Accordingly, the foregoing opinions are limited solely to the laws of the State of Louisiana, the laws of the United States and the corporation laws of the State of Delaware. BNP Paribas, as Agent November 9, 2001 Page 4 c. The validity, binding effect and enforceability of the Loan Documents may be limited or affected by bankruptcy, insolvency, moratorium, reorganization, or other similar laws affecting rights of creditors generally, including, without limitation, statutes or rules of law which limit the effect of waivers of rights by a debtor or grantor; provided, however, that the limitations and other effects of such statutes or rules of law upon the validity and binding effect of the Loan Documents should not differ materially from the limitations and other effects of such statutes or rules of law upon the validity and binding effect of credit agreements, promissory notes, guaranties, mortgages, deeds of trust and security agreements generally. The enforceability of the respective obligations of the Loan Parties under the Loan Documents is subject to general principles of equity (whether such enforceability is considered in a suit in equity or at law). In rendering our opinion as to the validity, binding effect and enforceability of the Loan Documents, we have assumed that the applicable laws and jurisprudence of the State of Texas are not materially different from those of the State of Louisiana. d. In rendering these opinions, we have not examined oil and gas leases or other documents of title, and we express no opinion, and hereby disclaim any opinion, as to the status or quality of title to any of the property that is subject to the transactions contemplated by the Loan Documents or as to the priority of any lien, security interest, or other encumbrance created by any of the Loan Documents. e. Our opinions are given as of the date hereof, and we undertake no obligation to advise the Lenders of any state of facts, or changes in law, occurring after the date hereof which might affect our opinions. Only Lenders and proper assignees of Lenders are entitled to rely upon or to assert any legal rights created by this opinion letter. This opinion letter may not be used or relied upon by any other person for any purpose whatsoever without, in each instance, this firm's prior written consent. Sincerely, HARGROVE, PESNELL & WYATT By: /s/ Scott C. Sinclair ---------------------------------- Scott C. Sinclair EXHIBIT A 1. Assignment of Notes, Documents and Liens (the "Assignment") dated November 9, 2001, executed by the Borrower, Goodrich and Lafitte, and the Prior Agent and Prior Lenders in favor of Agent, for the benefit of the Lenders. 2. Credit Agreement (the "Credit Agreement") dated November 9, 2001, between the Borrower, certain Lenders, and BNP Paribas, as Agent. 3. Revolving Note dated November 9, 2001, in the original principal amount of $50,000,000 made by the Borrower in favor of BNP Paribas. 4. Guaranty Agreement dated November 9, 2001, executed by Goodrich in favor of Agent and the Lenders. 5. Guaranty Agreement dated November 9, 2001, executed by Lafitte in favor of Agent and the Lenders. 6. Restated Mortgage, Security Agreement, Financing Statement and Assignment of Production (the "Amended Louisiana Mortgage") dated November 9, 2001, executed by the Borrower in favor of the Agent. 7. Restated Mortgage, Security Agreement, Financing Statement and Assignment of Production (the "Amended Louisiana Mortgage") dated November 9, 2001, executed by Lafitte in favor of the Agent. 8. UCC-1 Financing Statement covering the personal property Collateral included in the Amended Louisiana Mortgage executed by the Borrower in favor of the Agent. 9. UCC-1 Financing Statement covering the personal property Collateral included in the Amended Louisiana Mortgage executed by Lafitte in favor of the Agent. 10. Restated Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production (the "Amended Texas Mortgage"), dated November 9, 2001, executed by the Borrower in favor of the Agent. 11. UCC-1 Financing Statement covering the personal property Collateral included in the Amended Texas Mortgage executed by the Borrower in favor of the Agent. 12. General Security Agreements (the "Security Agreements") dated November 9, 2001, executed, respectively, by each of the Borrower, Goodrich and Lafitte in favor of the Agent. 13. UCC-1 Financing Statements covering the Collateral included in the Security Agreements executed by each of the Borrower, Goodrich and Lafitte in favor of the Agent. EXHIBIT E ASSIGNMENT AND ASSUMPTION AGREEMENT THIS AGREEMENT is entered into as of _____________________________, between _________________ ("Assignor") and ________________ ("Assignee"). Goodrich Petroleum Company, L.L.C., a Louisiana limited liability company ("BORROWER") certain lenders ("LENDERS"), and BNP Paribas, a foreign banking corporation organized under the laws of the Republic of France (in its capacity as Agent for Lenders, "Agent"), are party to the Credit Agreement (as renewed, extended, amended, or restated, the "Credit Agreement") dated as of November 9, 2001, all of the defined terms in which have the same meanings when used -- unless otherwise defined -- in this agreement. This agreement is entered into as required by Section 14.10(c) of the Credit Agreement and, if required pursuant to the terms of the Credit Agreement, is not effective until consented to by Borrower and Agent, which consents may not under the Credit Agreement be unreasonably withheld. ACCORDINGLY, for adequate and sufficient consideration, Assignor and Assignee agree as follows: 1. Assignment and Assumption. By this agreement, and effective as of (which must be at least five Business Days after the execution and delivery of this agreement to both Borrower, if applicable, and Agent for consent, the "Effective Date"), Assignor sells and assigns to Assignee (without recourse to Assignor) and Assignee purchases and assumes from Assignor a ___% interest (the "Assigned Interest"), which, if not equal to 100%, must be a percentage, when computed as an aggregate dollar amount, that is at least $5,000,000, in and to all of Assignor's Rights and obligations under the Credit Agreement as of the Effective Date, including, without limitation, the Assigned Interest in (a) Assignor's Commitment as of the Effective Date, (b) the Note held by Assignor as of the Effective Date, (c) all Principal Debt owed to Assignor on the Effective Date, (d) all unpaid reimbursement obligations under drawings or drafts under any LC on the Effective Date, (e) all outstanding participations owned by Assignor under Section 2.3(b) of the Credit Agreement on the Effective Date, (f) all interest accruing in respect of the Assigned Interest after the Effective Date, (g) all LC fees paid in advance before the Effective Date under Section 4.3(a) of the Credit Agreement in respect of the Assigned Interest and in respect of any period or periods after the Effective Date, and (h) all commitment fees accruing in respect of the Assigned Interest under Section 4.4 of the Credit Agreement after the Effective Date. 2. Assignor Provisions. Assignor (a) represents and warrants to Assignee that as of the Effective Date (i) the following principal amounts and LC liabilities are owed to it without reduction for any assignments that have not yet become effective: Item Amount ---- ------ Principal Debt of Revolving Facility $ LC reimbursement obligations $ (S) 2.3(b) participations $ and (ii) Assignor is the legal and beneficial owner of the Assigned Interest, which is free and clear of any adverse claim, and (b) makes no representation or warranty to Assignee and assumes no responsibility to Assignee with respect to (i) any statements, warranties, or representations made in or in connection with any Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency, or value of any Loan Document, or (iii) the financial condition of any Company or the performance or observance by any Company of any of its obligations under any Loan Document. EXHIBIT E - PAGE-1 3. Assignee Provisions. Assignee (a) represents and warrants to Assignor, Borrower, and Agent that Assignee is legally authorized to enter into this agreement, (b) confirms that it has received a copy of the Credit Agreement, copies of the Current Financials, and such other documents and information as it deems appropriate to make its own credit analysis and decision to enter into this agreement, (c) agrees with Assignor, Borrower, and Agent that Assignee shall -- independently and without reliance upon Agent, Assignor, or any other Lender and based on such documents and information as Assignee deems appropriate at the time -- continue to make its own credit decisions in taking or not taking action under the Loan Documents, (d) appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms of the Loan Documents and all other reasonably-incidental powers, (e) agrees with Assignor, Borrower, and Agent that Assignee shall perform and comply with all provisions of the Loan Documents applicable to Lenders in accordance with their respective terms, and (f) if Assignee is not organized under the Laws of the United States of America or one of its states, it (i) represents and warrants to Assignor, Agent, and Borrower that no Taxes are required to be withheld by Assignor, Agent, or Borrower with respect to any payments to be made to it in respect of the Obligations, and it has furnished to Agent and Borrower two duly completed copies of either U.S. Internal Revenue Service Forms W-8BEN, W-8ECI, or any other form acceptable to Agent that entitles Assignee to exemption from U.S. federal withholding Tax on all interest payments under the Loan Documents, (ii) covenants to provide Agent and Borrower a new Forms W-8BEN, W-8ECI, or other form acceptable to Agent upon the expiration or obsolescence of any previously delivered form according to Law, duly executed and completed by it, and to comply from time to time with all Laws with regard to the withholding Tax exemption, and (iii) agrees with Agent and Borrower that, if any of the foregoing is not true or the applicable forms are not provided, then Agent and Borrower (without duplication) may deduct and withhold from interest payments under the Loan Documents any United States federal-income Tax at the full rate applicable under the Code. 4. Credit Agreement and Commitments. From and after the Effective Date (a) Assignee shall be a party to the Credit Agreement and (to the extent provided in this agreement) have the Rights and obligations of a Lender under the Loan Documents and (b) Assignor shall (to the extent provided in this agreement) relinquish its Rights and be released from its obligations under the Loan Documents. On the Effective Date, after giving effect to this agreement, but without giving effect to any other assignments that have not yet become effective, Assignor's total Commitment (which, if positive, must be at least $5,000,000) and Assignee's total Commitment will be as follows: Lender Commitment ------ ---------- Assignor $ Assignee $ 5. Notes. Assignor and Assignee request Borrower to issue new Notes to Assignor and Assignee in the amounts of their respective Commitments under Paragraph 4 above and otherwise issued in accordance with the Credit Agreement. Upon delivery of those Notes, Assignor shall return to Borrower the Note previously delivered to Assignor under the Credit Agreement. 6. Payments and Adjustments. From and after the Effective Date, Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees, and other amounts) to Assignee. Assignor and Assignee shall make all appropriate adjustments in payments for periods before the Effective Date by Agent or with respect to the making of this assignment directly between themselves. EXHIBIT E - PAGE-2 7. Conditions Precedent. Paragraphs 1 through -5 above are not effective until (a) counterparts of this agreement are executed and delivered by Assignor and Assignee to -- and are executed in the spaces below by -- Borrower and Agent and (b) Agent receives from Assignor or Assignee a $3,500 processing fee. 8. Incorporated Provisions. Although this agreement is not a Loan Document, the provisions of Sections 1 and 14 of the Credit Agreement applicable to Loan Documents are incorporated into this instrument by reference the same as if this agreement were a Loan Document and those provisions were set forth in this agreement verbatim. 9. Communications. For purposes of Section 14.2 of the Credit Agreement, Assignee's address and telecopy number -- until changed under that section -- are beside its signature below. 10. Amendments, Etc.. No amendment, waiver, or discharge to or under this agreement is valid unless in writing that is signed by the party against whom it is sought to be enforced and is otherwise in conformity with the requirements of the Credit Agreement. 11. ENTIRETY. THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN ASSIGNOR AND ASSIGNEE ABOUT ITS SUBJECT MATTER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF ASSIGNOR AND ASSIGNEE. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN ASSIGNOR AND ASSIGNEE. 12. Parties. This agreement binds and benefits Assignor, Assignee, and their respective successors and assigns that are permitted under the Credit Agreement. EXECUTED as of the date first stated above. [ASSIGNOR] By:___________________________________ (Name)________________________________ (Title)_______________________________ [ASSIGNEE] By:___________________________________ (Name)________________________________ (Title)_______________________________ (Address) (Telecopy No.) EXHIBIT E - PAGE-3 As of the Effective Date, [Borrower] and Agent consent to this agreement and the transactions contemplated in it. [GOODRICH PETROLEUM COMPANY, L.L.C., as Borrower] By:___________________________________ (Name)________________________________ (Title)_______________________________ BNP PARIBAS, as Agent BY:___________________________________ (Name)________________________________ (Title)_______________________________ EXHIBIT E - PAGE-4 EX-10.3 4 dex103.txt CONSULTING SERVICES AGREEMENT EXHIBIT 10.3 [GOODRICH LOGO] CONSULTING SERVICES AGREEMENT THIS AGREEMENT, effective June 1, 2001, is by and between PATRICK E. MALLOY ("Consultant") and GOODRICH PETROLEUM CORPORATION ("Company") of 815 Walker, Suite 1040, Houston, Texas 77002. WHEREAS, the parties hereto desire to confirm in writing their agreement concerning consulting services that may be provided by Consultant for the Company. NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained, including the recital set forth above, the parties hereto agree as follows: 1. The term of this agreement shall be for two (2) years, commencing on the effective date hereof. 2. Consultant agrees to provide consulting services, on a non-exclusive basis, concerning the evaluation, research and implementation of the Company's oil and gas hedging activities and strategy. Consultant will assist management to devise and implement a hedging strategy and program in an effort to mitigate the risks associated with oil and gas commodity price volatility and to attempt to maximize the Company's realized oil and gas prices from its continuing operations. 3. The Company shall pay the Consultant an annual fee of ONE HUNDRED TWENTY THOUSAND AND NO/100 DOLLARS ($120,000.00). 4. Consultant shall perform his duties as directed by the Board of Directors and Chief Executive Officer of the Company. 5. Consultant shall perform all consulting assignments on a best-efforts basis. 6. Consultant shall be reimbursed by the Company for any reasonable expenses incurred by Consultant in the performance of the consulting services contemplated by this Agreement. Such expenses may include, but are not limited to, hotel accommodations, airfare, meals, auto rental, taxis and supplies. 7. To the extent and in the manner deemed appropriate by the Company, the Company agrees that Consultant may be supported by the Company through the assistance of various Company employees (e.g., secretarial and spreadsheet capability) in order to perform the consulting services most efficiently. 8. In the performance of this Agreement, Consultant may have access to private and confidential information owned or controlled by the Company. Such private and confidential information includes, but is not limited to, the terms of any agreement between the Company and any other participant or participants involved in the business of developing, drilling, producing or marketing hydrocarbons, information relating to any drilling or acquisition prospect, and any operating or performance information of the Company (all of the above information is collectively referred to as the "Confidential Information"). Consultant recognizes and agrees that all such Confidential Information is and shall remain the property of the Company. All information or data acquired by Consultant under this Agreement shall be and remain the Company's exclusive property, or the property of other participants or joint ventures of the Company or other third parties, as the case may be. Consultant shall keep any and all Confidential Information confidential, and shall not publish or disclose any Confidential Information or data to others without the Company's prior written approval. 9. Consultant shall perform all consulting services contemplated by this Agreement as an independent contractor. 10. The laws of the State of Texas will govern the interpretation, validity and effect of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the 1st day of June 2001. PATRICK E. MALLOY GOODRICH PETROLEUM CORPORATION (Consultant) (Company) /s/ PATRICK E. MALLOY By /s/ WALTER G. GOODRICH - ------------------------------ ----------------------------- Name: Walter G. Goodrich Title: President and CEO EX-10.7 5 dex107.txt LOAN AGREEMENT EXHIBIT 10.7 LOAN AGREEMENT BETWEEN GOODRICH PETROLEUM COMPANY, L.L.C., A LOUISIANA LIMITED LIABILITY COMPANY (BORROWER) AND MALLOY ENERGY COMPANY, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY (LENDER) TABLE OF CONTENTS
PAGE ---- ARTICLE I. DEFINITIONS.......................................................... 1 1.1 Defined Terms......................................................... 1 1.2 Accounting Terms...................................................... 5 1.3 Singular/Plural....................................................... 5 1.4 Other Terms........................................................... 5 ARTICLE II. AMOUNT AND TERMS OF THE LOANS....................................... 6 2.1 Loans................................................................. 6 2.2 Note.................................................................. 7 2.3 Payments; Mandatory Prepayments....................................... 7 2.4 Interest.............................................................. 8 2.5 Method of Payments; Computations...................................... 9 2.6 Use of Proceeds....................................................... 9 2.7 Recovery of Payments.................................................. 9 2.8 Subordination......................................................... 10 ARTICLE III. CLOSING; CONDITIONS OF CLOSING AND BORROWING....................... 10 3.1 Conditions of Closing and the making of the Initial Loan.............. 10 3.2 Conditions of All Loans............................................... 10 ARTICLE IV. REPRESENTATIONS AND WARRANTIES...................................... 11 4.1 Corporate Organization and Power...................................... 11 4.2 Litigation; Government Regulation..................................... 11 4.3 Taxes................................................................. 11 4.4 Enforceability of Loan Documents; Compliance with Other Instruments... 11 4.5 Event of Default...................................................... 12 4.6 Full Disclosure....................................................... 12 4.7 Title to Assets....................................................... 12 4.8 Use of Proceeds....................................................... 12 4.9 Priority.............................................................. 12 ARTICLE V. AFFIRMATIVE COVENANTS................................................ 13 5.1 Financial and Business Information about the Borrower................. 13 5.2 Notice of Certain Events.............................................. 13 5.3 Corporate Existence and Maintenance of Properties..................... 13 5.4 Payment of Debt....................................................... 14 5.5 Maintenance of Insurance.............................................. 14 5.6 Maintenance of Books and Records; Inspection.......................... 14 5.7 Compliance with Laws.................................................. 14 5.8 Name Change........................................................... 15 5.9 Additional Collateral................................................. 15
i ARTICLE VI. NEGATIVE COVENANTS.................................................. 15 6.1 Merger, Consolidation, Ownership...................................... 15 6.2 Liens and Encumbrances................................................ 15 6.3 Disposition of Assets................................................. 15 6.4 Transactions with Related Persons..................................... 15 ARTICLE VII. EVENTS OF DEFAULT.................................................. 16 7.1 Events of Default..................................................... 16 ARTICLE VIII. RIGHTS AND REMEDIES AFTER EVENT OF DEFAULT ....................... 17 8.1 Remedies.............................................................. 17 8.2 Right of Setoff....................................................... 18 ARTICLE IX. LENDER ACQUISITION RIGHTS........................................... 18 9.1 Option Interest....................................................... 18 9.2 Extension of Election Period.......................................... 19 9.3 Reduction of Maximum Line of Credit Amount............................ 19 ARTICLE X. MISCELLANEOUS........................................................ 19 10.1 Survival.............................................................. 19 10.2 Governing Law; Consent to Jurisdiction; Waiver of Jury Trial.......... 20 10.3 Notice................................................................ 20 10.4 Amendments, Waivers, etc.............................................. 21 10.5 Rights and Remedies Cumulative, Non-Waiver, etc....................... 21 10.6 Binding Effect, Assignment............................................ 22 10.7 Severability.......................................................... 22 10.8 Entire Agreement...................................................... 22 10.9 Interpretation........................................................ 22 10.10 Counterparts, Effectiveness........................................... 22 10.11 Conflict of Terms..................................................... 22 10.12 Injunctive Relief..................................................... 22 10.13 Expenses of the Lender................................................ 23
ii LOAN AGREEMENT THIS LOAN AGREEMENT, effective as of the 8th day of March, 2002, is made between GOODRICH PETROLEUM COMPANY, L.L.C., a Louisiana limited liability company (the "Borrower") and MALLOY ENERGY COMPANY, L.L.C., a Delaware limited liability company (the "Lender"). RECITALS WHEREAS, the Lender is willing to make the Loans described herein based on the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby agree as follows: ARTICLE I. DEFINITIONS 1.1 Defined Terms. For purposes of this Loan Agreement, in addition to the terms defined elsewhere in this Loan Agreement, the following terms shall have the meanings set forth below: "Affiliate" shall mean, as to any Person, each of the Persons that directly or indirectly, through one or more intermediaries, owns or controls, or is controlled by or under common control with, such Person. For the purpose of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of management and policies through the ownership of voting securities, by agreement or otherwise. "Agreement" or "this Agreement" or "Loan Agreement" shall mean this Loan Agreement and any amendments, modifications and supplements hereto, any replacements, renewals, extensions and restatements hereof, and any substitutes herefor, in whole or in part and all Schedules and Exhibits hereto. "Authorized Officer" shall mean any officer of the Borrower authorized by Borrower to take the action specified herein. "Bankruptcy Code" shall mean 11 U.S.C. (S) 101 et seq., as amended, and any successor statute or statute having substantially the same function. "Borrowing" shall mean the incurrence by the Borrower on a given date of a Loan. "Borrowing Date" shall have the meaning assigned to such term in Section 2.1. "Business Day" shall mean any day other than a Saturday or Sunday, a legal holiday or a day on which commercial banks in New York, New York, are required by law to be closed. 1 "Capital Lease" shall mean any lease of any property that would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on the balance sheet of the lessee. "Closing" shall mean the closing of the execution and delivery of this Agreement. "Closing Date" shall mean the date upon which the Closing takes place. "Collateral" shall mean (x) all right, title and interest of the Borrower in the Collateral described in the Mortgage and (y) all other collateral at any time and from time to time granted to secure any of the Obligations, whether in accordance with Section 5.9 hereof or otherwise. "Default" shall mean any event that, with the passage of time or giving of notice, or both, would constitute an Event of Default. "Dollars" or "$" shall mean dollars of the United States of America. "Event of Default" shall have the meaning specified in Article VII hereof. "Financing Statements" shall mean financing statements approved for filing in accordance with the applicable adopted version of the Uniform Commercial Code and all other titles, documents, and certificates that the Lender may require from the Borrower or any other Loan Party to describe and perfect the security interests created hereunder, under the Mortgage or under the other Loan Documents, and all assignments thereof and amendments thereto, in form and substance satisfactory to the Lender. "GAAP" shall mean generally accepted accounting principles, as in effect from time to time, applied on a consistent basis. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any central bank thereof, any municipal, local, city or county government, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Highest Lawful Rate" shall have the meaning specified in Section 2.4(c) hereof. "IRS" shall mean the Internal Revenue Service and any successor thereto. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Loan" shall have the meaning specified in Section 2.1(a). "Loan Documents" shall mean and collectively refer to this Agreement, the Note, the Mortgage, the Financing Statements, and any and all agreements, instruments and documents, including, without limitation, guaranties, mortgages, deeds to secure debt, deeds of trust, chattel mortgages, pledges, powers of attorney, consents, assignments, contracts, notices, security agreements, trust account agreements and all other written matters, whether heretofore, now or 2 hereafter, executed by or on behalf of the Borrower or any Subsidiary or any other Person and delivered to the Lender, with respect to securing the Obligations under this Agreement and the other Loan Documents or otherwise with respect to the extensions of credit contemplated by this Agreement, including, without limitation, those agreements and other documents executed and delivered in accordance with Section 5.9 hereof, and in each case, together with any amendments, modifications and supplements thereto, any replacements, renewals, extensions and restatements thereof, and any substitutes therefor, in whole or in part. "Loan Party" means the Borrower or any other Person who at any time executes and delivers to the Lender a Loan Document. "Margin Stock" means any margin stock within the meaning of Regulation U or X of the Board of Governors of the Federal Reserve System or any other regulations, interpretations or rulings thereunder. "Material Adverse Effect" or "Material Adverse Change" shall mean a material adverse effect upon, or a material adverse change in, any of (a) the condition (financial or otherwise), operations, business, properties or prospects of the Borrower or any of its Subsidiaries; or (b) the ability of the Borrower or any Loan Party to perform under the Loan Documents. "Maturity Date" shall mean December 31, 2004. "Maximum Line of Credit Amount" shall mean at any time the maximum amount of Loans that may be advanced at such time pursuant to the terms hereof and shall initially be $7,700,000.00, subject to reduction from time to time pursuant to the provisions of Article IX hereof. "Mortgage" shall mean that certain Mortgage and Security Agreement dated as of the date hereof by and between the Borrower and the Lender pursuant to which the Borrower has granted to the Lender a mortgage on and security interest in all of its property and assets as collateral security for the Obligations under this Agreement and the other Loan Documents. "Notice of Borrowing" shall have the meaning assigned to such term in Section 2.1(b). "Note" shall mean the promissory note referred to in the first sentence of Section 2.2 together with any amendments, modifications and supplements thereto and renewals, extensions and restatements thereof, and any substitutes therefor. "Obligations" shall mean (i) the Loans and all other loans, advances, indebtedness, liabilities, obligations, covenants and duties owing, arising, due or payable from the Borrower or any other Loan Parties to the Lender of any kind or nature, present or future, howsoever evidenced, created, incurred, acquired or owing, arising under this Agreement, the Note or the other Loan Documents, whether direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired and (ii) all interest (including, to the extent permitted by law, all post-petition interest), charges, expenses, fees, attorneys' fees and any other sums payable by the Borrower or any other Loan Party to the Lender under this Agreement or any of the other Loan Documents. 3 "Oil and Gas Assets" shall have the meaning assigned to such term in Article IX hereof. "Option Interests" shall have the meaning assigned to such term in Article IX hereof. "Permitted Liens" shall mean any of the following liens, restrictions or encumbrances securing any liability or indebtedness of the Borrower or any Subsidiary on, or otherwise affecting, any of the Borrower's or such Subsidiary's property, real or personal, whether now owned or hereafter acquired: (a) Senior Liens; (b) Liens granted to Lender; (c) Liens imposed by mandatory provisions of law of carriers, warehousemen, mechanics, repairmen and materialmen and other like liens required by provisions of law and incurred in the ordinary course of business for sums not yet due and payable (or with respect to any obligation not greater than $5,000, not more than sixty (60) days past the date of service) or that are being contested in good faith and with due diligence by appropriate proceedings; (d) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits, or liens arising from good faith deposits in connection with letters of credit, bids, tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business, provided that all such liens in the aggregate would not have a Material Adverse Effect; (e) Liens for current taxes, assessments or other governmental charges that are not delinquent or remain payable without any penalty or that are being contested in good faith and with due diligence by appropriate proceedings, provided that all such liens in the aggregate have no Material Adverse Effect; (f) Easements, rights of way, zoning restrictions and other similar encumbrances on real estate that do not materially impair the value of the property to which they relate; and (g) Any other liens or encumbrances constituting Permitted Liens under the Senior Agreement or as the Lender may otherwise approve in writing from time to time. "Person" shall mean a corporation, an association, a joint venture, a partnership, an organization, a business, an individual, a trust or a government or political subdivision thereof or any government agency or other Governmental Authority or any other legal entity. "Purchase Agreement" shall have the meaning assigned to such term in Article IX hereof. "Requirement of Law" means, as to any Person, the charter, articles or certificate of incorporation and bylaws or other organizational or governing documents of such Person, and any statute, law, treaty, rule, regulation, order, decree, writ, injunction or determination of any arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. 4 "Senior Agreement" shall mean that certain Credit Agreement dated November 9, 2001 by and between Goodrich Petroleum Company, L.L.C., the Lenders now or hereafter party thereto (the "Senior Lenders") and BNP Paribas, as agent for such Senior Lenders (the "Senior Agent"), as the same may be modified, amended or restated from time to time. "Senior Indebtedness" shall mean (i) all loans, advances, indebtedness, liabilities, obligations, covenants and duties owing, arising, due or payable from the Borrower to Senior Agent, any Senior Lender or any of their respective Affiliates of any kind or nature, present or future, howsoever evidenced, created, incurred, acquired or owing arising under the Senior Agreement, or any other Loan Document (as defined in the Senior Agreement) or Swap Agreement (as defined in the Senior Agreement), or in any other way related to such agreement, whether direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired and (ii) all interest (including, to the extent permitted by law, all post-petition interest), charges, expenses, fees, attorneys' fees and any other sums payable by the Borrower to Senior Agent or any Senior Lender under the Senior Agreement, any Swap Agreement or any of the other Loan Documents (as defined in the Senior Agreement). "Senior Liens" shall mean the liens granted in favor of Senior Agent or any Senior Lender pursuant to or in connection with the Senior Agreement. "Subordination Agreement" means that certain Subordination and Intercreditor Agreement of even date herewith by and among Lender, Borrower, the "Guarantors" described therein and Senior Agent, as the same may be modified, restated or amended from time to time. "Subsidiary" of any Person means (x) any entity of which more than 50% (in number of votes) of the voting capital stock (or equivalent interests) is owned of record or beneficially, directly or indirectly through one or more intermediaries, by that Person or (y) any general or limited partnership of which such Person, or any of its Subsidiaries, is the sole, controlling or managing general partner. "Uniform Commercial Code" shall mean the Uniform Commercial Code of the State of New York, as amended from time to time, unless in any particular instance the Uniform Commercial Code of another state is applicable, in which case it shall mean the Uniform Commercial Code of such state. 1.2. Accounting Terms. Any accounting terms used in this Agreement that are not specifically defined shall have the meanings customarily given them in accordance with GAAP, acknowledging that Borrower employs the cash method of accounting for income tax reporting purposes. 1.3 Singular/Plural. Unless the context otherwise requires, words in the singular include the plural and words in the plural include the singular. 1.4 Other Terms. All other terms contained in this Agreement shall, when the context so indicates, have the meanings provided for by the Uniform Commercial Code of the 5 State of New York, as in effect on the date hereof, to the extent the same are used or defined therein. ARTICLE II. AMOUNT AND TERMS OF THE LOANS 2.1 Loans. (a) Until the Maturity Date, and subject to the terms and conditions herein contained, the Lender shall provide a line of credit (the "Line of Credit") to the Borrower as provided in this Section 2.1. The parties hereto agree that all loans made under the Line of Credit shall be subject to and on the terms and conditions of this Agreement (each such loan, a "Loan" and collectively, the "Loans"). The Loans shall be made to the Borrower, from time to time on any Business Day during the period from the date hereof to but not including the Maturity Date, provided that (i) the aggregate principal amount of the Loans at any time outstanding shall not exceed the Maximum Line of Credit Amount; and (ii) no Borrowing shall be requested by the Borrower or made by the Lender if, immediately after giving effect thereto, a Default or Event of Default would exist. The proceeds of the Loans shall be used by Borrower for capital expenditures, for acquisitions of oil and gas interests, for drilling and completion expenses, for general working capital needs and for any other purpose approved by Lender, but in no event shall the proceeds of any Loan be used for the purpose of purchasing or carrying any Margin Stock. (b) The Borrower may request no more than two (2) Borrowings under the Line of Credit in any calendar month. Whenever the Borrower desires to make a Borrowing under the Line of Credit, the Borrower will give the Lender written notice (by telecopier or otherwise), prior to 11:00 a.m., Houston time, at least five (5) Business Days prior to such Borrowing. Each such notice (each, a "Notice of Borrowing") shall be irrevocable and shall be appropriately completed to specify (i) the principal amount of the Loan to be made pursuant to such Borrowing; (ii) the requested date of the Borrowing (the "Borrowing Date"), which shall be a Business Day; and (iii) the intended use of the proceeds of such Borrowing. In addition, the Borrower shall deliver such other documentation relating to the proposed Borrowing or the Borrower's business and operations as the Lender may, in its sole discretion, request. (c) The Lender will make the amount of such Borrowing available to the Borrower according to the instructions contained in the Notice of Borrowing, no later than 2:00 p.m., Houston time, on the Borrowing Date. The Borrower hereby authorizes the Lender to disburse the proceeds of each Borrowing in accordance with the terms of any written instructions from any of the Authorized Officers. (d) Interest on the Loans shall accrue in accordance with the provisions of Section 2.4. Accrued (and theretofore unpaid) interest on the Loans shall be payable the first day of each month commencing with May, 2002 and continuing monthly thereafter. (e) The Borrower shall have the right from time to time to prepay the Loans, in whole or in part, without premium or penalty, and may reborrow any sums so repaid on the terms set forth herein. 6 (f) The Loans are subject to payment, from time to time, as a result of the Lender's obligation to pay for Option Interests by reducing the amount of outstanding principal on the Loans as more specifically set forth in Article IX hereof. 2.2 Note. (a) The Loans made by the Lender shall be evidenced by a promissory note appropriately completed in substantially the form of Exhibit A. The Note issued to the Lender shall (i) be executed by the Borrower, (ii) be payable to the order of the Lender, (iii) be dated as of the date hereof, (iv) be in a stated principal amount equal to the initial Maximum Line of Credit Amount, (v) bear interest in accordance with the provisions of Section 2.4, as the same may be applicable from time to time, and (vi) be entitled to all of the benefits of this Agreement and the other Loan Documents and subject to the provisions hereof and thereof. (b) The Lender will record on its internal records the amount of each Loan made by it and each payment received by it in respect thereof; provided, however, that the failure of the Lender to make any such recordation or any error in such recordation shall not affect the Borrower's obligations in respect of such Loans. Within 30 days after the end of each month, the Lender shall furnish to the Borrower a detailed summary of all Borrowings, interest charges, payments and prepayments hereunder during such month; provided, however, that the failure to so furnish any such summary(ies) shall not affect the Borrower's obligations hereunder or under any other Loan Document; nor shall the Lender have any liability for any such failure(s). 2.3 Payments; Mandatory Prepayments. (a) In the event that the principal amount of Loans outstanding as of any date shall exceed the Maximum Line of Credit Amount as of such date, the Borrower shall prepay the amount of such excess within five (5) days after receipt of notice of such excess from the Lender. (b) The Borrower shall repay the Note in full on the Maturity Date, together with all accrued and unpaid interest thereon to such date. (c) All payments under this Agreement and the Note shall be made in the State of New York to such bank account as shall be designated from time to time by the Lender to the Borrower. In the event that payments made hereunder by the Borrower at any particular time are insufficient to satisfy in full the outstanding Obligations, such payments shall be applied (i) first, to expenses due pursuant to the terms of this Agreement or any other Loan Document, (ii) second, to accrued and unpaid interest on Loans and (iii) third, to the outstanding principal amount of Loans. 7 2.4 Interest. (a) The Borrower will pay interest in respect of the unpaid principal amount from time to time of the Loans, from the date of Borrowing thereof until such principal amount shall be paid in full, at a rate per annum equal to the lesser of (i) eight percent (8%) per annum and (ii) the Highest Lawful Rate. (b) Upon the occurrence and during the continuance of an Event of Default, all outstanding principal amounts of the Loans and, if and to the extent permitted by law, all interest accrued on the Loans and all other fees and amounts not paid when due hereunder, shall bear interest at a rate per annum equal to the lesser of (i) twelve percent (12%) per annum and (ii) the Highest Lawful Rate and such interest shall be payable on demand. To the greatest extent permitted by law, interest shall continue to accrue after the filing by or against the Borrower of any petition seeking any relief in bankruptcy or under any law pertaining to insolvency or debtor relief. (c) It is the intention of the parties hereto to conform strictly to applicable usury laws regarding the use, forbearance or detention of the indebtedness evidenced by this Agreement, the Note and the other Loan Documents, whether such laws are now or hereafter in effect, including the laws of the United States of America or any other jurisdiction whose laws are applicable, and including any subsequent revisions to or judicial interpretations of those laws, in each case to the extent they are applicable to this Agreement, the Note and the other Loan Documents (the "Applicable Usury Laws"). Accordingly, if any acceleration of the maturity of the Note or any payment by the Borrower or any other Person results in the Borrower or such other Person being deemed to have paid any interest in excess of the Maximum Amount, as hereinafter defined, or to have paid unearned interest in violation of any Applicable Usury Law, or if any transaction contemplated hereby or by any other Loan Document would otherwise be usurious under any Applicable Usury Laws, then, in that event, notwithstanding anything to the contrary in this Agreement or any other Loan Document or any other agreement or instrument, it is agreed as follows: (i) the provisions of this Section 2.4(c) shall govern and control; (ii) the aggregate of all interest under Applicable Usury Laws that is contracted for, charged or received under this Agreement, or under any of the other aforesaid agreements or instruments or otherwise shall under no circumstances exceed the Maximum Amount, and any excess shall be promptly refunded to the Borrower or such other Person by the Lender; (iii) neither the Borrower nor any other Person shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Amount; and (iv) the effective rate of interest on the Loan shall be ipso facto reduced to the Highest Lawful Rate, and the provisions of this Agreement, the Note and the other Loan Documents immediately shall be deemed reformed, without the necessity of the execution of any new document or instrument, so as to comply with all Applicable Usury Laws. All sums paid, or agreed to be paid, to the Lender for the use, forbearance or detention of the indebtedness of the Borrower to the Lender evidenced by this Agreement and the Note and the other Loan Documents shall, to the fullest extent permitted by the Applicable Usury Laws, be amortized, pro rated, allocated and spread throughout the full term of the indebtedness evidenced by this Agreement, the Note and the other Loan Documents so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. As used herein, the term "Highest Lawful Rate" means the maximum rate of interest, if any, that may be charged under all Applicable Usury Laws on the principal balance of the Loans from 8 time to time outstanding; and the term "Maximum Amount" means the maximum nonusurious amount of interest which may be lawfully contracted for, charged or received by the Lender in connection with the indebtedness evidenced by this Agreement, the Note and other Loan Documents under all Applicable Usury Laws. If at any time the stated rate of interest provided for under Sections 2.4(a) or (b), together with any other fees and additional amounts payable hereunder or under any other agreements or instruments that are deemed to constitute interest under Applicable Usury Laws (the "Additional Interest"), exceeds the Highest Lawful Rate, then the amount of interest to accrue pursuant to this Agreement and the Note and the other Loan Documents shall be limited, notwithstanding anything to the contrary in this Agreement or the Note or any other Loan Document or any other agreement or instrument, to the amount of interest that would accrue at the Highest Lawful Rate; provided, however, that to the fullest extent permitted by Applicable Usury Laws, any subsequent reductions in the Interest Rate shall not reduce the interest to accrue pursuant to this Agreement, the Note and the other Loan Documents below the Highest Lawful Rate until the aggregate amount of interest actually accrued pursuant to this Agreement, the Note and the other Loan Documents, together with all Additional Interest, equals the amount of interest which would have accrued if the stated interest rate provided hereunder had at all times been in effect and such Additional Interest, if any, had been paid in full. 2.5 Method of Payments; Computations. (a) Except as expressly set forth in Article IX hereof, all payments by the Borrower hereunder and under the Note shall be made without setoff, counterclaim or other defense, in Dollars and in immediately available funds to the Lender prior to 2 p.m., Houston time, on the date payment is due. Any such payment made as required hereinabove, but after 2 p.m., Houston time, shall be deemed to have been made on the next succeeding Business Day. If any payment falls due on a day that is not a Business Day, then such due date shall be extended to the next succeeding Business Day, and such extension of time shall then be included in the computation of payment of interest, fees or other applicable amounts. (b) All computations of interest and fees hereunder shall be made on the basis of a year consisting of 365 or 366 days, as applicable, and the actual number of days (including the first day, but excluding the last day) elapsed. 2.6 Use of Proceeds. The proceeds of each Loan shall be used for the purposes specified in the Notice of Borrowing relating to such Loan and in accordance with Section 2.1(a) hereof. 2.7 Recovery of Payments. The Borrower agrees that to the extent the Borrower makes a payment or payments to or for the account of the Lender, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy, insolvency or similar state or federal law, or otherwise at law or equity, then, to the extent of such payment or repayment and to the extent permitted by law, the Obligation intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been received. 9 2.8 Subordination. The Obligations shall be, to the extent and in the manner set forth in the Subordination Agreement, subordinated and junior in right of payment to the prior indefeasible payment in full of all Senior Debt (as defined therein). ARTICLE III. CLOSING; CONDITIONS OF CLOSING AND BORROWING 3.1 Conditions of Closing and the making of the Initial Loan. No Loans shall be made by Lender hereunder unless the following conditions precedent shall have been satisfied: (a) The Lender shall have received the following, each dated as of the Closing Date (unless otherwise specified): (i) counterparts hereof signed by each of the parties hereto; (ii) the Note; (iii) the Mortgage, duly completed and executed by the Borrower; (iv) an acknowledgement copy, or other evidence satisfactory to the Lender, of the proper filing or recording of each document (including Financing Statements) to be filed or recorded in each jurisdiction in which the filing or recording is necessary or appropriate in order to create in favor of the Lender, a valid, legal and perfected first priority security interest in or lien on the Collateral that is the subject of the Mortgage, subject only to Permitted Liens; 3.2 Conditions of All Loans. No Loans shall be made by Lender unless the following conditions precedent have been satisfied on the relevant Borrowing Date: (a) The Lender shall have received a Notice of Borrowing in accordance with Section 2.1(b); (b) Each of the representations and warranties made by the Borrower and each other Loan Party contained in Article IV or any other Loan Document shall be true and correct on and as of such Borrowing Date, with the same effect as if made on and as of the Borrowing Date, except to the extent, with the prior written consent of the Lender, the facts upon which such representation and warranty are based may be changed as a result of transactions permitted or contemplated hereby or such representation or warranty relates solely to a prior date; (c) No Default or Event of Default shall have occurred and be continuing on such date, both immediately before and after giving effect to the Loans to be made; and (d) The security interests in the Collateral previously pledged to the Lender pursuant to the Loan Documents shall remain perfected security interests second in priority only to the Senior Liens and other applicable Permitted Liens and shall be in full force and effect. (e) The use of proceeds of the Borrowing, as specified in the Notice of Borrowing, shall comply with Section 2.1. 10 (f) The Lender shall have received such other documents or certificates, in form and substance reasonably satisfactory to the Lender, as it may reasonably request in connection with such Loan. Each giving of a Notice of Borrowing and the consummation of each Borrowing shall be deemed to constitute a representation by the Borrower that the statements contained in subsections (b), (c), (d) and (e) above are true, both as of the date of such notice or request and as of the relevant Borrowing Date. ARTICLE IV. REPRESENTATIONS AND WARRANTIES In order to induce the Lender to enter into this Loan Agreement and extend the credit contemplated hereby, the Borrower makes the following warranties and representations to the Lender: 4.1 Corporate Organization and Power. (a) The Borrower is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Louisiana and each other Loan Party is an entity duly organized, validly existing and in good standing under the laws of its state of organization; and (b) each of the Borrower and the other Loan Parties has the power to own and grant a lien on and security interest in the Collateral it has granted in favor of the Lender and to engage in the transactions contemplated hereby and by the other Loan Documents to which it is a party; and each has the full power, authority and legal right to execute and deliver this Agreement and the other Loan Documents to which it is a party and to perform and observe the terms and provisions thereof. 4.2 Litigation; Government Regulation. (a) There are no judgments, injunctions or similar orders or decrees and no actions, suits, investigations or proceedings pending (pursuant to which the Borrower or any of its Subsidiaries has been served) or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries or their respective businesses at law or in equity before any court, arbitrator or other Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, and (b) neither the Borrower nor any of its Subsidiaries is in material violation of or in material default under any Requirement of Law. 4.3 Taxes. Neither the Borrower nor any of its Subsidiaries is delinquent in the payment of any material amount of taxes that have been levied or assessed by any Governmental Authority against it or its assets. Each of the Borrower and its Subsidiaries (a) has timely filed all tax returns required to be filed by law, and has paid all taxes shown on said returns and all other assessments or fees levied upon it or upon its properties to the extent that such taxes, assessments or fees have become due, and if not due, such taxes have been adequately provided for and sufficient reserves therefor established on its books of account, and (b) is current with respect to payment of all federal and state withholding taxes, social security taxes and other payroll taxes. 4.4 Enforceability of Loan Documents; Compliance with Other Instruments. Each of the Loan Documents to which the Borrower or any other Loan Party is a party, has been 11 duly authorized by all necessary action on the part of each such Loan Party, has been validly executed and delivered by each such Loan Party which is a party thereto and is the legal, valid and binding obligation of each such Loan Party which is a party thereof, enforceable against each such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditor's rights generally or by general principles of equity. Neither the Borrower nor any of its Subsidiaries is in default with respect to any indenture, loan agreement, mortgage, lease, deed or similar agreement related to the borrowing of monies to which it is a party or by which it, or any of its property, is bound except where such default could not reasonably be expected to have a Material Adverse Effect. Neither the execution, delivery or performance of the Loan Documents by the Borrower or any other Loan Party, nor compliance by the Borrower or any other Loan Party therewith: (a) conflicts or will conflict with or results or will result in any breach of, or constitutes or will constitute with the passage of time or the giving of notice or both, a default under, (i) any Requirement of Law or (ii) any written or oral agreement or instrument to which the Borrower or any other Loan Party is a party or by which it, or any of its property, is bound, or (b) results or will result in the creation or imposition of any lien, charge or encumbrance upon the properties of the Borrower or any other Loan Party pursuant to any such agreement or instrument. 4.5 Event of Default. No Default or Event of Default has occurred and is continuing. 4.6 Full Disclosure. There is no fact related to the business of the Borrower or any of its Subsidiaries that the Borrower has not disclosed to the Lender that may reasonably be expected to result in a Material Adverse Effect. 4.7 Title to Assets. The Borrower has good and indefeasible title to the Collateral purported to be covered by the Mortgage, and each other Loan Party that is a party to a Loan Document contemplated by Section 5.9 has good and indefeasible title to the Collateral purported to be covered thereby, in each case free and clear of all liens, claims, security interests and encumbrances except Permitted Liens, including without limitation the Senior Liens. 4.8 Use of Proceeds. The Borrower's use of the proceeds of any Loans made by the Lender to the Borrower pursuant to this Agreement are and will be legal and proper business uses, and such uses are and will be consistent in all material respects with all applicable laws and statutes, as in effect from time to time, and with Section 2.1 (a) hereof. 4.9 Priority. Except for Permitted Liens, when the initial Loans are made hereunder, this Agreement, together with the other Loan Documents, will create valid and perfected security interests and liens in and upon the Collateral purported to be covered thereby second only in priority to the Senior Liens, in each case enforceable against the Borrower and all other Persons in all relevant jurisdictions and securing the payment of all Obligations purported to be secured thereby. 12 ARTICLE V. AFFIRMATIVE COVENANTS The Borrower covenants and agrees that, until the termination of this Agreement and the payment in full of all principal and interest with respect to the Loans together with all other amounts then due and owing hereunder, it will comply and cause its Subsidiaries to comply with the following covenants. 5.1 Financial and Business Information about the Borrower and its Subsidiaries. The Borrower shall provide the following financial information and statements, and such additional information as requested by the Lender from time to time, all in form and detail reasonably acceptable to the Lender: (a) within 120 days of the end of each fiscal year of the Borrower, the Borrower's annual financial statements, compiled by a certified public accountant; (b) within 45 days of the end of each calendar quarter, the Borrower's unaudited quarterly financial statements; and (c) upon the Lender's request, the Borrower will furnish such information about the Collateral or the financial condition and operations of the Borrower and each of its Subsidiaries as the Lender may from time to time reasonably request and Borrower may supply without violation of its obligations to any third party. 5.2 Notice of Certain Events. The Borrower shall promptly, but in no event later than five (5) Business Days after the Borrower or any of its Subsidiaries obtains knowledge thereof, give written notice to the Lender of: (a) Any attachment, judgment, lien, levy or order that is placed on, assessed against or threatened against the Borrower or any of its Subsidiaries or any of the Collateral, except for Permitted Liens including, without limitation, the Senior Liens; (b) Any Default or Event of Default; and (c) Any matter that has resulted in a Material Adverse Change or that could reasonably be expected to have a Material Adverse Effect. 5.3 Corporate Existence and Maintenance of Properties. The Borrower shall and shall cause each of its Subsidiaries to: (a) Maintain and preserve in full force and effect (i) its existence as a limited liability company, in the case of the Borrower, or other legal entity, in the case of each such Subsidiary, and (ii) all material rights, privileges and franchises; (b) Keep its properties in good working order and condition (normal wear and tear excepted) and from time to time make all needed repairs to, renewals of or replacements of its properties (except to the extent that any of such properties are obsolete or are being replaced); and 13 (c) File or cause to be filed in a timely manner all reports, applications, estimates and licenses and other filings required by any Governmental Authority that, if not timely filed, could reasonably be expected to have a Material Adverse Effect. 5.4 Payment of Debt. The Borrower shall and shall cause each of its Subsidiaries to pay all material indebtedness when due and all other obligations in accordance with customary trade practices. 5.5 Maintenance of Insurance. (a) The Borrower shall and shall cause each of its Subsidiaries to maintain and pay for insurance on its properties, assets and business, now owned or hereafter acquired, against such casualties, risks and contingencies, and in such types and amounts and with such insurance companies, as shall be customary in its business and reasonably satisfactory to the Lender and, if requested, deliver certificates and copies of policies of such insurance to the Lender, provided, however, that such types and amounts of insurance in effect at the Closing Date shall continue to be satisfactory for the business of the Borrower (in existence as of the date hereof) as conducted as of the date of this Agreement. (b) If the Borrower or any of its Subsidiaries fails to obtain and maintain any of the policies of insurance required to be maintained hereunder or to pay any premium in whole or in part, then the Lender may, at the Borrower's expense, without waiving or releasing any obligation or Default by the Borrower hereunder, procure the same, but shall not be required to do so. All sums so disbursed by the Lender, including reasonable expenses and other charges related thereto, shall be payable on demand by the Borrower to the Lender and shall be additional Obligations hereunder, secured by the Collateral. (c) Upon the reasonable request of the Lender from time to time, the Borrower shall deliver to the Lender evidence that the insurance required to be maintained pursuant to this Agreement is in effect. 5.6 Maintenance of Books and Records; Inspection. The Borrower shall and shall cause each of its Subsidiaries to maintain adequate books, accounts and records and, upon reasonable request, to permit employees or agents of the Lender to inspect the properties of the Borrower or such Subsidiary relating to this Agreement and the other Loan Documents and to examine or audit the books, records, working papers and accounts of the Borrower and each such Subsidiary and make copies and memoranda of them, and to discuss the affairs, finances and accounts of the Borrower and its Subsidiaries with its officers, all at such times and from time to time during business hours as may be reasonably requested. 5.7 Compliance with Laws. The Borrower shall and shall cause each of its Subsidiaries to (i) have all material licenses, permits, certifications, approvals and authorizations required by Governmental Authorities or necessary to the ownership, occupation or use of its properties or the conduct of its business and maintain the same at all times in full force and effect for so long as is required, and (ii) comply in all material respects with all Requirements of Law in respect of the conduct of its business, the ownership of its property and the Collateral. 14 5.8 Name Change. The Borrower shall notify the Lender at least thirty (30) days prior to the effective date of any change of its name or the name of any Loan Party, and prior to such effective date the Borrower shall, or shall cause such Loan Party, as applicable, to have executed any required amended or new Financing Statements and other Loan Documents necessary to maintain and continue the mortgage on and perfected security interest of the Lender in all of its Collateral and shall have taken such other actions and executed such documents as the Lender shall reasonably require. 5.9 Additional Collateral. At any time the Borrower or any other Person pledges, assigns or grants a lien or security interest or otherwise provides collateral security in any property to secure any of the Senior Indebtedness, the Borrower shall, or shall cause such other Person, as the case may be, to execute and deliver to the Lender appropriate agreements, instruments and documents, in form and substance satisfactory to the Lender, granting a valid and perfected lien and security interest in favor of the Lender, to secure all of the Obligations, in all such property, second only in priority to the Senior Liens; provided, however, that no such grant need be made in any capital stock of the Borrower or any of its Subsidiaries. ARTICLE VI. NEGATIVE COVENANTS The Borrower covenants and agrees that, until the termination of this Agreement and the payment in full of all principal and interest with respect to the Loans together with all other amounts then due and owing hereunder: 6.1 Merger, Consolidation, Ownership. The Borrower will not, and will not permit any of its Subsidiaries to, liquidate, wind up or dissolve, or enter into any consolidation, merger or other such combination, or agree to do any of the foregoing; nor shall the Borrower or any of its Subsidiaries at any time, directly or indirectly, purchase or carry any Margin Stock. 6.2 Liens and Encumbrances. The Borrower will not, and will not permit any of its Subsidiaries to, create, assume or suffer to exist any deed of trust, mortgage or encumbrance, lien (including a lien of attachment, judgment or execution) or security interest (including the interest of a conditional seller of goods), securing a charge or obligation, in or on any of its property, real or personal, whether now owned or hereafter acquired, except for Permitted Liens including, without limitation, the Senior Liens. 6.3 Disposition of Assets. The Borrower will not, and will not permit any of its Subsidiaries to, sell, lease, transfer, convey or otherwise dispose of any of its assets or property, including, without limitation, the Collateral, except for sales of assets or property in the ordinary course of business and as otherwise may be permitted under the terms of the Senior Agreement. 6.4 Transactions with Related Persons. Other than transactions with the Lender and its Affiliates, the Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly make any loan or advance to, or purchase, assume or guarantee any debt to or from, any of its officers, directors, stockholders or Affiliates, or subcontract any operations to any 15 Affiliate, or enter into any transaction with any Affiliate, except (a) in the ordinary course of and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and (b) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arm's-length transaction with a Person not an Affiliate. ARTICLE VII. EVENTS OF DEFAULT 7.1 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default": (a) The Borrower fails to pay when due any principal of or interest on the Note within three (3) days of the date the same becomes due or fails to pay within ten (10) days of the date when due any fees, expenses or other payments hereunder or under any other Loan Document; (b) The Borrower or any other Loan Party fails or neglects to observe, perform or comply with any term, provision, condition or covenant contained herein or in any Loan Document except those specified in subsection (a) above (and except to the extent that violations of any such provisions or covenants otherwise trigger an Event of Default under any of the other subparagraphs of this Section 7.1), and such failure, if capable of being remedied, shall remain unremedied for fifteen (15) business days after the earlier of (i) notice thereof from the Lender or (ii) the Borrower or such Loan Party, as the case may be, acquires knowledge thereof; (c) The Borrower or any of its Subsidiaries fails or neglects to observe, perform or comply with any term, provision, condition or covenant contained in the Senior Agreement or any other material contract for borrowed money, and such failure or neglect continues beyond any grace period provided for therein; (d) If any representation or warranty made in writing by or on behalf of the Borrower or any other Loan Party in this Agreement, in the other Loan Documents or in any other agreement now existing or hereafter executed between the Borrower or such other Loan Party and the Lender in connection with any Loan Document, or in connection with the transactions contemplated hereby or thereby, shall prove to have been false or misleading in any material respect when made; (e) The occurrence of an "Event of Default" under any of the Loan Documents; (f) The occurrence of any material uninsured damage to or loss, theft or destruction of the Collateral or other assets of the Borrower or any of its Subsidiaries that has a Material Adverse Effect; (g) The Borrower or any Loan Party shall (i) file a voluntary petition or commence a voluntary case seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to controvert in a timely and appropriate manner, any petition or case of the 16 type described in subsection (h) below, (iii) apply for or consent to the appointment of or taking possession by a custodian, trustee, receiver or similar official for or of itself or all or a substantial part of its properties or assets, (iv) fail generally to pay its debts generally as they become due, or (v) make a general assignment for the benefit of creditors; (h) Any involuntary petition or case shall be filed or commenced against the Borrower or any Loan Party seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts, the appointment of a custodian, trustee, receiver or similar official for it or all or a substantial part of its properties or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, and such petition or case shall continue undismissed and unstayed for a period of sixty (60) days; or an order, judgment or decree approving or ordering any of the foregoing shall be entered in any such proceeding; (i) A notice of lien, levy or assessment in excess of $1,000,000 is filed of record against any portion of the assets of the Borrower or any of its Subsidiaries by the United States, or any department, agency or instrumentality thereof, or by any other Governmental Authority or if any taxes or debts in excess of $1,000,000 owing at any time or times hereafter to any one of them becomes a lien or encumbrance (other than a Permitted Lien) upon the Collateral or any other asset of the Borrower or any of its Subsidiaries, and the same is not dismissed, released, discharged or stayed pending appeal within thirty (30) days after the same becomes a lien or encumbrance or, in the case of ad valorem taxes, prior to the last day when payment may be made without penalty; (j) The entry of a judgment or the issuance of a warrant of attachment, execution or similar process against the Borrower or any of its Subsidiaries or any of their respective assets that is $1,000,000 or more in excess of proceeds of insurance which shall not be dismissed, discharged, stayed pending appeal or bonded within sixty (60) days after entry; (k) The occurrence of any Material Adverse Change; or (l) The existence of any security interests, liens or other encumbrances in any property of the Borrower or any of its Subsidiaries in excess of $20,000 in the aggregate at any time other than Permitted Liens including the Senior Liens. ARTICLE VIII. RIGHTS AND REMEDIES AFTER EVENT OF DEFAULT 8.1 Remedies. Upon and at any time after the occurrence and during the continuance of any Event of Default, the Lender may take any or all of the following actions at the same or different times: (a) Declare all or any part of the outstanding principal amount of the Loans, all unpaid interest accrued thereon, and all other amounts (excluding unearned interest) payable under this Agreement, the Note and the other Loan Documents to be immediately due and payable, whereupon such outstanding principal amounts, accrued interest and other such amounts shall become immediately due and payable without presentment, demand, protest, notice of intent to accelerate or other notice or legal process of any kind, all of which are hereby 17 knowingly and expressly waived by the Borrower to the extent permitted by law (provided that, upon the occurrence of an Event of Default pursuant to Sections 7.1(g) or (h), all of such outstanding principal amounts, accrued and unpaid interest and other such amounts shall automatically become immediately due and payable); (b) Terminate any further obligation on the part of the Lender to make any Loans hereunder; and (c) Exercise all rights and remedies available to it under this Agreement, the other Loan Documents and applicable law. 8.2 Right of Setoff. The Lender may, and is hereby authorized by the Borrower, at any time and from time to time, to the fullest extent permitted by applicable law, to set off any other indebtedness at any time owing by the Lender to or for the credit or the account of the Borrower against any or all of the Obligations now or hereafter existing, which are then due and payable. The Lender agrees to notify the Borrower ten (10) days prior to any such setoff or application. ARTICLE IX. LENDER ACQUISITION RIGHTS AND MAXIMUM LINE OF CREDIT 9.1 Option Interest. In connection with the transaction contemplated by the Purchase and Sale Agreement between the Borrower and the Lender dated as of March 4, 2002 (the "Purchase Agreement") and this Agreement, the Borrower hereby grants to the Lender the right to acquire up to thirty percent (30%) of the Borrower's or any of its Affiliates' interest in any Oil and Gas Assets acquired by the Borrower or any of its Affiliates during the period commencing with the Effective Time (as defined in the Purchase Agreement) and, subject to Section 9.2, ending on the Maturity Date (the "Option Interests") for a pro-rata portion of the Acquisition Cost (hereinafter defined) paid therefor by the Borrower or one or more of its Affiliates; provided, however, that in no event shall the Lender be entitled to acquire more than the dollar amount of Option Interests equal to the Maximum Line of Credit Amount as in effect immediately prior to any termination thereof in accordance with (S) 8.1 hereof. As used herein, the term Oil and Gas Assets shall mean any right, title or interest, whether direct or indirect, in, to or under any oil and gas property, oil and gas lease, mineral interest, overriding royalty interest, net profits interest, production payment, royalty interest, or other interest in oil and gas (including farmin agreements or similar contractual rights to acquire such interest) in the State of Louisiana, but shall exclude any leasehold interest within the boundaries of the projects described on Exhibit B hereto. As used herein, the term Acquisition Cost shall mean and include the price paid for the acquisition, together with all land-related and title review costs and expenses (including landman costs), brokerage fees and commissions, title examination fees and expenses, filing fees, attorney fees and other costs and expenses reasonably incurred by Borrower in connection with the acquisition. If any of the Option Interests covers contiguous lands that are partially within the State of Louisiana and partially outside the State of Louisiana, the Lender's acquisition rights pursuant to this Article IX shall also apply to that portion of such contiguous lands that are outside the State of Louisiana. Within five (5) business days of the closing of any acquisition of Oil and Gas Assets constituting Option Interests, the Borrower will give the Lender written notice thereof and 18 provide access to any and all information or data with respect to the terms of the acquisition and the Oil and Gas Assets covered thereby. Except as provided in Section 9.2 of this Agreement, the Lender must elect within a period of ninety (90) days from the date of its receipt of such notice whether to participate in the Option Interests. Such election must be made by written notice to the Borrower setting forth the percentage interest (not greater than thirty percent (30%)) in the Option Interests to be acquired by the Lender and the method of payment therefor. Failure by the Lender to notify the Borrower of its election within such ninety (90) day period shall be deemed an election not to participate. Payment by the Lender for Option Interests shall be made, at the Lender's option, by payment in cash or by reduction of the then outstanding principal amounts due the Lender under this Agreement, the Note or any other Loan Document (together, in the case of any such reduction, with the delivery of cash to the extent necessary to pay any amount due in respect of such Option Interest in excess of the aggregate amount of all principal amounts then outstanding). For purposes of this Agreement, reductions of amounts due to the Lender under this Agreement, the Note and the other Loan Documents shall be treated as a payment of principal by the Borrower to the Lender. For each dollar paid (or deemed paid) by the Lender, in respect of Option Interests acquired by Lender under this Article IX, the Maximum Line of Credit Amount shall be automatically and permanently reduced by a corresponding amount. The closing of the Lender's acquisition of any Option Interests shall occur within five (5) business days of the Borrower's receipt of a notice from the Lender setting forth its election to acquire Option Interests. If Lender elects to acquire the Option Interests, such acquisition shall be effective as of the date that Borrower acquires the Oil and Gas Assets and the Borrower and Lender shall make such accounting adjustments and payments as are necessary to give effect to the Lender's acquisition as of such effective date. 9.2 Extension of Election Period. In the event that the terms of the Subordination Agreement prohibit the Borrower's exchange of the Option Interest for reduction of outstanding obligations due to the Lender as herein described, and the Lender does not elect to pay for such Option Interest in cash, then the ninety (90) day period provided for Lender's election to participate in the Option Interests shall be extended until ninety (90) days from the date after such prohibition under the Subordination Agreement is extinguished, whether by operation of the provisions of the Subordination Agreement, or by payment in full of all Senior Indebtedness, or otherwise. 9.3 Reduction of Maximum Line of Credit Amount. The Borrower has informed the Lender that it is considering making an acquisition from Greka Energy of an interest in the Potash Field in Plaquemines Parish, Louisiana, and in anticipation of that acquisition the parties have agreed that the Maximum Line of Credit Amount shall initially be $7,700,000. In the event that the Borrower has not for any reason completed such Potash Field acquisition by December 31, 2002, then, the Maximum Line of Credit Amount shall automatically and without further action be reduced by $2,700,000 effective as of January 1, 2003. ARTICLE X. MISCELLANEOUS 10.1 Survival. The representations and warranties made by or on behalf of the Borrower in this Agreement and in each other Loan Document shall survive the execution and 19 delivery of this Agreement and each such other Loan Document until the satisfaction of all of Obligations and the termination of this Agreement. 10.2 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT, THE NOTE AND (EXCEPT AS OTHERWISE PROVIDED THEREIN) EACH OTHER LOAN DOCUMENT SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. (b) ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO OR ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS AGREEMENT, THE NOTE OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDER, IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK. THE BORROWER HEREBY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE LENDER IN ACCORDANCE WITH THIS SECTION. (c) The Borrower hereby irrevocably designates CT Corporation System, or such other corporate process agent as is acceptable to the Lender, as the designee, appointee and agent of the Borrower to receive, for and on behalf of the Borrower, service of process out of any of the aforementioned courts in any legal action or proceeding with respect to this Agreement, any other Loan Document or any document related thereto and agrees to take all necessary steps to effectuate such appointment. It is understood that a copy of such process served by such agent will be promptly forwarded by mail to the Borrower at its address specified below, but the failure of the Borrower to receive such copy shall not to the extent permitted by law affect in any way the service of such process. The Borrower further irrevocably consents to the service of process of any of the courts set forth in clause (b) above in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at such address, such service to become effective four (4) days after mailing. Nothing herein shall affect the right of the Lender to serve process in any other manner permitted by law. (d) THE BORROWER AND THE LENDER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM, OR OTHER LITIGATION THAT RELATES TO OR ARISES OUT OF ANY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR OTHERWISE WITH RESPECT THERETO. THE PROVISIONS OF THIS SECTION ARE A MATERIAL INDUCEMENT FOR THE LENDER ENTERING INTO THIS AGREEMENT. 10.3 Notice. All notices and other communications provided for hereunder or in connection herewith shall be in writing (including telegraphic, telex, facsimile transmission or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered to the party to be notified at the following addresses: 20 If to the Lender: Malloy Energy Company, L.L.C. Bay Street at the Waterfront P.O. Box 1979 Sag Harbor, New York 11963 Attention: Patrick Malloy Telephone: 631-725-4540 Telecopier: 631-725-0334 If to the Borrower: Goodrich Petroleum Company, L.L.C. 815 Walker, Suite 1040 Houston, Texas 77002 Attention: Robert C. Turnham, Jr. Telephone: (713) 780-9494 Telecopier: (713) 780-9254 or to such other address as any party may designate for itself by like notice to all other parties hereto. All such notices and communications shall be deemed to have been given (i) if mailed as provided above by any method other than overnight delivery service, on the third Business Day after deposit in the mails, (ii) telegraphed, telexed, telecopied or cabled, when delivered to the telegraph company, confirmed by telex answerback, transmitted by telecopier (with such transmission machine confirmed), or delivered to the cable company, respectively, or (iii) if delivered by hand, or mailed by overnight delivery services, upon delivery. 10.4 Amendments, Waivers, etc. Except as may be otherwise specifically set forth in this Agreement or the other Loan Documents, neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be amended, modified, waived, discharged or terminated, and no consent to any departure by any Loan Party from any provision hereof or thereof may be given, except in a writing signed by all parties thereto. 10.5 Rights and Remedies Cumulative, Non-Waiver, etc. The enumeration of the Lender's rights and remedies set forth in this Agreement and the other Loan Documents is not intended to be exhaustive, and the exercise by the Lender of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative, and shall be in addition to any other right or remedy given hereunder, under the other Loan Documents or under any other agreement between the Borrower and the Lender, or any of them, or that may now or hereafter exist in law or in equity or by suit or otherwise. No delay or failure to take action on the part of the Lender in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude other or further exercise thereof or the exercise of any other right, power or privilege or shall be construed to be a waiver of any Event of Default. No course of dealing between any of the Borrower and the Lender or their agents or employees shall be effective to change, modify or discharge any provision of this Agreement or to constitute a waiver of any Event of Default. No notice to or demand upon the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of the Lender to exercise any right or remedy or take any other or further action in any circumstances without notice or demand. 21 10.6 Binding Effect, Assignment. All of the terms of this Agreement and the other Loan Documents to which the Borrower is a party shall be binding upon, inure to the benefit of and be enforceable by the respective successors and assigns of the Borrower and the Lender; provided, however, that the Borrower may not sell, assign or transfer this Agreement or any other Loan Document or any portion hereof or thereof, including, without limitation, any of its rights, title, interests, remedies, powers and duties hereunder or thereunder. 10.7 Severability. To the extent any provision of this Agreement or any other Loan Document is prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions hereof or thereof. 10.8 Entire Agreement. THIS AGREEMENT AND THE DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED CONTEMPORANEOUSLY HEREWITH AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES HERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS OF SUCH PERSONS, VERBAL OR WRITTEN, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THIS AGREEMENT, THE NOTE, THE OTHER LOAN DOCUMENTS AND THE INSTRUMENTS AND DOCUMENTS EXECUTED IN CONNECTION HEREWITH 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. 10.9 Interpretation. The captions to the various sections and subsections of this Agreement have been inserted for convenience only and shall not limit or affect any of the terms hereof. Unless the context otherwise requires, words in the singular include the plural and words in the plural include the singular, and the use of any gender shall be applicable to all genders. 10.10 Counterparts, Effectiveness. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all of which shall together constitute one and the same instrument. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto. 10.11 Conflict of Terms. Except as otherwise provided in this Agreement and except as otherwise provided in the other Loan Documents, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision of the other Loan Documents, the provision contained in this Agreement shall control. 10.12 Injunctive Relief. The Borrower recognizes that in the event it fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy of law may prove to be inadequate relief to the Lender. The Borrower therefore agrees that the Lender, shall be entitled to the fullest extent permitted by law to temporary and permanent 22 injunctive relief without the necessity of proving actual damages in any case where a remedy at law, would prove to be inadequate relief. 10.13 Expenses of the Lender. The Borrower will be liable to reimburse, on demand, the Lender for any and all costs and expenses including, without limitation, the fees and expenses of the Lender's counsel and of any other counsel, experts, consultants or agents, which the Lender may incur in connection with (i) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (ii) the exercise or enforcement of any rights of the Lender hereunder or under any of the other Loan Documents, or (iii) the failure by the Borrower or any other Loan Party to perform or observe any of the provisions hereof or of any of the other Loan Documents. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first above written. LENDER: MALLOY ENERGY COMPANY, L.L.C. By: Malloy Oil and Gas Corporation Managing Member By: ------------------------------------- Name: Patrick E. Malloy, III Title: President BORROWER: GOODRICH PETROLEUM COMPANY, L.L.C. By: ------------------------------------- Name: Robert C. Turnham, Jr. Title: Executive V.P. and Chief Operating Officer 23 ASSIGNMENT AND BILL OF SALE THAT, GOODRICH PETROLEUM COMPANY, L.L.C., a Louisiana limited liability company, with a place of business at 815 Walker, Suite 1040, Houston, Texas 77002 (herein called "Assignor"), in consideration of Ten Dollars ($10.00) and other good and valuable consideration to it in hand paid, the receipt and sufficiency of which are hereby acknowledged, does hereby grant, bargain, convey, sell, assign, and transfer unto MALLOY ENERGY COMPANY, L.L.C., a Delaware limited liability company, with a place of business at Bay Street on the Waterfront, Sag Harbor, New York 11963 (herein called "Assignee"), effective as of 12:00 a.m., local time, where the Assets (as defined below) are located on January 1, 2002 (the "Effective Time"), the undivided interests set forth below in and to the following (all of which shall collectively be referred to hereinafter as the "Assets"): (a) An undivided thirty percent (30%) of 8/8 interest in the "shallow rights" (as described in Exhibit A) and an undivided fifteen percent (15%) of 8/8 interest in the "deep rights" (as described in Exhibit A), under the leasehold estates created by the oil and gas leases described in Exhibit A-1 hereto (the "Leases") and the lands covered thereby (the "Lands"), together with all overriding royalty interests, production payments and other payments out of or measured by the value of oil and gas production from or attributable to the Leases; (b) An undivided thirty percent (30%) of 8/8 interest in the oil and gas wells located on the Leases hereto and any other wellbores, plugged or unplugged, shut in, or permanently or temporarily abandoned that are located on the Leases (the "Wells"); such undivided interests in the Wells being not less than the interests shown on Exhibit A-2 under the heading, "Working Interest", and such undivided interests in the Wells entitling Assignee to not less than the interests in total production set forth on ExhibitA-2 under the heading, "Net Revenue Interest". (c) An undivided thirty percent (30%) of 8/8 interest in all of the personal property, fixtures and improvements appurtenant to the Wells, or the Leases or used or obtained in connection with the operation of the Wells, or the Leases or with the production, treatment, sale or disposal of hydrocarbons or water produced therefrom or attributable thereto, including without limitation, salt water disposal wells, pipelines, gathering lines and systems and compression facilities appurtenant to or located upon the Leases (the "Personalty"); (d) An undivided thirty percent (30%) of 8/8 interest in all oil, gas and other hydrocarbons produced from or attributable to the "shallow rights" under the Leases after the Effective Time and proceeds from the sale thereof and an undivided fifteen percent (15%) of 8/8 interest in all oil, gas and other hydrocarbons produced from or attributable to the "deep rights" under the Leases after the Effective Time and proceeds from the sale thereof ("Hydrocarbons"), subject to a proportionate part of all royalty, overriding royalty and other lease burdens of record and in effect as of the Effective Time; (e) To the extent transferable, an undivided thirty percent (30%) of 8/8 interest in all agreements, product purchase and sale contracts, surface leases, gas gathering contracts, salt water disposal leases, processing agreements, compression agreements, equipment leases, permits, rights-of- way, easements, licenses, farmouts and farmins, options, orders, pooling, spacing or consolidation agreements and operating agreements, including rights of operatorship thereunder, and all other agreements relating to the Wells, Leases, Hydrocarbons and Personalty, including, without limitation, the rights-of-way, permits, contracts and agreements described on Exhibit A-3 (the "Contracts"); (f) To the extent transferable at no cost or liability to Seller, an undivided thirty percent (30%) of 8/8 interest in all seismic licenses, permits and all other rights to geological and/or geophysical data and information relating to the Wells, Leases, Hydrocarbons and Personalty (the "Seismic Rights"); (g) An undivided thirty percent (30%) of 8/8 interest in that certain escrow account no. 5149 at Compass Bank, Texas, Houston, Texas, and a like interest in all proceeds therein, as more fully described on Exhibit A-4 (the "Escrow Account"); (h) An undivided thirty percent (30%) of 8/8 interest in all the property, rights, privileges, benefits and appurtenances in any way belonging to, incidental to, or appertaining to the property, interests and rights described above, including the Wells, Leases, Personalty, Lands, Contracts, Hydrocarbons and Seismic Rights (the "Benefits"); (i) All applicable files, records and data (or copies thereof), subject to any restrictions on Assignor's disclosure of same including, without limitation, land and lease files, well files, title records including abstracts of title, title opinions, contracts, production records, all logs including electric logs, core data, pressure data and decline curves and graphical production curves and all related materials in the possession of Assignor; and (j) To the extent any of the Contracts, Personalty, Seismic Rights or Benefits relate to the "deep rights" (as described in Exhibit A), the undivided interest to be transferred to Assignee shall be limited to fifteen percent (15%) of 8/8. 1. ASSIGNOR EXPRESSLY DISCLAIMS ANY WARRANTY, EXPRESS, IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, AS TO THE CONDITION OF THE OIL AND GAS INTERESTS INCLUDING (i) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE OR OF FREEDOM FROM HIDDEN DEFECTS, (ii) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, AND (iii) ANY IMPLIED OR EXPRESS WARRANTY AS TO THE ENVIRONMENTAL CONDITION OF THE OIL AND GAS INTERESTS, IT BEING EXPRESSLY UNDERSTOOD BY 2 ASSIGNEE THAT THE ASSETS, INCLUDING ALL PERSONAL PROPERTY, FIXTURES AND ITEMS ARE BEING CONVEYED TO ASSIGNEE AS IS, WHERE IS, WITH ALL FAULTS, AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR AND THAT ASSIGNEE HAS BEEN GIVEN THE OPPORTUNITY TO MAKE OR CAUSE TO BE MADE SUCH INSPECTIONS AS ASSIGNEE DEEMS APPROPRIATE. 2. Assignee, in consideration of the mutual benefits to be derived hereunder by its acceptance hereof, understands and agrees to the following terms and conditions: (a) This Assignment is made subject to that certain Purchase and Sale Agreement dated March 4, 2002, between Assignor and Assignee, and all terms and conditions of said Purchase and Sale Agreement are incorporated herein by reference to the same extent end with the same effect as if copied in full herein. The terms of the Purchase and Sale Agreement shall govern any conflict between this Assignment and Bill of Sale and the Purchase and Sale Agreement. (b) ASSIGNEE AGREES TO RELEASE, DEFEND, INDEMNIFY AND HOLD ASSIGNOR, ITS AFFILIATED, PARENT AND SUBSIDIARY ENTITIES AND THEIR RESPECTIVE AGENTS, REPRESENTATIVES, SHARE HOLDERS, OFFICERS, DIRECTORS AND EMPLOYEES (COLLECTIVELY "INDEMNITEES"); HARMLESS FROM ANY DAMAGES, EXPENSES (INCLUDING COURT COST AND ATTORNEY'S FEES), CIVIL FINES, PENALTIES, AND OTHER COSTS AND LIABILITIES INCURRED AS A RESULT OF CLAIMS, DEMANDS, AND CAUSES OF ACTION ASSERTED, IN CONNECTION WITH THE ASSETS (BUT ONLY AS TO ASSIGNEE'S UNDIVIDED INTEREST THEREIN), INCLUDING BUT NOT LIMITED) TO ANY COSTS, EXPENSES, AND LIABILITIES WHATSOEVER ARISING OUT OF, OR IN CONNECTION WITH, THE PLUGGING AND ABANDONING OF ANY WELLS, REMOVAL OR MODIFICATION OF FACILITIES (INCLUDING PIPELINES), CLOSURE OF PITS, AND RESTORATION OF THE SURFACE REGARDLESS OF WHETHER THE OBLIGATION TO PLUG, REMOVE, MODIFY, CLOSE OR RESTORE AROSE PRIOR TO OR SUBSEQUENT TO THE EFFECTIVE TIME. ASSIGNEE'S INDEMNIFICATION OF INDEMNITEES SHALL EXTEND TO AND INCLUDE, WITHOUT LIMITATION, CLAIMS, CAUSES OF ACTION AND DEMANDS BASED ON (i) THE NEGLIGENCE OF ASSIGNOR, ASSIGNEE, OR THIRD PARTIES, WHETHER SUCH NEGLIGENCE IS ACTIVE OR PASSIVE, JOINT, CONCURRENT OR SOLE, OR (ii) ASSIGNOR'S OR ASSIGNEE'S STRICT LIABILITY, OR (iii) OTHER FAULT OR, RESPONSIBILITY OF ASSIGNOR. NOTWITHSTANDING THE ABOVE PROVISIONS OR ANY OTHER PROVISION OF THIS AGREEMENT, ASSIGNEE'S INDEMNIFICATION OF ASSIGNOR SHALL NOT INCLUDE LOSSES SUSTAINED OR LIABILITIES 3 INCURRED AS A RESULT OF ASSIGNOR'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. 3. This Assignment is executed without any representations or warranties whatsoever, express or implied, including, but not limited to, representations or warranties as to the title (except as to claims arising by, through or under Assignor) or the condition and state of repair of the Assets or its va1ue, quality, merchantability, suitability or fitness for any uses or purposes, or freedom from vices or defects or dangerous conditions, whether hidden or apparent. 4. Assignee acknowledges that the Assets has been used for exploration, development, and production of oil and gas and that there may be petroleum, produced water, wastes, or other materials located on, under or associated with the Assets. Equipment and sites included in the Assets may contain wastes, asbestos, hazardous substances, or naturally occurring radioactive material ("NORM"). NORM may affix or attach itself to the inside of wells, materials, and equipment as scale, or in other forms; the wells, materials and equipment located on or included in the Assets may contain NORM and other wastes or hazardous substances; and NORM containing material and other wastes or hazardous substances may have been buried, come in contact with the soil, or otherwise been disposed of on the Assets. Special procedures may be required for the remediation, removal, transportation, or disposal of wastes, asbestos, hazardous substances; and NORM from the Interests and Assets. The presence of wastes, asbestos, hazardous substances or NORM in or on the Assets shall be the sole responsibility of Assignee, and, with respect to the undivided interests herein acquired, Assignee agrees to defend, indemnify and hold harmless Assignor from any and all claims arising from and/or related to the presence of any such materials, substances or wastes. 5. Assignee hereby assumes Assignee's proportionate part of all duties, liabilities and obligations, express or implied, imposed upon Assignor under the provisions of the Leases and any and all assignments, subleases, farmout agreements, assignments of overrides, joint operating agreements, easements, rights-of-way, and all other contracts, agreements arid instruments affecting the Assets to the extent they are described in Exhibit A and are binding on Assignor, and under all applicable laws, rules, regulations, orders and ordinances; including, but not limited to, the plugging and abandonment of the wells included in this assignment, and the clean-up and restoration of the premises on which the wells are located. Assignee agrees to defend, indemnify and hold harmless Assignor from and against, any and all claims, obligations, liabilities, costs, expenses, losses and damages of any kind or character sustained by it as a result of any failure of Assignee to perform such obligations as more fully set forth in the Purchase and Sale Agreement. 6. Assignee agrees that it will not assign, sublease or transfer, in whole or part, any rights acquired herein or by virtue of the above identified Purchase and Sale Agreement without requiring its assignees, subleases, and transferees to expressly assume all obligations owed to Assignor under the terms of this assignment and the Purchase and Sale Agreement as to the undivided interest so assigned, and all such pertinent terms shall be incorporated into any and all future instruments translative of title. 4 TO HAVE AND TO HOLD the same unto the said Assignee forever. The provisions hereof shall be covenants running with the land and shall inure to the benefit of and be binding upon Assignor and Assignee, their respective personal representatives, successors and assigns. Assignor covenants that Assignor shall execute such additional documents and take such further actions as Assignee may reasonably request for the purpose of transferring to Assignee all properties and interests intended to be transferred by this Assignment. IN WITNESS HEREOF, the undersigned have executed this instrument on the date of the acknowledgments annexed hereto, but to be effective for all purposes as of the Effective Time. ASSIGNOR: WITNESSES GOODRICH PETROLEUM COMPANY, L.L.C. - ------------------------------- Printed Name: By: ------------------ ------------------------------- Name: Robert C. Turnham, Jr. Title: Chief Operating Officer - ------------------------------- Printed Name: ------------------ ASSIGNEE: WITNESSES MALLOY ENERGY COMPANY, L.L.C. By: Malloy Oil and Gas Corporation, Managing Member - ------------------------------- Printed Name: ------------------ By: ------------------------------- Name: Patrick E. Malloy, III - ------------------------------- Title: President Printed Name: ------------------ 5 ACKNOWLEDGEMENTS STATE OF TEXAS (S) (S) COUNTY OF HARRIS (S) On this _____ day of March, 2002, before me appeared Robert C. Turnham, Jr., to me personally known, who, being by me duly sworn, did say that he is the Chief Operating Officer of GOODRICH PETROLEUM COMPANY, L.L.C., a Louisiana limited liability company, and that said instrument was signed on behalf of said limited liability company by authority of its Board of Directors and said appearer acknowledged said instrument to be the free act and deed of said limited liability company. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. [S E A L] ------------------------------------------------ Notary Public in and for the State of Texas STATE OF (S) (S) COUNTY OF (S) On this ____ day of March, 2002, before me appeared Patrick E. Malloy, III, to me personally known, who, being by me duly sworn, did say that he is the President of Malloy Oil and Gas Corporation, a Delaware corporation, Managing Member of MALLOY ENERGY COMPANY, L.L.C., and that said instrument was signed on behalf of said limited liability company by authority of its Members and said appearer acknowledged said instrument to be the free act and deed of said limited liability company. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. [S E A L] ------------------------------------------------ Notary Public in and for the State of ---------- 6 SUBORDINATION AND INTERCREDITOR AGREEMENT THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this "AGREEMENT") is made as of March 8, 2002, by and among BNP PARIBAS, as agent ("SENIOR AGENT") for the lenders (the "SENIOR LENDERS") party to the herewith defined Credit Agreement, MALLOY ENERGY COMPANY, L.L.C., a Delaware limited liability company ("SUBORDINATED CREDITOR"), GOODRICH PETROLEUM COMPANY, L.L.C., a Louisiana limited liability company ("BORROWER"), GOODRICH PETROLEUM CORPORATION, a Delaware corporation ("GOODRICH"), and GOODRICH PETROLEUM COMPANY-LAFITTE, L.L.C., a Louisiana limited liability company ("LAFITTE", and collectively with Goodrich herein referred to as the "GUARANTORS"). WHEREAS, Subordinated Creditor and Borrower have entered into a Loan Agreement of even date herewith (as amended, modified, supplemented, restated, extended or renewed from time to time, the "SUBORDINATED LOAN AGREEMENT"), pursuant to which Subordinated Creditor has agreed, among other things, to make certain loans and advances to Borrower in the maximum principal amount of $7,700,000 and Borrower has agreed, among other things, to assign, transfer and convey the Option Interests (as defined in the Subordinated Loan Agreement) to Subordinated Creditor in accordance with the terms and provisions of the Subordinated Loan Agreement and the Purchase Agreement (as defined in the Subordinated Loan Agreement and herein so called); WHEREAS, to secure the obligations under the Subordinated Loan Agreement, Borrower has granted and from time to time may grant to Subordinated Creditor a lien and security interest in certain assets of Borrower (the "SUBORDINATED COLLATERAL"), including, without limitation, certain oil and gas properties and related assets now owned or hereafter acquired by Borrower that constitute Senior Collateral (hereinafter defined); WHEREAS, Senior Agent, Senior Lenders and Borrower have previously entered into that certain Credit Agreement dated as of November 9, 2001 (as amended, modified, supplemented, restated, extended or renewed from time to time including, without limitation, pursuant to the First Amendment (hereinafter defined), the "CREDIT AGREEMENT"), by and among Senior Agent, Senior Lenders and Borrower pursuant to which, among other things, the Senior Lenders have agreed to make certain loans and other extensions of credit to Borrower; WHEREAS, to assure the payment and performance of the Obligation under the Credit Agreement, Guarantors executed a Guaranty Agreement dated as of November 9, 2001 (together with all modifications, amendments, renewals, extensions, and restatements thereof, the "GUARANTY AGREEMENT"), in favor of Senior Agent and the Senior Lenders; WHEREAS, to secure the "Obligation" (as such term is defined in the Credit Agreement and herein so called) under the Credit Agreement, Borrower and Guarantors have granted and from time to time may grant to Senior Agent, for the benefit of the Senior Lenders, a first priority lien and security interest in certain property and assets, including, without limitation, certain oil and gas properties and related assets now owned or hereafter acquired by Borrower and Lafitte and all of the capital stock of Borrower and Lafitte (such property and assets, together with any and all other collateral now or hereafter granted, assigned or pledged to Senior Agent or any Senior Lender at any time to secure the Obligation, and all products and proceeds of the foregoing, herein collectively referred to as the "SENIOR COLLATERAL"); WHEREAS, at the request of and as an accommodation to Borrower and the Guarantors, Borrower, Guarantors, Senior Agent and the Senior Lenders are entering into that certain First Amendment to Credit Agreement of even date herewith (the "FIRST AMENDMENT") pursuant to which, among other things, certain covenants contained in the Credit Agreement have been modified and amended to permit Borrower to incur the indebtedness arising under the Subordinated Loan Agreement and to grant liens and security interests in favor of the Subordinated Creditor in the Subordinated Collateral to secure such indebtedness; and WHEREAS, as a condition precedent to Senior Agent's and each Senior Lender's agreement to enter into the First Amendment, Senior Agent has required that Subordinated Creditor, Borrower and Guarantors execute this Subordination and Intercreditor Agreement. NOW, THEREFORE, in consideration of the above recitals and the provisions set forth herein, Senior Agent (on behalf of the Senior Lenders), Subordinated Creditor, Borrower, and each Guarantor agree as follows: 1. DEFINITIONS. Unless otherwise indicated, terms defined in the introductory paragraph of this Agreement or in the Recitals to this Agreement are used herein with their meaning as defined in such paragraph or Recitals; additionally, the following terms in this Agreement shall have the meanings indicated: "BLOCKAGE PERIOD" has the meaning assigned to such term in SECTION 4 of this Agreement. "OPTION INTERESTS" has the meaning assigned to such term in the Subordinated Loan Agreement. "PAYMENT DEFAULT" means the failure by the Borrower or any Guarantor to pay all or any portion of the Senior Debt when due, whether at maturity, by acceleration or otherwise. "SENIOR AGENT" means Senior Agent and its successors and assigns as "AGENT" under the Credit Agreement. "SENIOR DEBT" means: (a) the Obligation and all other indebtedness, liabilities, and obligations of every kind or nature, absolute or contingent, now or existing or hereafter arising, of Borrower, or any Guarantor, owed to Senior Agent or any Senior Lender or their affiliates under the Senior Documents, including, without limitation, the principal of, and interest on (including any interest accruing after the commencement of any bankruptcy, insolvency, or similar proceeding with respect to Borrower or any Guarantor, whether or not allowed as a claim in such proceeding), and all premiums, fees, charges, expenses, and indemnities arising under or in connection with, the Senior Documents; and (b) any modifications, amendments, refinancing, restatements, supplements, renewals, or extensions of any indebtedness, liability, or obligation described in the immediately preceding CLAUSE (A) above. "SENIOR DOCUMENTS" means the Credit Agreement, the Guaranty Agreement and any Swap Agreement (as defined in the Senior Loan Agreement) by and among Borrower and/or any Guarantor and Senior Agent or any Senior Lender or any of their affiliates and all mortgages, security agreements, documents, instruments and other agreements executed pursuant to or in connection therewith and providing security for the Credit Agreement, the Guaranty Agreement or such Swap Agreement, as applicable, and all amendments, modifications, renewals, extensions, supplements, refinancings, and restatements thereof. 2 "SENIOR LENDERS" means the Senior Lenders, their respective successors and assigns, and any person or entity who refinances all or any portion of the Senior Debt. "SUBORDINATED CREDITOR" means Subordinated Creditor and its successors and assigns. "SUBORDINATED DOCUMENTS" means the Subordinated Loan Agreement, any promissory note evidencing the indebtedness thereunder, and the Subordinated Security Documents, together with all renewals, extensions, amendments, supplements, modifications, or restatements thereof. "SUBORDINATED MATURITY DATE" has the meaning assigned to such term in SECTION 5 of this Agreement. "SUBORDINATED OBLIGATION" means the "Obligations" (as defined in the Subordinated Loan Agreement) and all other indebtedness and obligations now and from time to time hereafter owed by Borrower to Subordinated Creditor evidenced by or arising under the Subordinated Documents, including principal, interest, fees, and charges and all other present or future liabilities, indebtedness, or obligations of Borrower to Subordinated Creditor under the Subordinated Documents. "SUBORDINATED SECURITY DOCUMENTS" means any and all security agreements, mortgages, assignments, pledges, financing statements, documents, agreements or other encumbrances now or hereafter securing all or any part of the Subordinated Obligation (together with all now-existing or hereafter arising amendments, modifications, restatements, or modifications thereto). 2. SUBORDINATION TO SENIOR DEBT. Notwithstanding any other provision of any Subordinated Documents, the Subordinated Obligation is and shall be subordinate and junior in right of payment, to the extent and in the manner hereinafter set forth, to the prior indefeasible payment in full of all Senior Debt. Except as and to the extent provided hereinafter, Subordinated Creditor will not ask, demand, sue for, take, or receive from Borrower or any Guarantor, by set-off or in any other manner, direct or indirect payment (whether in cash or property) of the whole or any part of the Subordinated Obligation, or any transfer of any property (including, without limitation, any transfer or conveyance of any Option Interest) in payment thereof or as security therefor (other than any collateral security taken in accordance with the terms of this Agreement), unless and until the Senior Lenders have no further commitment to extend any credit to Borrower under the Senior Documents and all Senior Debt has been indefeasibly paid in full. 3. DISTRIBUTIONS IN LIQUIDATION AND BANKRUPTCY. In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise of all or any part of the assets of Borrower or any Guarantor, or the proceeds thereof (including any assets now or hereafter securing any Subordinated Obligation), (i) upon any indebtedness of Borrower or any Guarantor as a result of the liquidation, dissolution, or other winding up, partial or complete, of Borrower or any Guarantor, (ii) as a result of any receivership, insolvency, or bankruptcy proceeding, or assignment for the benefit of creditors or marshaling of assets, or (iii) as a result of any proceeding by or against Borrower or any Guarantor for any relief under any bankruptcy or insolvency law or laws relating to the relief of debtors, readjustment of indebtedness, arrangements, reorganizations, compositions, or extensions, then and in any such event: (a) The Senior Lenders shall be entitled to receive payment in full of all Senior Debt before Subordinated Creditor shall be entitled to receive any payment or other distributions on, or with respect to, the Subordinated Obligation; 3 (b) Any payment or distribution of any kind or character, whether in cash, securities, or other property, which but for these provisions would be payable or deliverable upon or with respect to the Subordinated Obligation shall instead be paid or delivered directly to Senior Agent for the benefit of the holders of the Senior Debt for application on the Senior Debt, whether then due or not due, until the Senior Debt shall have first been fully and indefeasibly paid in full and the Senior Lenders shall have no further commitment to extend any credit to Borrower or any Guarantor; (c) In the event that Subordinated Creditor shall not have filed a claim in any bankruptcy, insolvency, or similar proceeding with respect to Borrower or any Guarantor at least fifteen (15) days prior to the expiration of the time to file such claims, then Senior Agent, on behalf of Subordinated Creditor, shall be authorized to file a claim with respect to the Subordinated Obligation; and (d) Should any such direct or indirect payment be made to Subordinated Creditor upon or with respect to the Subordinated Obligation prior to the payment in full of the Senior Debt as provided herein, Subordinated Creditor will forthwith deliver the same to Senior Agent in precisely the form received (except for the endorsement or assignment by Subordinated Creditor where necessary) for application on the Senior Debt, whether then due or not due. Until so delivered, the payment or distribution shall be held in trust by Subordinated Creditor as property of the holders of the Senior Debt. In the event of failure of Subordinated Creditor to make any such endorsement or assignment, Senior Agent, and each of its officers and employees are hereby irrevocably authorized to make the same. 4. PERMITTED PAYMENTS. Until such time as the Senior Debt is paid and performed in full and the Senior Lenders have no further commitments to extend credit to Borrower under the Senior Documents, Subordinated Creditor shall not receive or accept any payment from Borrower or any Guarantor with respect to the Subordinated Obligation without the prior written consent of Senior Agent; provided that, so long as Senior Agent has not delivered written notice to each of the Borrower and the Subordinated Creditor (a "BLOCKAGE NOTICE") that a "Default", "Potential Default", or Borrowing Base Deficiency (as each such term is defined in the Credit Agreement) exists (or would arise after giving effect to any such payment) under the Senior Debt or under the Senior Documents, Borrower may pay, and Subordinated Creditor may accept (i) payments consisting of accrued and unpaid interest owed under the Subordinated Loan Agreement (the "ACCRUED SUBORDINATED INTEREST"); (ii) principal payments on any outstanding loans made by Subordinated Creditor under the Subordinated Loan Agreement in an amount up to, and as a direct offset against, the sale price owed by Subordinated Creditor to Borrower for any Option Interest in the Potash Field (contemplated to be acquired by Borrower from Greka Energy, Inc.) in Plaquemines Parish, Louisiana if the closing of such acquisition by the Borrower is upon terms and conditions consistent with those previously disclosed to Senior Agent and occurs before April 30, 2002; (iii) principal payments on any outstanding loans made by Subordinated Creditor under the Subordinated Loan Agreement to finance the acquisition by Borrower of oil and gas properties in the State of Louisiana solely in an amount up to, and as a direct offset against, the sale price owed by Subordinated Creditor to Borrower for any sale to Subordinated Creditor of an Option Interest in such oil and gas properties which is consummated within ten (10) days of such acquisition by Borrower; and (iv) other payments of principal on any outstanding loans made by Subordinated Creditor under the Subordinated Loan Agreement (including, without limitation, any such payments made or deemed made in respect of the sale by Borrower of any Option Interests to Subordinated Creditor) so long as, in the case of this clause (iv), the "Committed Usage" (as such term is defined in the Credit Agreement as in effect on the date hereof) does not exceed (or would not exceed after giving effect to any such principal payment) eighty percent (80%) of the lesser of the "Commitments" or the then current "Borrowing Base" (as each of such terms is 4 defined in the Credit Agreement), as such Borrowing Base may be redetermined by the Senior Agent and the Senior Lenders to reflect any sale of Option Interests giving rise to such payments; provided, however, that if such a "Default", "Potential Default" or "Borrowing Base Deficiency" exists, under the Senior Debt or under the Senior Documents, other than as a result of a Payment Default, for a period of 180 consecutive days after delivery of a Blockage Notice (a "BLOCKAGE PERIOD") and the Senior Lenders have not declared all Senior Debt to be due and payable within such time, Borrower may thereafter resume payments, and Subordinated Creditor may accept payments, of any amounts described in the immediately preceding CLAUSES (I) through (IV); provided, further, that during any 360-day consecutive period, only one such Blockage Period may commence; provided, moreover, that nothing contained in this Agreement shall limit the rights of Subordinated Creditor to take actions toward collection of the Subordinated Obligation or otherwise to enforce its rights and remedies with respect to the Subordinated Obligations (x) in accordance with and pursuant to Section 5 of this Agreement or (y) upon at least fifteen (15) days prior written notice to Senior Agent, at any time or from time to time on or after the Subordinated Maturity Date subject to the rights of the Senior Agent and Senior Lenders to receive payment in full of all Senior Debt then due and payable prior to any payment of the Subordinated Obligation and the other rights of the Senior Agent and the Senior Lenders as provided in SECTIONS 3 and 8 hereof. No "Default", "Potential Default" or "Borrowing Base Deficiency" under the Senior Debt or under the Senior Documents giving rise to, or occurring during the first 120 consecutive days of, any Blockage Period shall be, or be made, the basis for any subsequent Blockage Period. During any Blockage Period the Senior Agent shall respond to reasonable inquiries by the Subordinated Creditor as to the amount and payment status of the Senior Debt. 5. LIMITATION ON ACCELERATION OR EXERCISE OF REMEDIES PRIOR TO THE SUBORDINATED MATURITY DATE. Notwithstanding any other provision of this Agreement to the contrary, prior to the Subordinated Maturity Date unless the Senior Lenders have accelerated the maturity of the Senior Debt, Subordinated Creditor shall be prohibited from taking, except with the prior written consent of the Senior Agent, any action towards the collection of the Subordinated Obligation or the payment of any other amounts in respect of the Subordinated Obligation (x) during any Blockage Period or (y) during the sixty (60) day period after the occurrence of a Payment Default, including, without limitation: (a) suing for payment of the Subordinated Obligation (including, without limitation, the commencement or joining with any other creditors of Borrower or any Guarantor in the commencement of any bankruptcy, reorganization, receivership, readjustment of debt, dissolution, liquidation, or insolvency proceeding against Borrower or any Guarantor), (b) exercising any right of set- off for the collection of any amounts due in respect of the Subordinated Obligation, or (c) commencing or prosecuting a Lien Enforcement Action; provided, however, that the Subordinated Creditor may, without the consent of the Senior Agent or any Senior Lender, accelerate the maturity of the Subordinated Obligation at any time in accordance with the Subordinated Loan Agreement; and provided, further, that from and after the stated maturity date of the loans made under the Subordinated Loan Agreement (the "SUBORDINATED MATURITY DATE"), the Subordinated Creditor may, upon at least fifteen (15) days prior written notice to Senior Agent, at any time and from time to time under all circumstances take any action (including a Lien Enforcement Action) available to it by agreement or otherwise, without the consent of the Senior Agent or any Senior Lender, to enforce its rights and remedies with respect to the Subordinated Obligation, subject only to the right of the Senior Lenders to receive payment in full of all Senior Debt then due and payable prior to any payment of the Subordinated Obligation, and subject to the provisions of Sections 3 and 8 hereof. "LIEN ENFORCEMENT ACTION" shall mean any action, whether legal, equitable, judicial, non-judicial, or otherwise, to enforce any lien, security interest, or other encumbrance now or in the future securing all or any Subordinated Obligation, including, without limitation, any repossession, foreclosure, public sale, private sale, or retention of all or any part of the collateral securing the Subordinated Obligation. Any Lien Enforcement Action taken by Subordinated Creditor shall be expressly undertaken, prosecuted, settled, compromised, or otherwise effected at all times subject to the senior and prior rights of Senior Agent and 5 the Senior Lenders in and to any such collateral hereunder and under applicable law, and all such collateral or proceeds thereof, or rights obtained with respect thereto, shall be subject to the senior and prior rights of Senior Agent and the Senior Lenders hereunder and under applicable law. 6. CONTINUING SUBORDINATION. The subordination effected by these provisions is a continuing subordination and may not be modified or terminated by Subordinated Creditor or any other holder of any Subordinated Obligation until the Senior Lenders have no further commitments to lend to Borrower and all of the Senior Debt shall have been indefeasibly paid in full. At any time and from time to time, without consent of or notice to Subordinated Creditor or any other holder of all or any portion of the Subordinated Obligation, and without impairing or affecting the obligations of any of them hereunder: (a) The time for Borrower's or any Guarantor's performance of, or compliance with, any of its agreements contained in the Senior Documents, or any other agreement, instrument, or document relating to the Senior Debt, may be modified or extended or such performance or compliance may be waived; (b) Senior Agent or any Senior Lender may exercise or refrain from exercising any rights under the Senior Documents, or any other agreement, instrument, or document relating to the Senior Debt; (c) The Senior Documents, or any other agreement, instrument, or document relating to the Senior Debt, may be revised, amended, or otherwise modified for the purpose of adding or changing any provisions thereof (including, without limitation, increases in the principal amount of loans to the Borrower or increases in the interest charges or fees), or changing in any manner the rights of Senior Agent or any Senior Lender, Borrower or any Guarantor, any other obligor of the Senior Debt; (d) Payment of the Senior Debt or any portion thereof may be extended, refunded, or refinanced or any notes evidencing such Senior Debt may be renewed in whole or in part; (e) The maturity of the Senior Debt may be accelerated, and any collateral security therefor or any other rights of Senior Agent or any Senior Lender may be exchanged, sold, surrendered, released, or otherwise dealt with, in accordance with applicable law and the terms of any present or future agreement with Borrower or any Guarantor, or any other obligor, and any other agreement of subordination (and the debt covered thereby) may be surrendered, released, or discharged, or the terms thereof modified or otherwise dealt with in any manner; (f) Any guarantor liable in any manner for payment of any Senior Debt may be released by holders of Senior Debt; and (g) Notwithstanding the occurrence of any of the foregoing, these subordination provisions shall remain in full force and effect with respect to the Senior Debt, as the same shall have been extended, renewed, modified, increased or refinanced. 7. WAIVERS. Subordinated Creditor hereby waives, and agrees not to assert: (a) any right, now or hereafter existing, to require Senior Agent or any Senior Lender to proceed against or exhaust any collateral at any time securing the Senior Debt, or to marshal any assets in favor of Subordinated Creditor or any other holder of the Subordinated Obligation; and (b) any notice of the incurrence of Senior Debt, it being understood that Senior Agent or any Senior Lender may, in reliance upon these subordination 6 provisions, make advances under the Senior Documents, or any other agreement, document, or instrument now or hereafter relating to the Senior Debt, without notice to or authorization of Subordinated Creditor. 8. LIEN SUBORDINATION AND STANDBY. The parties hereto hereby agree that any lien, security interest, encumbrance, charge, or claim of Subordinated Creditor on any assets or property of Borrower or any Guarantor, or any proceeds or revenues therefrom which Subordinated Creditor may have at any time as security for any Subordinated Obligation shall be, and hereby is, subordinated to all liens, security interests, encumbrances, claims, or changes, now or hereafter granted to Senior Agent or any Senior Lender by Borrower or any Guarantor, notwithstanding the date or order of attachment or perfection of any such lien, security interest, encumbrance, or claim or charge or the provision of any applicable law. Until the Senior Lenders have no further commitment to extend credit to Borrower and Senior Agent and the Senior Lenders have received indefeasible payment in full of the Senior Debt, Subordinated Creditor agrees (x) that, except as otherwise expressly provided in Sections 4 and 5 of this Agreement, the Subordinated Creditor will not, without the prior written consent of the Senior Agent, take any Lien Enforcement Action against any and all collateral for the Subordinated Obligation and (y) that Senior Agent, upon not less than fifteen (15) days prior written notice to the Subordinated Creditor with respect to any disposition or release of oil and gas properties, may release or dispose of any or all of the collateral for the Senior Debt, whether through judicial or nonjudicial proceedings in accordance with applicable law or pursuant to a consensual agreement between the Borrower and/or any Guarantor and Senior Agent or any Senior Lender regarding any such release or disposition and regardless of whether or not Subordinated Creditor has commenced any Lien Enforcement Action or other action or proceeding to collect the Subordinated Obligation with respect to such collateral, without consent by Subordinated Creditor including, without limitation, releasing any such collateral in connection with a sale or assignment by Borrower or such Guarantor (whether or not all or any portion of the net proceeds from such sale or assignment are used to repay the Senior Debt or the Subordinated Obligation), but excluding, however, any transaction whereby Senior Agent or any Senior Lender takes title thereto; provided, however, that nothing herein is intended to or does waive any right Subordinated Creditor may otherwise have to notice under applicable law; and provided further, however, that if at the time of any such release, sale or other disposition (i) a "DEFAULT" or an "EVENT OF DEFAULT" (each as defined in the Credit Agreement) has occurred and is continuing, (ii) the aggregate Net Disposition Amount (hereinafter defined) from the release, sale or other disposition of all such collateral since the occurrence of such Default or Event of Default, as the case may be, exceeds $7,500,000, and (iii) less than seventy- five percent (75%) of the Net Disposition Amount of any such release, sale or other disposition in excess of, in the aggregate, $7,500,000 is to be paid to or credited by the Senior Lenders and applied as a permanent reduction of the Senior Debt (or, if there is no outstanding indebtedness owed to the Senior Lenders, then to the Subordinated Obligation), no such release, sale or other disposition of any such collateral which also constitutes Subordinated Collateral may be consummated without the prior written consent of Subordinated Creditor. Subordinated Creditor agrees that any such sale, release or other disposition of collateral shall be made free and clear of any liens or security interests granted by holders of the Subordinated Obligation. Upon Senior Agent's request, Subordinated Creditor shall execute and deliver any releases or other documents and agreements that Senior Agent or Borrower, reasonably deems necessary to release or otherwise dispose of the collateral as provided herein free of Subordinated Creditor's interest in same. As used herein, the term "NET DISPOSITION AMOUNT" shall mean with respect to any sale, release or other disposition of collateral, including any foreclosure sale, the proceeds received from such sale, release or other disposition, net of the reasonable costs and expenses incurred in connection with such sale, release or other disposition. 9. SUBROGATION. Until the Senior Lenders have no further commitment to extend credit to Borrower and the Senior Debt shall have been indefeasibly paid in full, Subordinated Creditor hereby agrees not to exercise any right of subrogation with respect to the rights of Senior Agent and the Senior Lenders to receive payments or distributions and with respect to any rights to any collateral for the Senior 7 Debt. Upon indefeasible payment in full of the Senior Debt and termination of any commitment of the Senior Lenders to lend or extend credit to the Borrower, Subordinated Creditor shall be subrogated, to the extent permitted by law, to all rights of the holders of Senior Debt. 10. MODIFICATION OF SUBORDINATED OBLIGATION; TAKING OF ADDITIONAL SUBORDINATED COLLATERAL. Unless and until the Senior Lenders have no further commitment to extend credit to Borrower and all Senior Debt has been indefeasibly paid in full, Subordinated Creditor shall not (i) modify, amend or waive any term or provision of the Subordinated Loan Agreement (or enter into any other agreement which would have the effect of directly or indirectly modifying, waiving or amending any term or provision of the Subordinated Loan Agreement), in each case in a manner that increases the maximum principal amount of loans which may be made thereunder or the amount of any scheduled payment or amortization of the loans outstanding thereunder, or shortens the time when due for any such payment, or increases any rate or amount of interest, fees or other sums payable to Subordinated Creditor thereunder, or which results in the covenants, events of default, or other material terms and provisions contained therein being more restrictive on the Borrower than those in effect on the date hereof, in each case without the prior written consent of Senior Agent, or (ii) modify, amend or supplement any Subordinated Security Documents or enter into or accept any additional Subordinated Security Documents or take any other action which would result in each case in Subordinated Creditor obtaining liens and security interests on property or assets of the Borrower or any Guarantor which do not constitute Senior Collateral, without in each case providing at least thirty (30) days prior written notice thereof to Senior Agent describing, in reasonable detail, any such property or assets. The Borrower shall furnish to (x) Senior Agent copies of all amendments, modifications and waivers of any of the terms or provisions of the Subordinated Documents within ten (10) days of the execution thereof, and (y) the Subordinated Creditor copies of all amendments, modifications and waivers of any of the terms or provisions of the Senior Documents within ten (10) days of the execution thereof. 11. SUBORDINATION NOT IMPAIRED BY BORROWER OR GUARANTOR. No right of any holder of Senior Debt to enforce the subordination of the Subordinated Obligation shall be impaired by any act or failure to act by Borrower or any Guarantor. 12. NO THIRD PARTY BENEFICIARIES. SECTIONS 2 through 11 of this Agreement are not intended to give or confer any rights to any person other than the holders of the Senior Debt and the Subordinated Creditor. No other party, including Borrower or any Guarantor, is intended to be a third party beneficiary of this Agreement, except that Borrower and each Guarantor shall comply with their respective agreements and obligations under this Agreement. 13. REPRESENTATIONS AND WARRANTIES. Subordinated Creditor hereby represents and warrants that: (a) the execution and delivery of this Agreement and the performance by Subordinated Creditor of its obligations hereunder have received all necessary approvals, corporate or otherwise, and do not and will not contravene or conflict with any provision of law or any provision of any indenture, instrument, or other agreement to which Subordinated Creditor is a party or by which it or its property may be bound or affected; (b) Subordinated Creditor has full power, authority, and legal right to make and perform this Agreement; (c) Subordinated Creditor has not assigned or transferred any indebtedness owing by Borrower or any Guarantor, or any of the collateral for the Subordinated Obligation and Subordinated Creditor will not assign or transfer same unless (i) such assignee or transferee expressly assumes the obligations of Subordinated Creditor hereunder and agrees to be bound hereby, and (ii) Subordinated Creditor shall have given at least ten days prior written notice to Senior Agent at the address set forth by its signature below (unless otherwise notified in writing by Senior Agent); and (d) this Agreement is the legal, valid, and binding obligation of Subordinated Creditor, enforceable against Subordinated Creditor in accordance with its terms. 8 14. NO WAIVER. No failure on the part of Senior Agent or any Senior Lender to exercise, no delay in exercising, and no course of dealing with respect to, any right or remedy hereunder will operate as a waiver thereof; nor will any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy. This Agreement may not be amended or modified except by written agreement of Senior Agent, Subordinated Creditor, Borrower and the Guarantors, and no consent or waiver hereunder shall be valid unless in writing and signed by the party to be charged thereby. 15. SUCCESSOR AND ASSIGNS. This Agreement, and the terms, covenants, and conditions hereof, shall be binding upon and inure to the benefit of the parties hereto, and their respective heirs, personal representatives, successors, and assigns. 16. GOVERNING LAW. THIS AGREEMENT WILL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 9 IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written. BNP PARIBAS, as Senior Agent Notice Address: By: -------------------------------------- Name: 1200 Smith Street, Suite 3100 Title: Houston, Texas 77002 Attention: Mr. Brian M. Malone GOODRICH PETROLEUM COMPANY, L.L.C., as Borrower Notice Address: By: -------------------------------------- Name: 815 Walker Street Title: Houston, Texas 77002 Attention: Mr. Robert C. Turnham GOODRICH PETROLEUM COMPANY - LAFITTE, L.L.C., as a Guarantor Notice Address: By: -------------------------------------- Name: 815 Walker Street Title: Houston, Texas 77002 Attention: Mr. Robert C. Turnham 10 GOODRICH PETROLEUM CORPORATION, as a Guarantor Notice Address: By: -------------------------------------- Name: 815 Walker Street Title: Houston, Texas 77002 Attention: Mr. Robert C. Turnham MALLOY ENERGY COMPANY, L.L.C., as Subordinated Creditor By: Malloy Oil and Gas Corporation Managing Member Notice Address: By: -------------------------------------- Patrick E. Malloy, III President Bay Street at the Waterfront P.O. Box 1979 Sag Harbor, NY 11963 Attn: Mr. Patrick E. Malloy, III 11 EX-23 6 dex23.txt INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Goodrich Petroleum Corporation: We consent to the incorporation by reference in the registration statements No. 33-01077) on Form S-8, (No. 333-47078) on Form S-1, and (No. 333-70840) on Form S-3 of Goodrich Petroleum Corporation of our report dated March 22, 2002 with respect to the consolidated balance sheets of Goodrich Petroleum Corporation and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of Goodrich Petroleum Corporation. Our report refers to a change in the method of accounting for derivative instruments and hedging activities. KPMG LLP Shreveport, Louisiana March 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----