<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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THE HOUSTON EXPLORATION COMPANY
(Exact Name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 1311 22-2674487
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
JAMES F. WESTMORELAND
THE HOUSTON EXPLORATION COMPANY
1100 LOUISIANA, SUITE 2000 1100 LOUISIANA, SUITE 2000
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 830-6800 (713) 830-6800
(Address, Including Zip Code, and Telephone (Name, Address, Including Zip Code and
Number, Including Telephone
Area Code, of Registrant's Principal Executive Number, Including Area Code, of Agent for
Offices Service)
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Copy to:
JEFFREY L. WADE
ANDREWS & KURTH L.L.P.
2170 BUCKTHORNE PLACE, SUITE 150
THE WOODLANDS, TEXAS 77380
(713) 220-4801
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8 5/8% Senior Subordinated
Notes due 2008,
Series B............... $100,000,000 100% $100,000,000 $29,500
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</TABLE>
(1) Calculated pursuant to Rule 457(f) under the Securities Act of 1933 as the
market value of the securities to be canceled in the exchange, based on
average of bid asked price of the Old Notes at close of business on April
14, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 15, 1998
PROSPECTUS
THE HOUSTON EXPLORATION COMPANY
OFFER TO EXCHANGE
$1,000 PRINCIPAL AMOUNT OF 8 5/8% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B
FOR EACH $1,000 PRINCIPAL AMOUNT OF OUTSTANDING
8 5/8% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
($100,000,000 IN AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
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The Houston Exploration Company, a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal, to exchange $1,000
principal amount of its 8 5/8% Senior Subordinated Notes Due 2008, Series B (the
"Exchange Notes"), in a transaction registered under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to a Registration Statement (as
defined herein) of which this Prospectus constitutes a part, for each $1,000
principal amount of the outstanding 8 5/8% Senior Subordinated Notes due 2008,
Series A (the "Old Notes"), of which $100,000,000 aggregate principal amount is
outstanding (the "Exchange Offer"). The Exchange Notes and the Old Notes are
sometimes referred to herein collectively as the "Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the date
the Exchange Offer expires, which will be , 1998 unless the Exchange
Offer is extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. However, the Exchange Offer is subject to certain
conditions that may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement (as defined herein). See "The Exchange Offer."
Old Notes may be tendered only in denominations of $1,000 and integral multiples
thereof. The Company has agreed to pay the expenses of the Exchange Offer. There
will be no cash proceeds to the Company from the Exchange Offer. See "Use of
Proceeds."
The Exchange Notes will be obligations of the Company entitled to the
benefits of the indenture relating to the Notes (the "Indenture"). The form and
terms of the Exchange Notes are identical in all material respects to the form
and terms of the Old Notes, except that (i) the offering of the Exchange Notes
has been registered under the Securities Act, (ii) the Exchange Notes will not
be subject to transfer restrictions and (iii) the Exchange Notes will not be
entitled to registration or other rights under the Registration Rights Agreement
(as defined herein) including the provision in the Registration Rights Agreement
for payment of Liquidated Damages (as defined in the Registration Rights
Agreement) upon failure by the Company to consummate the Exchange Offer or the
occurrence of certain other events. Following the Exchange Offer, any holders of
Old Notes will continue to be subject to the existing restrictions on transfer
thereof and, as a general matter, the Company will not have any further
obligation to such holders to provide for registration under the Securities Act
of transfers of the Old Notes held by them. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered and tendered but unaccepted Old Notes could be adversely affected.
See "The Exchange Offer -- Purpose and Effect of the Exchange Offer."
(continued on next page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is , 1998.
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The Old Notes were sold by the Company on March 2, 1998, to Donaldson,
Lufkin & Jenrette Securities Corporation, Salomon Brothers Inc, PaineWebber
Incorporated, Chase Securities Inc. and Howard, Weil, Labouisse, Friedrichs
Incorporated (the "Initial Purchasers") in transactions not registered under the
Securities Act in reliance upon the exemption provided in Section 4(2) of the
Securities Act (the "Offering"). The Initial Purchasers placed the Old Notes
with qualified institutional buyers (as defined in Rule 144A under the
Securities Act) ("Qualified Institutional Buyers" or "QIBs"), each of whom
agreed to comply with certain transfer restrictions and other restrictions.
Accordingly, the Old Notes may not be reoffered, resold or otherwise transferred
in the United States unless such transaction is registered under the Securities
Act or an applicable exemption from the registration requirements of the
Securities Act is available. The Exchange Notes are being offered hereby in
order to satisfy the obligations of the Company under a registration rights
agreement among the Company and the Initial Purchasers relating to the Old Notes
(the "Registration Rights Agreement").
The Exchange Notes will bear interest at a rate of 8 5/8% per annum,
payable semi-annually on January 1 and July 1 of each year, commencing July 1,
1998. Holders of Exchange Notes of record on June 15, 1998 will receive on July
1, 1998 an interest payment in an amount equal to (x) the accrued interest on
such Exchange Notes from the date of issuance thereof to July 1, 1998, plus (y)
the accrued interest on the previously held Old Notes from the date of issuance
of such Old Notes (March 2, 1998) to the date of exchange thereof. Interest will
not be paid on Old Notes that are accepted for exchange. The Notes mature on
January 1, 2008.
The Old Notes were initially represented by three global Old Notes (the
"Old Global Notes") in registered form, registered in the name of Cede & Co., as
nominee for The Depository Trust Company ("DTC" or the "Depositary"), as
depositary. The Exchange Notes exchanged for Old Notes represented by the Old
Global Notes will be initially represented by a single global Exchange Note (the
"Exchange Global Note") in registered form, registered in the name of the
Depositary. See "Description of the Notes -- Book-Entry; Delivery; Form and
Transfer." References herein to "Global Notes" shall be references to the Old
Global Notes and the Exchange Global Note.
Based on an interpretation of the Securities Act by the staff of the
Securities and Exchange Commission (the "SEC"), Exchange Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder thereof (other than (i) a
broker-dealer who purchased such Old Notes directly from the Company for resale
pursuant to Rule 144A or any other available exemption under the Securities Act
or (ii) a person that is an "affiliate" (within the meaning of Rule 405 of the
Securities Act) of the Company), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the Exchange Notes in its ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Old Notes
wishing to accept the Exchange Offer must represent to the Company that such
conditions have been met.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must agree that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of up to 180 days
after the Expiration Date, it will make this Prospectus available to any broker-
dealer for use in connection with any such resale. See "Plan of Distribution."
The Exchange Notes will be a new issue of securities for which there
currently is no market. The Company does not intend to apply for listing or
quotation of the Exchange Notes on any securities exchange or stock market.
Although one of the Initial Purchasers has informed the Company that it
currently intends to make a market in the Exchange Notes, it is not obligated to
do so, and any such market-making may be discontinued at any time without
notice. Accordingly, there can be no assurance as to the development, liquidity
or maintenance of any market for the Exchange Notes. See "Risk Factors."
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR
A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of 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 Prospectus, including without limitation,
statements under "Prospectus Summary," "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the planned capital expenditures, increases in oil and gas production,
the number of anticipated wells to be drilled in 1998 and thereafter, 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 have
been correct. There are numerous uncertainties inherent in estimating quantities
of proved oil and natural gas reserves and in projecting future rates of
production and timing of development expenditures, including many factors beyond
the control of the Company. 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, if significant, would 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 are disclosed under
"Risk Factors" and elsewhere in this Prospectus, including, without limitation,
in conjunction with the forward-looking statements included in this Prospectus.
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.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements,
including the notes thereto, included elsewhere and incorporated by reference in
this Prospectus. Unless otherwise indicated, references to "Houston Exploration"
or the "Company" refer to The Houston Exploration Company and its subsidiaries
on a combined basis. Investors should carefully consider the information set
forth under "Risk Factors." Certain oil and gas industry terms used in this
Prospectus are defined in "Glossary of Oil and Gas Terms."
This Prospectus contains certain forward-looking statements with respect to
the business of the Company and the industry in which it operates. These
forward-looking statements are subject to certain risks and uncertainties which
may cause actual results to differ significantly from such forward-looking
statements. See "Disclosure Regarding Forward-Looking Statements" and "Risk
Factors."
THE COMPANY
Houston Exploration is an independent natural gas and oil company engaged
in the exploration, development, exploitation and acquisition of domestic
natural gas and oil properties. The Company's offshore properties are located
primarily in the shallow waters (up to 600 feet) of the Gulf of Mexico, and its
onshore properties are located in South Texas, the Arkoma Basin, East Texas and
West Virginia. The Company has utilized its geological and geophysical expertise
to grow its reserve base through a combination of high potential exploratory
drilling in the Gulf of Mexico and lower risk, high impact exploitation and
development drilling onshore. The Company believes that the lower risk projects
and more stable production associated with its onshore properties complement its
high potential exploratory prospects in the Gulf of Mexico by balancing risk and
reducing volatility.
The Company has achieved significant growth in net proved reserves,
production, revenues and EBITDA over the past five years. The Company has
increased net proved reserves at a compound annual rate of 30% from 92 Bcfe at
December 31, 1992 to 337 Bcfe at December 31, 1997. During this period, annual
production increased at a compound annual rate of 30% from 14 Bcfe in 1992 to 51
Bcfe in 1997. Average daily production during the month of December 1997 was 179
MMcfe per day. The Company's oil and gas revenues increased from $22 million in
1992 to $116 million in 1997, and its EBITDA increased from $17 million to $93
million over the same period. At December 31, 1997, Houston Exploration reported
net proved reserves of 337 Bcfe with a discounted present value of cash flows
before income taxes ("PV-10%") of $377 million.
The Company believes that its primary strengths are its high quality
reserves, its substantial inventory of high potential exploration, exploitation
and development opportunities, its expertise in generating new prospects, its
geographic focus and its low-cost operating structure. Approximately 98% of the
Company's net proved reserves at December 31, 1997 were natural gas and
approximately 78% were classified as proved developed. The Company operates over
90% of its production.
The geographic focus of the Company's operations in the Gulf of Mexico and
core onshore areas enables it to manage a large asset base with a relatively
small number of employees and to add and operate production at relatively low
incremental costs. The Company achieved lease operating expenses (excluding
severance taxes) of $0.28 per Mcfe of production and net general and
administrative expenses of $0.11 per Mcfe of production for the year ended
December 31, 1997. The Company believes that these expense levels are among the
lowest within its peer group.
BUSINESS STRATEGY
The Company's strategy is to continue to increase its reserves, production
and cash flow by pursuing internally generated exploration prospects, primarily
in the Gulf of Mexico, by conducting development and exploitation drilling on
its onshore and offshore properties and by making selective opportunistic
acquisitions. Over the past five years, the Company has added 400 Bcfe of net
proved reserves through exploration, acquisitions, and exploitation and
development. During this period, the Company has produced a total of 151 Bcfe,
and total net proved reserves added due to extensions, discoveries and revisions
were approximately
3
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168% of cumulative production. Total net proved reserves added during this
period including acquisitions were approximately 265% of cumulative production.
During 1997, the Company increased production by more than 60%, from 32 Bcfe in
1996 to 51 Bcfe in 1997. The Company focuses on the following elements in
implementing this strategy:
High Potential Exploratory and Development Drilling in the Gulf of Mexico
The Company plans to drill approximately 15 exploratory wells in the Gulf
of Mexico in 1998, the successful completion of any one of which could
substantially increase the Company's reserves. Over the past five years, the
Company has drilled 20 successful exploratory wells and 19 successful
development wells in the Gulf of Mexico, representing a historical success rate
of 74%. The Company believes it has assembled a four year inventory of
exploration and development drilling opportunities in the Gulf of Mexico,
principally in shallow waters. The Company holds interests in 79 lease blocks,
representing 394,093 gross (292,837 net) acres, in federal and state waters in
the Gulf of Mexico, of which 28 have current operations. The Company has a 100%
working interest in 38 of these lease blocks and a 50% or greater working
interest in 22 other lease blocks. The Company anticipates that approximately
$68 million of its $100 million 1998 capital expenditure budget (excluding
acquisitions) will be spent on offshore projects. In addition, the Company
intends to continue its participation in federal lease sales and to actively
pursue attractive farm-in opportunities as they become available. The Company's
management believes that the Gulf of Mexico area remains attractive for future
exploration and development activities due to the availability of geologic data,
remaining reserve potential and the infrastructure of gathering systems,
pipelines, platforms and providers of drilling services and equipment. Based on
1997 annual production, the Company's offshore reserves have a reserve to
production ratio of 5.4 years. During December 1997, average net production from
the Company's Gulf of Mexico properties was approximately 62 MMcfe per day.
Lower Risk, High Impact Exploitation and Development Drilling Onshore
The Company owns significant onshore natural gas and oil properties in
South Texas, the Arkoma Basin of Oklahoma and Arkansas, East Texas and West
Virginia, accounting for approximately 65% of its net proved reserves at
December 31, 1997. Complementing the Company's offshore properties, the
Company's onshore properties are characterized by relatively longer reserve
lives and more predictable production. Over the past five years, the Company has
drilled or participated in the drilling of 63 successful development wells and
six successful exploratory wells onshore representing a historical drilling
success rate of 76%. One example of the successful implementation of the
Company's onshore strategy is in the Charco Field in South Texas, where the
Company has increased net production from an average of 38 MMcfe per day in July
1996, immediately following its acquisition of such properties, to an average of
92 MMcfe per day in December 1997. During 1997, the Company produced 20 Bcfe,
net to the Company's interest, from the Charco Field and added 40 Bcfe in net
proved reserves. The Company has identified an extensive inventory of more than
100 potential onshore drilling locations, of which approximately 70 are located
in the Charco Field. The Company anticipates that approximately $32 million of
its $100 million 1998 capital expenditure budget (excluding acquisitions) will
be spent on onshore projects, including the drilling of approximately 25 wells.
Based on 1997 annual production, the Company's onshore reserves have a reserve
to production ratio of 7.4 years. During December 1997, average net production
from the Company's onshore properties was approximately 117 MMcfe per day.
Opportunistic Acquisitions
The Company's primary strategy of growing its reserves through the drillbit
is supplemented by the Company's continuing pursuit of opportunistic
acquisitions of properties with unexploited reserve potential. The Company
targets properties (i) that it can operate, (ii) that are either in the Gulf of
Mexico or onshore in existing core operating areas or in new geographic areas in
which the Company believes it can establish a substantial concentration of
properties and operations, and (iii) that provide a base for further exploration
and development. The Company has a successful track record of building its
reserves through opportunistic acquisitions onshore and in the Gulf of Mexico
and successfully exploiting those reserves. In particular, the
4
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Company has drilled 25 successful wells (74% success rate) in the Charco Field
since acquiring its properties in the field in July 1996. See "-- Pending
Acquisition."
High Percentage of Operated Properties
The Company seeks to operate properties in which it has a significant
ownership interest. By operating these properties, the Company can manage
production performance while controlling operating expenses and the timing and
amount of capital expenditures. Properties operated by the Company account for
approximately 90% of its Gulf of Mexico production and approximately 95% of its
onshore production. The Company currently has two offshore jackup rigs and two
land rigs under long-term contracts, which allow the Company to manage the
timing of the drilling of its wells. The Company also pursues cost savings
through the use of outside contractors for much of its offshore field operations
activities. As a result of these and other factors, the Company achieved lease
operating expense (excluding severance taxes) of $0.28 per Mcfe of production
and net general and administrative expense of $0.11 per Mcfe of production for
the year ended December 31, 1997.
Use of Advanced Technology for In-House Prospect Generation
The Company generates virtually all of its exploration prospects utilizing
in-house geological and geophysical expertise. The Company uses advanced
technology, including 3-D seismic and in-house computer-aided exploration
technology, to reduce risks, lower costs and prioritize drilling prospects. The
Company has acquired approximately 2,400 square miles of 3-D seismic data,
including 3-D seismic surveys on 65 of its offshore lease blocks and on possible
lease and acquisition prospects, and 73,500 linear miles of offshore 2-D seismic
data. Since the acquisition of its Charco Field properties in 1996, the Company
has purchased and commenced interpretation of 3-D seismic data covering 148
square miles of the field. In 1998, the Company anticipates the acquisition of
30 square miles of 3-D seismic data on its recently acquired East Texas acreage.
The Company has 13 geologists/geophysicists with average industry experience of
approximately 28 years and 10 geophysical workstations for use in interpreting
3-D seismic data. The availability of 3-D seismic data for Gulf of Mexico
properties at reasonable costs has enabled the Company to identify exploration
and development prospects in the Company's existing inventory of properties and
to define possible lease and acquisition prospects.
Geographically Focused Operations
Focusing drilling activities on properties in relatively concentrated
offshore and onshore areas permits the Company to utilize its base of
geological, engineering, exploration and production experience in the regions.
The Company currently operates in five areas of geographic concentration -- the
Gulf of Mexico, South Texas, the Arkoma Basin, East Texas, and West
Virginia -- and continues to evaluate and may add additional core areas in the
future. The Company is currently evaluating an acquisition that would add a new
core area of operations onshore in South Louisiana. See "-- Pending
Acquisition." The geographic focus of the Company's operations allows it to
manage a large asset base with a relatively small number of employees and
enables the Company to add production at relatively low incremental costs. For
example, in the Charco Field, the Company has reduced lease operating expense
(excluding severance taxes) by 50%, from $0.38 per Mcfe for the six month period
beginning on July 1, 1996, when the Company acquired its Charco Field
properties, and ending December 31, 1996 to $0.19 per Mcfe for the six month
period ended December 31, 1997.
PENDING ACQUISITION
On March 18, 1998, the Company entered into a definitive agreement with
respect to the acquisition of natural gas and oil properties located onshore in
South Louisiana representing 41 Bcfe of net proved reserves as of November 1,
1997 (the "Pending Acquisition"). The average net production in December 1997
attributable to such properties was approximately 14 MMcfe per day. The
agreement provides for the Company to pay $54.9 million for the properties to be
acquired. The completion of the Pending Acquisition is subject to numerous
conditions; accordingly, no assurances can be made that the Pending Acquisition
will be consummated.
5
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OWNERSHIP
Houston Exploration commenced operations in January 1986 as a wholly owned
subsidiary of The Brooklyn Union Gas Company ("Brooklyn Union") and completed an
initial public offering of 7.13 million shares of common stock, par value $0.01
per share (the "Common Stock"), in September 1996. As of March 31, 1998, the
Company had 23.9 million shares of Common Stock outstanding, and the last
reported sale price on April 14, 1998 of the Company's Common Stock on the New
York Stock Exchange was $24.31. Brooklyn Union continues to indirectly own
approximately 64% of the outstanding shares of Common Stock of the Company.
Brooklyn Union distributes gas in an area of New York City with a population of
approximately four million. In September 1997, Brooklyn Union became a wholly
owned subsidiary of KeySpan Energy Corporation ("KeySpan"), which has an equity
market capitalization of $1.8 billion, based on the April 14, 1998 closing price
of $35.19 per share of its common stock on the New York Stock Exchange, and
reported revenues of $1.5 billion for the fiscal year ended September 30, 1997.
6
<PAGE> 9
SUMMARY OF TERMS OF EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $100,000,000 aggregate
principal amount of Exchange Notes for up to an equal aggregate principal amount
of Old Notes. The Exchange Notes will be obligations of the Company entitled to
the benefits of the Indenture. The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Old Notes,
except that (i) the offering of the Exchange Notes has been registered under the
Securities Act, (ii) the Exchange Notes will not be subject to transfer
restrictions and (iii) the Exchange Notes will not be entitled to registration
or other rights under the Registration Rights Agreement including the provision
in the Registration Rights Agreement for the payment of Liquidated Damages upon
failure by the Company to consummate the Exchange Offer or the occurrence of
certain other events. See "Description of the Notes."
REGISTRATION RIGHTS
AGREEMENT..................... The Old Notes were sold by the Company on March
2, 1998 to the Initial Purchasers pursuant to a
Purchase Agreement, dated February 25, 1998
(the "Purchase Agreement"). Pursuant to the
Purchase Agreement, the Company and the Initial
Purchasers entered into the Registration Rights
Agreement which, among other things, grants the
holders of the Old Notes certain exchange and
registration rights. The Exchange Offer is
intended to satisfy certain obligations of the
Company under the Registration Rights
Agreement.
THE EXCHANGE OFFER............ $1,000 principal amount of Exchange Notes will
be issued in exchange for each $1,000 principal
amount of Old Notes validly tendered and
accepted pursuant to the Exchange Offer. As of
the date hereof, $100,000,000 in aggregate
principal amount of Old Notes are outstanding.
The Company will issue the Exchange Notes to
tendering holders of Old Notes promptly
following the Expiration Date. The terms of the
Exchange Notes are identical in all material
respects to the Old Notes except for certain
transfer restrictions and registration rights
relating to the Old Notes.
No federal or state regulatory requirements
must be complied with or approval obtained in
connection with the Exchange Offer, other than
the registration requirements under the
Securities Act.
RESALE........................ Based on existing interpretations of the
Securities Act by the staff of the SEC set
forth in several no-action letters to third
parties, and subject to the immediately
following sentence, the Company believes that
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by
a holder thereof (other than (i) a broker-
dealer who purchased such Old Notes directly
from the Company for resale pursuant to Rule
144A or any other available exemption under the
Securities Act or (ii) a person that is an
"affiliate" (within the meaning of Rule 405 of
the Securities Act) of the Company), without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that the holder is acquiring the
Exchange Notes in its ordinary course of
business and is not participating, and has no
arrangement or understanding with any person to
participate, in the distribution of the
Exchange Notes. However, any purchaser of Notes
who is an affiliate of the Company or who
intends to participate in the Exchange Offer
for the purpose of distributing the Exchange
7
<PAGE> 10
Notes, or any broker-dealer who purchased the
Old Notes from the Company to resell pursuant
to Rule 144A or any other available exemption
under the Securities Act, (i) will not be able
to rely on the interpretations by the staff of
the SEC set forth in the above-mentioned
no-action letters, (ii) will not be able to
tender its Old Notes in the Exchange Offer and
(iii) must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any sale or
transfer of the Notes unless such sale or
transfer is made pursuant to an exemption from
such requirements. The Company does not intend
to seek its own no-action letter and there is
no assurance that the staff of the SEC would
make a similar determination with respect to
the Exchange Notes as it has in such no-action
letters to third parties. See "The Exchange
Offer -- Purpose and Effect of the Exchange
Offer" and "Plan of Distribution." Each
broker-dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a
prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by
delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may
be used by a broker-dealer in connection with
resales of Exchange Notes received in
connection with resales of Exchange Notes
received in exchange for Old Notes where such
Old Notes were acquired by such broker-dealer
as a result of market-making activities or
other trading activities. The Company has
agreed that, for a period of up to 180 days
after the Expiration Date, it will make this
Prospectus available to any broker-dealer for
use in connection with any such resale. See
"Plan of Distribution."
EXPIRATION DATE............... 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND THE
OLD NOTES................... The Exchange Notes will bear interest at a rate
of 8 5/8% per annum, payable semiannually on
January 1 and July 1 of each year, commencing
July 1, 1998. Holders of Exchange Notes of
record on June 15, 1998 will receive on July 1,
1998 an interest payment in an amount equal to
(x) the accrued interest on such Exchange Notes
from the date of issuance thereof to July 1,
1998, plus (y) the accrued interest on the
previously held Old Notes from the date of
issuance of such Old Notes (March 2, 1998) to
the date of exchange thereof. Interest will not
be paid on Old Notes that are accepted for
exchange. The Notes mature on January 1, 2008.
CONDITIONS TO THE EXCHANGE
OFFER......................... The Company may terminate the Exchange Offer if
it determines that its ability to proceed with
the Exchange Offer could be materially impaired
due to the occurrence of certain conditions.
8
<PAGE> 11
The Company does not expect any of such
conditions to occur, although there can be no
assurance that such conditions will not occur.
Holders of Old Notes will have certain rights
under the Registration Rights Agreement should
the Company fail to consummate the Exchange
Offer. See "The Exchange Offer -- Conditions to
the Exchange Offer."
PROCEDURES FOR TENDERING OLD
NOTES......................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be
exchanged and any other required documentation,
to The Bank of New York, as Exchange Agent, at
the address set forth herein and therein or
effect a tender of Old Notes pursuant to the
procedures for book-entry transfer as provided
for herein and therein. By executing the Letter
of Transmittal, each holder will represent to
the Company that, among other things, the
Exchange Notes acquired pursuant to the
Exchange Offer are being acquired in the
ordinary course of business of the person
receiving such Exchange Notes, whether or not
such person is the holder, that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such
Exchange Notes and that neither the holder nor
any such other person is an "affiliate," as
defined in Rule 405 under the Securities Act,
of the Company. See "The Exchange
Offer -- Procedures for Tendering."
Following consummation of the Exchange Offer,
holders of Old Notes not tendered as a general
matter will not have any further registration
rights, and the Old Notes will continue to be
subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for
the Old Notes could be adversely affected. See
"Risk Factors -- Absence of Public Market for
the Notes and "-- Consequences of Exchange and
Failure to Exchange" and "The Exchange
Offer -- Consequences of Failure to Exchange."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender in the Exchange Offer
should contact such registered holder promptly
and instruct such registered holder to tender
on his behalf. If such beneficial owner wishes
to tender on his own behalf, such beneficial
owner must, prior to completing and executing
the Letter of Transmittal and delivering his
Old Notes, either (a) make appropriate
arrangements to register ownership of the Old
Notes in such holder's name or (b) obtain a
properly completed bond power from the
registered holder or endorsed certificates
representing the Old Notes to be tendered. The
transfer of record ownership may take
considerable time, and completion of such
transfer prior to the Expiration Date may not
be possible. See "The Exchange
Offer -- Procedures for Tendering."
9
<PAGE> 12
GUARANTEED DELIVERY
PROCEDURES.................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available, or who cannot deliver
their Old Notes (or complete the procedure for
book-entry transfer) and deliver a properly
completed Letter of Transmittal and any other
documents required by the Letter of Transmittal
to the Exchange Agent prior to the Expiration
Date may tender their Old Notes according to
the guaranteed delivery procedures set forth in
"The Exchange Offer -- Guaranteed Delivery
Procedures."
WITHDRAWAL RIGHTS............. Tenders of Old Notes may be withdrawn at any
time prior to the Expiration Date by furnishing
a written or facsimile transmission notice of
withdrawal to the Exchange Agent containing the
information set forth in "The Exchange
Offer -- Withdrawal of Tenders."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF EXCHANGE NOTES.... Subject to certain conditions (as summarized
above in "Conditions to the Exchange Offer" and
described more fully in "The Exchange
Offer -- Conditions to the Exchange Offer"),
the Company will accept for exchange any and
all Old Notes that are properly tendered in the
Exchange Offer prior to the Expiration Date.
See "The Exchange Offer -- Procedures for
Tendering." The Exchange Notes issued pursuant
to the Exchange Offer will be delivered
promptly following the Expiration Date.
EXCHANGE AGENT................ The Bank of New York, the Trustee under the
Indenture, is serving as the Exchange Agent
(the "Exchange Agent") in connection with the
Exchange Offer. The mailing address of the
Exchange Agent is The Bank of New York, P.O.
Box 11248, Church Street Station, New York, NY
10286-1248, Attention: Remo J. Reale. The
overnight courier and hand delivery address for
the Exchange Agent is The Bank of New York,
Tender and Exchange Department, 101 Barclay
Street, Receive and Deliver Window, New York,
NY 10286. For assistance and requests for
additional copies of the Prospectus, the Letter
of Transmittal or the Notice of Guaranteed
Delivery, the telephone number for the Exchange
Agent is (212) 815-3703, and the facsimile
number for the Exchange Agent is (212) 815-5915
(Eligible Institutions only). All
communications should be directed to the
attention of Remo J. Reale.
EFFECT ON HOLDERS OF OLD
NOTES......................... Holders of Old Notes who do not tender their
Old Notes in the Exchange Offer will continue
to hold their Old Notes and will be entitled to
all the rights and limitations applicable
thereto under the Indenture. All untendered,
and tendered but unaccepted, Old Notes will
continue to be subject to the restrictions on
transfer provided for in the Old Notes and the
Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer,
the trading market, if any, for the Old Notes
could be adversely affected. See "Risk
Factors -- Consequences of Exchange and Failure
to Exchange."
See "The Exchange Offer" for more detailed information concerning the terms
of the Exchange Offer.
10
<PAGE> 13
SUMMARY OF TERMS OF EXCHANGE NOTES
All capitalized terms used in this Prospectus with respect to the Notes and
not otherwise defined herein have the meanings set forth under "Description of
the Notes."
SECURITIES OFFERED............ $100,000,000 aggregate principal amount of
8 5/8% Senior Subordinated Notes due 2008,
Series B.
MATURITY DATE................. January 1, 2008.
INTEREST RATE................. Interest on the Exchange Notes will accrue at a
rate of 8 5/8% per annum and will be payable
semi-annually in arrears on each January 1 and
July 1, commencing July 1, 1998.
MANDATORY REDEMPTION.......... The Company is not required to make mandatory
redemption or sinking fund payments with
respect to the Exchange Notes except as set
forth under "Description of the
Notes -- Repurchase at the Option of Holders."
OPTIONAL REDEMPTION........... On or after January 1, 2003, the Company may
redeem the Exchange Notes, at the redemption
prices set forth herein, plus accrued and
unpaid interest to the date of redemption.
Notwithstanding the foregoing, at any time
prior to January 1, 2001, the Company may
redeem up to 35% of the original aggregate
principal amount of the Exchange Notes with the
net proceeds of an Equity Offering at a
redemption price equal to 108.625% of the
principal amount thereof, plus accrued and
unpaid interest to the date of redemption;
provided that at least 65% of the original
aggregate principal amount of the Exchange
Notes remains outstanding after such
redemption. See "Description of the Notes --
Optional Redemption."
RANKING....................... The Exchange Notes will be general unsecured
obligations of the Company, will rank
subordinate in right of payment to all existing
and future Senior Debt of the Company and will
rank senior or pari passu in right of payment
to all existing and future subordinated
indebtedness of the Company. The Exchange Notes
will be effectively subordinated to all
liabilities, if any, of any subsidiaries of the
Company. As of December 31, 1997, on a pro
forma basis, the Company had $15.4 million of
Senior Debt outstanding, $42.4 million of trade
payables and other accrued liabilities, and no
other senior subordinated indebtedness other
than the Exchange Notes. On a pro forma basis,
the Company would have had the capacity to
borrow an additional $99.6 million of Senior
Debt under the Credit Facility. See "Risk
Factors -- Subordination of the Notes."
CHANGE OF CONTROL............. Upon a Change of Control, each holder will have
the right to require the Company to repurchase
such holder's Exchange Notes at a price equal
to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of
repurchase. See "Description of the
Notes -- Repurchase at the Option of Holders."
There can be no assurance that the Company will
have sufficient funds to repurchase the
Exchange Notes in the event of a Change of
Control.
11
<PAGE> 14
CERTAIN COVENANTS............. The Indenture pursuant to which the Exchange
Notes will be issued contains certain covenants
which, among other things, limit the ability of
the Company and its Restricted Subsidiaries to:
(i) incur additional indebtedness and issue
preferred stock; (ii) repay certain other
indebtedness; (iii) pay dividends or make
certain other distributions; (iv) repurchase
equity interests or make certain investments;
(v) consummate certain asset sales; (vi) enter
into certain transactions with affiliates;
(vii) incur liens; (viii) merge or consolidate
with any other person; (ix) sell, assign,
transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the
Company and its Restricted Subsidiaries; (x)
enter into agreements that restrict the ability
of Restricted Subsidiaries to make certain
distributions or payments or (xi) enter into
guarantees of Indebtedness of the Company. In
addition, under certain circumstances, the
Company will be required to make an offer to
purchase the Exchange Notes at a price equal to
100% of the principal amount thereof, plus
accrued and unpaid interest to the date of
purchase, with the proceeds from certain asset
sales. See "Description of the Notes -- Certain
Covenants" and "-- Repurchase at the Option of
Holders -- Asset Sales."
TRANSFER RESTRICTIONS......... For a description of restrictions on transfer
of the Exchange Notes, see "The Exchange
Offer -- Purpose and Effect of the Exchange
Offer."
RISK FACTORS
See "Risk Factors," beginning on page 16 hereof, for a discussion of
certain factors that should be considered in evaluating an investment in the
Exchange Notes.
12
<PAGE> 15
SUMMARY COMBINED FINANCIAL DATA
The summary combined financial data set forth below with respect to the
Company's combined statements of operations for each of the three years in the
period ended December 31, 1997 and with respect to the Company's combined
balance sheets as of December 31, 1997 are derived from the financial statements
of the Company that have been audited by Arthur Andersen LLP, independent public
accountants. The summary combined financial data should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Financial Statements and Notes thereto
included elsewhere and incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas and oil revenues.............................. $39,431 $ 64,864 $116,349
Other..................................................... 1,778 1,040 1,297
------- -------- --------
Total revenues.................................... 41,209 65,904 117,646
Expenses:
Lease operating........................................... 5,005 10,800 14,146
Severance tax............................................. 463 1,401 4,233
Depreciation, depletion and amortization.................. 21,969 33,732 59,081
General and administrative, net........................... 3,486 6,249 5,825
Nonrecurring charge(1).................................... 12,000 -- --
------- -------- --------
Total operating expenses.......................... 42,923 52,182 83,285
Income (loss) from operations............................... (1,714) 13,722 34,361
Interest expense, net....................................... 2,398 2,875 938
Income (loss) before income taxes........................... (4,112) 10,847 33,423
Income tax provision (benefit).............................. (3,809) 2,205 10,173
------- -------- --------
Net income (loss)........................................... $ (303) $ 8,642 $ 23,250
======= ======== ========
OTHER DATA:
EBITDA(2)................................................... $32,255 $ 47,454 $ 93,442
Capital expenditures(3)..................................... 70,249 154,125 145,055
PRO FORMA DATA:(4)
Cash interest expense(5).................................... $ 9,792
Ratio of EBITDA to cash interest expense.................... 9.5x
Ratio of net debt to EBITDA(6).............................. 1.2x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(7)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,745 $ 4,245
Working capital (deficit)(8)................................ (5,401) (5,901)
Property, plant and equipment, net.......................... 443,738 443,738
Total assets................................................ 491,391 493,766
Total long-term debt........................................ 113,000 115,375(9)
Stockholders' equity........................................ 256,187 256,187
</TABLE>
Footnotes on next page
13
<PAGE> 16
- ---------------
(1) Represents a nonrecurring non-cash charge incurred in connection with the
reorganization effective in February 1996. See Note 11 to the Company's
Combined Financial Statements.
(2) EBITDA is defined as income (loss) from operations (before nonrecurring
charges) plus depreciation, depletion and amortization. EBITDA should not be
considered as an alternative to income (loss) from operations or net income
(loss), as determined in accordance with generally accepted accounting
principles, as a measure of the Company's operating performance or to net
cash provided by operating, investing and financing activities, as
determined in accordance with generally accepted accounting principles, as a
measure of the Company's ability to meet cash needs. The Company believes
that EBITDA is a measure commonly reported and widely used by investors and
other interested parties as a measure of a company's operating performance
and debt servicing ability because it assists in comparing performance on a
consistent basis without regard to depreciation, depletion and amortization,
which can vary significantly depending upon accounting methods (particularly
when acquisitions are involved) or nonoperating factors (such as historical
cost). Accordingly, this information has been disclosed herein to permit a
more complete comparative analysis of the Company's operating performance
relative to other companies and of the Company's debt servicing ability.
However, EBITDA may not be comparable in all instances to other similar
types of measures used.
(3) Capital expenditures reflected in the table consist of cash used for
investments in property and equipment, and do not reflect non-cash capital
expenditures in the year ended December 31, 1996 of $22.9 million reflecting
the issuance of shares of the Company's Common Stock in consideration for
its acquisition of natural gas and oil properties. Including the $22.9
million in non-cash capital expenditures, the Company's capital expenditures
for 1996 would have been approximately $177.0 million.
(4) Gives pro forma effect to the sale of the Old Notes and the application of
the net proceeds therefrom as if it had occurred on January 1, 1997. Does
not give effect to the Pending Acquisition.
(5) Pro forma cash interest is defined as (i) gross interest expense of $6.8
million less (ii) amortization of debt issue costs of $0.3 million less
(iii) interest on debt refinanced of $5.3 million plus (iv) interest on $100
million of 8 5/8% Senior Subordinated Notes of $8.6 million.
(6) Net debt is defined as total debt less cash and cash equivalents at December
31, 1997.
(7) As adjusted to give effect to the sale of the Old Notes and the application
of the net proceeds therefrom as if it had occurred on December 31, 1997;
does not reflect any borrowings under the Credit Facility to fund the
purchase price of the Pending Acquisition.
(8) Includes accrual for the minimum deferred purchase price of $8.8 million
with respect to the Company's 1996 acquisition of certain offshore
properties from Smith Offshore Exploration Company. See Note 12 to the
Company's Combined Financial Statements. The Company paid the deferred
purchase price in the first quarter of 1998 by delivering 520,777 shares of
Common Stock with an aggregate value (determined by reference to a 20
trading day average price of the Common Stock) of $8.8 million.
(9) The Company used the net proceeds from the sale of the Old Notes to repay
indebtedness outstanding under the Credit Facility. As amended, the Credit
Facility has a borrowing base of $115 million.
14
<PAGE> 17
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Production:
Natural gas (MMcf)........................................ 21,077 31,215 50,310
Oil (MBbls)............................................... 100 118 171
Total (MMcfe)............................................. 21,677 31,923 51,336
Average sales prices:
Natural Gas (per Mcf)(1).................................. $ 1.79 $ 2.00 $ 2.25
Oil (per Bbl)............................................. 16.54 21.53 18.33
Expenses (per Mcfe):
Lease operating........................................... $ 0.23 $ 0.34 $ 0.28
Severance tax............................................. 0.02 0.04 0.08
Depreciation, depletion and amortization.................. 1.01 1.06 1.15
General and administrative, net........................... 0.16 0.20 0.11
</TABLE>
- ---------------
(1) Reflects the effects of hedging. Absent the effects of hedging, average
realized natural gas prices would have been $1.53, $2.35 and $2.45 per Mcf
for the years ended December 31, 1995, 1996 and 1997, respectively. See
"Risk Factors -- Hedging Risks," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General" and
"Business -- Marketing and Customers."
SUMMARY NATURAL GAS AND OIL RESERVE DATA
The following table summarizes the estimates of the Company's historical
net proved natural gas and oil reserves as of the dates indicated and the
present value attributable to these reserves at such dates. The reserve and
present value data as of December 31, 1997 have been prepared by Netherland,
Sewell & Associates, Inc. ("NSA"), and Miller and Lents, Ltd. ("Miller and
Lents"), independent petroleum engineering consultants. The reserve data and
present values as of December 31, 1996 were prepared by NSA, Miller and Lents
and Ryder Scott Company and as of December 31, 1995, by NSA, Miller and Lents,
Ryder Scott Company and Huddleston & Co., Inc. For additional information
relating to the Company's natural gas and oil reserves, see "Business -- Natural
Gas and Oil Reserves" and Note 13 of the Notes to the Combined Financial
Statements of the Company included elsewhere and incorporated by reference in
this Prospectus. The reserves stated in the table below do not include any
reserves that may be acquired in the Pending Acquisition.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT OPERATING
DATA)
<S> <C> <C> <C>
Net Proved Reserves:
Natural gas (MMcf)........................................ 195,946 320,474 330,601
Oil (MBbls)............................................... 889 1,131 1,077
Total (MMcfe)............................................. 201,280 327,260 337,063
Present value of future net revenues before income
taxes(1).................................................. $206,574 $577,000 $377,065
Standardized measure of discounted future net cash
flows(2).................................................. $171,459 $452,582 $315,380
</TABLE>
- ---------------
(1) The present value of future net revenues attributable to the Company's
reserves was prepared using prices in effect as of the end of the respective
periods presented, discounted at 10% per annum on a pre-tax basis. Such
amounts reflect the effects of the Company's hedging contracts and do not
reflect the effects of Section 29 tax credits which were monetized in 1997.
Average prices per Mcf of natural gas used in making such present value
determinations as of December 31, 1995, 1996 and 1997 were $2.06, $3.41 and
$2.31, respectively. Average prices per Bbl of oil used in making such
present value determinations as of December 31, 1995, 1996 and 1997 were
$17.29, $22.94 and $17.23, respectively.
(2) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10%.
Such amounts reflect the effects of the Company's hedging contracts.
15
<PAGE> 18
RISK FACTORS
Holders of Old Notes should carefully consider the information set forth
below, as well as other information appearing in this Prospectus, before
tendering any Old Notes for exchange into Exchange Notes. Certain matters set
forth below also apply to the Old Notes and will continue to apply to any Old
Notes remaining outstanding after the Exchange Offer.
VOLATILITY OF NATURAL GAS AND OIL PRICES
Revenues generated from the Company's operations are highly dependent upon
the price of, and demand for, natural gas and oil. Historically, the markets for
natural gas and oil have been volatile, and such markets are likely to continue
to be volatile in the future. Prices for natural gas and oil are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for natural gas and oil, market uncertainty and a variety of additional factors
that are beyond the control of the Company. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of natural gas and oil, the
price of foreign imports and overall domestic and global economic conditions. It
is impossible to predict future natural gas and oil price movements with any
certainty. Declines in natural gas and oil prices also may reduce the amount of
natural gas and oil that the Company can produce economically.
In order to reduce its exposure to short-term fluctuations in the price of
natural gas, the Company enters into hedging arrangements from time to time. The
Company's hedging arrangements apply to only a portion of its production and
provide only partial price protection against declines in natural gas prices. In
addition, the Company's hedging arrangements limit the benefit to the Company of
increases in the price of natural gas. See "-- Hedging Risks," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General" and "Business -- Marketing and Customers."
The Company uses the full cost method of accounting for its investment in
natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
natural gas and oil reserves and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged to
operations. If a writedown is required, it would result in a charge to earnings
but would not have an impact on cash flows from operating activities. Once
incurred, a writedown of oil and gas properties is not reversible at a later
date even if oil and gas prices increase.
As of December 31, 1997, the Company estimates, using prices in effect as
of such date, that the ceiling limitation imposed under full cost accounting
rules on total capitalized natural gas and oil property costs exceeded actual
capitalized costs. Natural gas prices have fluctuated substantially from prices
used in reserve valuations for the year ended December 31, 1997. Depending upon
natural gas prices and the results of the Company's drilling programs, the
Company may be required to write down the carrying value of its natural gas and
oil properties.
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
There are numerous uncertainties inherent in estimating natural gas and oil
reserves and their estimated values, including many factors beyond the control
of the producer. The reserve data set forth in this Prospectus represents only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of natural gas and oil that cannot be measured in an
exact manner. Estimates of economically recoverable natural gas and oil reserves
and of future net cash flows necessarily depend upon a number of variable
factors and assumptions, such as historical production from the area compared
with production from other producing areas, the assumed effects of regulations
by governmental agencies and assumptions concerning future natural gas and oil
prices, future operating costs, severance and excise taxes, development
16
<PAGE> 19
costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of natural gas and oil attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers but at different times
may vary substantially and such reserve estimates may be subject to downward or
upward adjustment based upon such factors. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances may be material. See "Business -- Natural Gas and
Oil Reserves."
RESERVE REPLACEMENT RISK
In general, the volume of production from natural gas and oil properties
declines as reserves are depleted. The rate of decline depends on reservoir
characteristics, and varies from the steep decline rate characteristic of Gulf
of Mexico reservoirs, where the Company has a significant portion of its
production, initial steep decline followed by relatively slower decline in South
Texas to the relatively slow decline rate characteristic of the longer-lived
fields in the Arkoma Basin, East Texas and West Virginia. The proved reserves of
the Company will decline as reserves are produced, except to the extent the
Company acquires properties containing proved reserves or conducts successful
exploration and development activities, or both. The Company's future natural
gas and oil production is, therefore, highly dependent upon its level of success
in finding or acquiring additional reserves. The business of exploring for,
developing or acquiring reserves is capital intensive. To the extent cash flow
from operations is reduced and external sources of capital become limited or
unavailable, the Company's ability to make the necessary capital investment to
maintain or expand its asset base of natural gas and oil reserves would be
impaired. In addition, there can be no assurance that the Company's future
exploration, development and acquisition activities will result in additional
proved reserves or that the Company will be able to drill productive wells at
acceptable costs.
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive natural gas or oil reservoirs will be encountered. The cost of
drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities in
formations, equipment failures or accidents, adverse weather conditions and
shortages or delays in the delivery of equipment. The Company's future drilling
activities may not be successful and, if unsuccessful, such failure will have an
adverse effect on the Company's future results of operations and financial
condition.
OPERATING RISKS OF NATURAL GAS AND OIL OPERATIONS
The natural gas and oil business involves certain operating hazards such as
well blowouts, collapse or failure of wellbore or tubulars, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, formations with
abnormal pressures, pollution, releases of toxic gas and other environmental
hazards and risks, any of which could result in substantial losses to the
Company. The Company's offshore operations also are subject to the additional
hazards of marine operations, such as severe weather, capsizing and collision.
The availability of a ready market for the Company's natural gas and oil
production also depends on the proximity of reserves to, and the capacity of,
natural gas and oil gathering systems, pipelines and trucking or terminal
facilities. In addition, the Company may be liable for environmental damages
caused by previous owners of property purchased or leased by the Company. As a
result, substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could reduce or eliminate the funds available for
exploration, development or acquisitions or result in the loss of the Company's
properties. In accordance with customary industry practices, the Company
maintains insurance against some, but not all, of such risks and losses. The
Company does not carry business interruption insurance. The occurrence of such
an event not fully covered by insurance could have a material adverse effect on
the financial condition and results of operations of the Company.
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Most of the Company's natural gas is transported through gas gathering
systems and gas pipelines which are not owned by the Company. Transportation
space on such gathering systems and pipelines is occasionally limited and at
times unavailable due to repairs or improvements being made to such facilities
or due to such space being utilized by other gas shippers with priority
transportation agreements. While the Company's ability to market its natural gas
has been subject to limitations or delays only on a very infrequent basis, if
transportation space is restricted or is unavailable, the Company's cash flow
from the affected properties could be adversely affected.
ACQUISITION RISKS
The successful acquisition of producing properties requires an assessment
of recoverable reserves, future oil and gas prices, operating costs, potential
environmental and other liabilities and other factors. The accuracy of such
assessments is inherently uncertain. In connection with such as assessment, the
Company performs a review of the subject properties that it believes to be
generally consistent with industry practice, which generally includes on-site
inspections and the review of reports filed with the Minerals Management Service
for environmental compliance. Such a review, however, will not reveal all
existing or potential problems nor will it permit a buyer to become sufficiently
familiar with the properties to fully assess their deficiencies and
capabilities. Inspections may not always be performed on every platform or well,
and structural or environmental problems are not necessarily observable even
when an inspection is undertaken. As a result of the foregoing factors, the
Company may suffer the loss of one or more acquired properties due to title
deficiencies or may be required to make significant expenditures to cure
environmental contamination with respect to acquired properties. Even when
problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of such problems. The
Company is generally not entitled to contractual indemnification for
environmental liabilities and acquires structures on a property on an "as is"
basis.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company's business is capital intensive and to maintain its base of
proved oil and gas reserves, a significant amount of cash flow from operations
must be invested in property acquisitions, development or exploration
activities. The Company makes, and will continue to make, substantial capital
expenditures for the exploration, development, acquisition and production of
natural gas and oil reserves. Historically, the Company has financed these
expenditures primarily with cash generated by operations, proceeds from bank
borrowings and the Company's initial public offering ("IPO") and, prior to the
Company's IPO, capital contributions by Brooklyn Union. The Company plans to
incur capital expenditures (excluding acquisitions) of approximately $100
million in 1998. Management believes that the Company will have sufficient cash
provided by operating activities and borrowings under the Credit Facility to
fund planned capital expenditures in 1998. If revenues or the Company's
borrowing base decrease as a result of lower natural gas and oil prices,
operating difficulties or declines in reserves, the Company may have limited
ability to expend the capital necessary to undertake or complete future drilling
programs or acquisition opportunities. Without such investment, the Company's
oil and gas reserves would decline. There can be no assurance that additional
debt or equity financing or cash generated by operations will be available to
meet these requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
HEDGING RISKS
From time to time, the Company enters into hedging arrangements relating to
a portion of its natural gas production. These hedges have in the past involved
fixed arrangements and other arrangements at a variety of fixed prices and with
a variety of other provisions including price floors and ceilings. The Company
may in the future enter into natural gas futures contracts, options, collars and
swaps. The Company's hedging activities, while intended to reduce the Company's
sensitivity to changes in market prices of natural gas, are subject to a number
of risks including instances in which (i) production is less than expected, (ii)
there is a widening of price differentials between delivery points required by
fixed price delivery contracts to the extent they differ
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from those on the Company's production or (iii) the Company's counterparties to
its futures contract will be unable to meet the financial terms of the
transaction. While the use of hedging arrangements limits the risk of declines
in natural gas prices, it may limit the benefit to the Company of increases in
the price of natural gas. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
EFFECTS OF LEVERAGE
The Company's senior credit facility (the "Credit Facility") provides for a
commitment of $150 million and has a current borrowing base of $115 million,
reduced from a borrowing base of $130 million in effect immediately prior to the
sale of the Old Notes. The Company had availability of approximately $15.4
million under the Credit Facility at December 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
On a pro forma basis giving effect to the sale of the Old Notes, the
Company's outstanding indebtedness at December 31, 1997 would have been $115.4
million, without giving effect to borrowings that would be required to fund the
Pending Acquisition, if completed. The Company's level of indebtedness has
several important effects on its operations, including (i) a substantial portion
of the Company's cash flow from operations must be dedicated to the payment of
interest on its indebtedness and will not be available for other purposes, (ii)
the covenants contained in the Credit Facility and the Indenture require the
Company to meet certain financial tests, and other restrictions limit its
ability to borrow additional funds or to dispose of assets and may affect the
Company's flexibility in planning for, and reacting to, changes in business
conditions and (iii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired. Moreover, future
acquisition or development activities may require the Company to alter its
capitalization significantly. These changes in capitalization may significantly
alter the leverage of the Company. The Company's ability to meet its debt
service obligations and to reduce its total indebtedness will be dependent upon
the Company's future performance, which will be subject to general economic
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control. There can be no assurance
that the Company's future performance will not be adversely affected by such
economic conditions and financial, business and other factors. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SUBORDINATION OF THE NOTES
The Notes are subordinated in right of payment to all existing and future
Senior Debt of the Company, which includes all indebtedness under the Credit
Facility. After giving pro forma effect to the sale of the Old Notes and the
application of the net proceeds therefrom, the Company would have had $15.4
million of Senior Debt outstanding and would have had up to $99.6 million of
additional borrowing capacity available under the Credit Facility which, if
borrowed, would be included as Senior Debt. In the event of a liquidation,
dissolution, reorganization, bankruptcy or any similar proceeding regarding the
Company, the assets of the Company will be available to pay obligations on the
Notes only after Senior Debt of the Company has been paid in full. Additional
Senior Debt may be incurred by the Company from time to time, subject to certain
restrictions imposed by the Indenture and the Credit Facility. Accordingly,
there may not be sufficient funds remaining to pay amounts due on all or any of
the Notes. See "Description of the Notes -- Ranking and Subordination."
In addition to being subordinated to all existing and future Senior Debt of
the Company, the Notes will not be secured by any of the Company's or its
Subsidiaries' assets, as the case may be.
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Company to purchase all or a portion of such holder's Notes at 101%
of the principal amount of the Notes, together with accrued and unpaid interest
and Liquidated Damages, if any, to the date of purchase. The occurrence of a
Change of Control may result in a default under the Credit Facility which
prohibits the purchase of the Notes
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by the Company unless and until such time as the Company's indebtedness under
the Credit Facility is repaid. The Indenture requires that prior to such a
purchase, the Company must either repay all outstanding Senior Debt or obtain
any required consents to such purchase. If a Change of Control were to occur,
the Company may not have the financial resources to repay all of the Senior
Debt, the Notes and the other indebtedness that would become payable upon the
occurrence of such Change of Control. See "Description of the Notes --
Repurchase at the Option of Holders -- Change of Control."
FRAUDULENT CONVEYANCE
The incurrence of indebtedness (such as the Notes) is subject to review
under relevant federal and state fraudulent conveyance statutes in a bankruptcy
or reorganization case or a lawsuit by or on behalf of other creditors of the
Company. To the extent that a court were to find that (i) the Notes were
incurred with the intent to hinder, delay or defraud any present or future
creditor or that the Company contemplated insolvency with a design to favor one
or more creditors to the exclusion in whole or in part of others or (ii) the
Company did not receive fair consideration or reasonably equivalent value for
issuing the Notes and, at the time thereof, the Company (a) was insolvent or
rendered insolvent by reason of the issuance of the Notes, (b) was engaged or
about to engage in a business or transaction for which its remaining assets
constituted unreasonably small capital or (c) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they matured,
a court could avoid or subordinate the Notes in favor of other creditors.
On the basis of historical financial information, recent operating history
as discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other information currently available to it, the
Company believes that the Notes are being incurred for proper purposes and in
good faith and that, after giving effect to indebtedness incurred in connection
with the issuance of the Notes, the Company is solvent, will have sufficient
capital for carrying on its business and will be able to pay its debts as such
debts become absolute and mature. There can be no assurance, however, that a
court passing on such questions would reach the same conclusions and, if not, a
court could, among other things, void all or a portion of the Company's
obligations to holders of Notes and/or subordinate the Company's obligations
under the Notes to a greater extent than would otherwise be the case.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of certain key
management personnel. The loss of the services of such management personnel
could have a material adverse effect on the Company's operations. The Company
believes that its success is also dependent upon its ability to continue to
employ and retain skilled technical personnel. See "Management -- Employment
Agreements."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company's business is regulated by certain local, state and federal
laws and regulations relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, natural gas and
oil. The Company's business is also subject to extensive and changing
environmental and safety laws and regulations governing plugging and
abandonment, the discharge of materials into the environment or otherwise
relating to environmental protection. In addition, the Company is subject to
changing and extensive tax laws, and the effect of newly enacted tax laws cannot
be predicted. The implementation of new, or the modification of existing, laws
or regulations, including regulations which may be promulgated under the Oil
Pollution Act of 1990, could have a material adverse effect on the Company. See
"Business -- Abandonment Costs," "-- Regulation" and "-- Environmental Matters"
for a more complete description of the laws and regulations relating to the
Company's business.
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties. The
Company's competitors include major integrated oil and gas companies and
numerous independent oil and gas companies, individuals and drilling and income
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<PAGE> 23
programs. Many of its competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the oil and gas
business for a much longer time than the Company. Such companies may be able to
pay more for productive natural gas and oil properties and exploratory prospects
and to define, evaluate, bid for and purchase a greater number of properties and
prospects than the Company's financial or human resources permit. The Company's
ability to acquire additional properties and to discover reserves in the future
will be dependent upon its ability to evaluate and select suitable properties
and to consummate transactions in this highly competitive environment.
RELATIONSHIP WITH KEYSPAN AND POTENTIAL CONFLICTS OF INTEREST
There may be conflicts of interest arising in the future between the
Company and KeySpan and its subsidiaries in a number of areas relating to their
past and ongoing relationships, including dividends, acquisitions of natural gas
and oil businesses or properties, transfers of assets, insurance matters,
marketing, financial commitments, registration rights and issuances and sales of
capital stock of the Company. As of March 31, 1998, Brooklyn Union, a wholly
owned subsidiary of KeySpan, indirectly owned approximately 64% of the Company's
outstanding Common Stock. The Company's Chairman of the Board, Robert B. Catell,
is also the Chairman of the Board of Directors and Chief Executive Officer of
Brooklyn Union. In addition, two other directors of the Company, Craig G.
Matthews and James Q. Riordan, are the President and a director of Brooklyn
Union, respectively. As a result of KeySpan's beneficial holdings of Common
Stock, KeySpan is in a position to control the election of the entire Board of
Directors of the Company and is able to control the outcome of the vote on all
matters requiring the vote of the Company's stockholders. See "Certain
Transactions."
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. In addition, upon the
consummation of the Exchange Offer holders of Old Notes which remain outstanding
will not be entitled to any rights to have such Old Notes registered under the
Securities Act or to any similar rights under the Registration Rights Agreement,
subject to certain exceptions. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered, or
tendered but unaccepted, Old Notes could be adversely affected.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Old Notes are currently owned by a relatively small number of
beneficial owners. The Old Notes have not been registered under the Securities
Act or any state securities laws and, unless so registered and to the extent not
exchanged for the Exchange Notes, may not be offered or sold except pursuant to
an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. Any Old
Notes tendered and exchanged in the Exchange Offer will reduce the aggregate
principal amount of Old Notes outstanding. Following the consummation of the
Exchange Offer, holders who did not tender their Old Notes generally will not
have any further registration rights under the Registration Rights Agreement,
and such Old Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Old Notes could be
adversely affected. The Old Notes are currently eligible for sale pursuant to
Rule 144A in the Private Offerings, Resale and Trading through Automatic
Linkages (PORTAL) market of the National Association of Securities Dealers, Inc.
Because the Company anticipates that most holders will elect to exchange their
Old Notes for Exchange Notes due to the restrictions on the resale of Old Notes
under the Securities Act, the Company anticipates that the liquidity of
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<PAGE> 24
the market for any Old Notes remaining after the consummation of the Exchange
Offer may be substantially limited.
The Exchange Notes will constitute a new issue of securities for which
there is currently no active trading market. If the Exchange Notes are traded
after their initial issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for similar
securities and other factors including general economic conditions and the
current financial condition, results of operations and business prospects of the
Company. Although the Exchange Notes will generally be permitted to be resold or
otherwise transferred by non-affiliates of the Company without compliance with
the registration and prospectus delivery requirements of the Securities Act, the
Company does not intend to apply for a listing or quotation of the Exchange
Notes on any securities exchange or stock market. Although one of the Initial
Purchasers has informed the Company that it currently intends to make a market
in the Exchange Notes, it is not obligated to do so, and any such market-making
may be discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed under the Exchange Act.
Accordingly, there can be no assurance as to the development, liquidity or
maintenance of any market for the Exchange Notes. If no trading market develops
or is maintained for the Exchange Notes, holders may experience difficulty in
reselling the Exchange Notes or may be unable to sell them.
The liquidity of, and trading market for, the Old Notes or the Exchange
Notes also may be adversely affected by general declines in the market for
similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects for,
the Company.
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THE COMPANY
Houston Exploration is an independent natural gas and oil company engaged
in the exploration, development and acquisition of domestic natural gas and oil
properties. The Company's offshore properties are located primarily in the
shallow waters (up to 600 feet) of the Gulf of Mexico, and its onshore
properties are located in South Texas, the Arkoma Basin, East Texas and West
Virginia. At December 31, 1997, the Company had net proved reserves of 337 Bcfe.
Approximately 98% of the Company's net proved reserves on such date were natural
gas and approximately 78% of net proved reserves were classified as proved
developed. The Company operates over 90% of its production. The Company believes
its primary strengths are its high quality reserves, its substantial inventory
of exploration and development opportunities, its in-house expertise in
generating new prospects, and its geographic focus and low-cost operating
structure.
The Company was incorporated in Delaware in December 1985 to conduct
certain of the natural gas and oil exploration and development activities in
Brooklyn Union. The Company initially focused primarily on the exploration and
development of high potential prospects in the Gulf of Mexico. Effective
February 29, 1996, Brooklyn Union implemented a reorganization of its
exploration and production assets by transferring to Houston Exploration certain
onshore producing properties and developed and undeveloped acreage. Subsequent
to the reorganization, the Company has expanded its focus to include lower risk
exploitation and development drilling on the onshore properties transferred, in
addition to seeking opportunistic acquisitions both onshore and offshore. On
July 2, 1996, the Company acquired certain natural gas and oil properties and
associated pipelines located in Zapata County, Texas from TransTexas Gas
Corporation and TransTexas Transmission Corporation (together, "TransTexas") for
a net purchase price of approximately $56 million. In September 1996, the
Company completed its IPO of 7,130,000 shares of Common Stock. Concurrently with
the completion of its IPO, the Company completed the acquisition of
substantially all of the natural gas and oil properties and related assets of
Smith Offshore Exploration Company ("Soxco") for a net purchase price consisting
of approximately $20.3 million in cash and 762,387 shares of Common Stock with
an aggregate value (determined by reference to the IPO price) of $11.8 million.
In addition, the Company has agreed to pay to Soxco effective January 31, 1998 a
deferred purchase price, payable in shares of the Company's Common Stock, of not
more than $17.6 million and not less than $8.8 million as determined by Soxco's
probable reserves as of December 31, 1995 that are produced or classified as
proved prior to December 31, 1997. The Company paid the deferred purchase price
in the first quarter of 1998 by delivering 520,777 shares of Common Stock with
an aggregate value (determined by reference to a 20 trading day average price of
the Common Stock) of $8.8 million. As of March 31, 1998, THEC Holdings Corp., a
wholly owned subsidiary of Brooklyn Union, owned approximately 64% of the
outstanding shares of Common Stock. Brooklyn Union, which in September 1997
became a wholly owned subsidiary of KeySpan, distributes natural gas in an area
of New York City with a population of four million.
The Company's principal executive offices are located at 1100 Louisiana,
Suite 2000, Houston, Texas 77002 and its telephone number is (713) 830-6800.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on March 2, 1998 to the Initial
Purchasers pursuant to a Purchase Agreement, dated February 25, 1998, between
the Company and the Initial Purchasers (the "Purchase Agreement"). The Initial
Purchasers subsequently resold all of the Old Notes to Qualified Institutional
Buyers, each of whom agreed to comply with certain transfer restrictions and
other conditions. As a condition to the purchase of the Old Notes by the Initial
Purchasers, the Company entered into a registration rights agreement with the
Initial Purchasers (the "Registration Rights Agreement"), which requires, among
other things, that promptly following the issuance and sale of the Old Notes,
the Company file with the SEC the Registration Statement with respect to the
Exchange Notes, use its best efforts to cause the Registration Statement to
become effective under the Securities Act and, upon the effectiveness of the
Registration Statement, offer to the holders of the Old Notes the opportunity to
exchange their Old Notes for a like principal amount of Exchange Notes, which
will be issued without a restrictive legend and may be reoffered and resold by
the holder without restrictions or limitations under the Securities Act subject
to certain exceptions described below. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The term "holder" with respect to the Exchange Offer
means any person in whose name Old Notes are registered on the Company's books
or any other person who has obtained a properly completed bond power from the
registered holder or any person whose Old Notes are held of record by the
Depositary who desires to deliver such Old Notes by book-entry transfer of the
Depositary.
Based on existing interpretations of the Securities Act by the staff of the
SEC set forth in several no-action letters to third parties, and subject to the
immediately following sentence, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than (i) a
broker-dealer who purchased such Old Notes directly from the Company for resale
pursuant to Rule 144A or any other available exemption under the Securities Act
or (ii) a person that is an "affiliate" (within the meaning of Rule 405 of the
Securities Act) of the Company), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the Exchange Notes in its ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. However, any purchaser
of Old Notes who is an affiliate of the Company or who intends to participate in
the Exchange Offer for the purpose of distributing the Exchange Notes, or any
broker-dealer who purchased the Old Notes from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act, (i) will
not be able to rely on the interpretations by the staff of the SEC set forth in
the above-mentioned no-action letters, (ii) will not be able to tender its Old
Notes in the Exchange Offer and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of the Old Notes unless such sale or transfer is made pursuant
to an exemption from such requirements. Accordingly, any holder who tenders in
the Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "Plan of Distribution."
As a result of the filing and effectiveness of the Registration Statement
of which this Prospectus is a part, the Company will not be required to pay an
increased interest rate on the Old Notes. Following the consummation of the
Exchange Offer, holders of Old Notes not tendered will not have any further
registration rights except in certain limited circumstances requiring the filing
of a Shelf Registration Statement (as defined herein), and the Old Notes will
continue to be subject to certain restrictions on transfer. See "Description of
the Notes -- Registered Exchange Offer; Registration Rights." Accordingly, the
liquidity of the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept all Old Notes properly
tendered and not withdrawn prior to 5:00 p.m. New York City
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<PAGE> 27
time, on the Expiration Date. After authentication of the Exchange Notes by the
Trustee or an authenticating agent, the Company will issue and deliver $1,000
principal amount of Exchange Notes in exchange for each $1,000 principal amount
of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some
or all of their Old Notes pursuant to the Exchange Offer in denominations of
$1,000 and integral multiples thereof.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange
Notes in the Exchange Offer will be required to represent that (i) it is not an
affiliate of the Company, (ii) any Exchange Notes to be received by it were
acquired in the ordinary course of its business and (iii) it has no arrangement
or understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Old Notes, except that (i) the offering of
the Exchange Notes has been registered under the Securities Act, (ii) the
Exchange Notes will not be subject to transfer restrictions and (iii) certain
provisions relating to an increase in the stated interest rate on the Old Notes
provided for under certain circumstances will be eliminated. The Exchange Notes
will evidence the same debt as the Old Notes. The Exchange Notes will be issued
under and entitled to the benefits of the Indenture.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Old Notes is outstanding. In connection with the issuance of the Old
Notes, the Company arranged for the Old Notes to be issued and transferable in
book-entry form through the facilities of the Depositary, acting as depositary.
The Exchange Notes will also be issuable and transferable in book-entry form
through the Depositary.
This Prospectus, together with the accompanying Letter of Transmittal, is
initially being sent to all registered holders of the Old Notes as of the close
of business on , 1998. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act, and the rules and regulations of the SEC thereunder, including Rule 14e-1,
to the extent applicable. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered, and holders of the Old
Notes do not have any appraisal or dissenters' rights under the General
Corporation Law of the State of Delaware or under the Indenture in connection
with the Exchange Offer. The Company shall be deemed to have accepted validly
tendered Old Notes when, as and if the Company has given oral or written notice
thereof to the Exchange Agent. See "-- Exchange Agent." The Exchange Agent will
act as agent for the tendering holders for the purpose of receiving Exchange
Notes from the Company and delivering Exchange Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, at the
Company's cost, to the tendering holder thereof as promptly as practicable after
the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Solicitation of Tenders, Fees and Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
MOREOVER, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF
OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGRE-
25
<PAGE> 28
GATE AMOUNT OF OLD NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER
OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON THEIR OWN
FINANCIAL POSITION AND REQUIREMENTS.
\ EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998 unless the Company, in its sole discretion, extends
the Exchange Offer, in which case the term "Expiration Date" shall mean the
latest date to which the Exchange Offer is extended. The Company may extend the
Exchange Offer at any time and from time to time by giving oral or written
notice to the Exchange Agent and by timely public announcement.
The Company expressly reserves the right, in its sole discretion (i) to
delay acceptance of any Old Notes, to extend the Exchange Offer or to terminate
the Exchange Offer and to refuse to accept Old Notes not previously accepted, if
any of the conditions set forth herein under "-- Conditions of the Exchange
Offer" shall have occurred and shall not have been waived by the Company (if
permitted to be waived by the Company), by giving oral or written notice of such
delay, extension or termination to the Exchange Agent and (ii) to amend the
terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof by the Company to the registered holders of
the Old Notes. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of such
amendment and the Company will extend the Exchange Offer to the extent required
by law.
Without limiting the manner in which the Company may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, the Company shall have no obligation to publish, advise, or
otherwise communicate any such public announcement, other than by making a
timely release thereof to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 8 5/8% per annum,
payable semi-annually on January 1 and July 1 of each year, commencing July 1,
1998. Holders of Exchange Notes of record on June 15, 1998 will receive on July
1, 1998 an interest payment in an amount equal to (x) the accrued interest on
such Exchange notes from the date of issuance thereof to July 1, 1998, plus (y)
the accrued interest on the previously held Old Notes from the date of issuance
of such Old Notes (March 2, 1998) to the date of exchange thereof. Interest will
not be paid on Old Notes that are accepted for exchange. The Notes mature on
January 1, 2008.
PROCEDURES FOR TENDERING
Each holder of Old Notes wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such facsimile, together with
the Old Notes to be exchanged and any other required documentation, to The Bank
of New York, as Exchange Agent, at the address set forth herein and therein or
effect a tender of Old Notes pursuant to the procedures for book-entry transfer
as provided for herein and therein. By executing the Letter of Transmittal, each
holder will represent to the Company, that, among other things, the Exchange
Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is the holder, that neither the holder nor any such other person has
any arrangement or understanding with any person to participate in the
distribution of such Exchange Notes and that neither the holder nor any such
other person is an "affiliate," as defined in Rule 405 under the Securities Act,
of the Company.
Any financial institution that is a participant in the Depositary's
Book-Entry Transfer Facility system may make book-entry delivery of the Old
Notes by causing the Depositary to transfer such Old Notes into the Exchange
Agent's account in accordance with the Depositary's procedure for such transfer.
Although delivery
26
<PAGE> 29
of Old Notes may be effected through book-entry transfer into the Exchange
Agent's account at the Depositary, the Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at its address set forth herein under "-- Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO THE
DEPOSITARY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
Only a holder may tender its Old Notes in the Exchange Offer. To tender in
the Exchange Offer, a holder must complete, sign and date the Letter of
Transmittal or a facsimile thereof, have the signatures thereof guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver such Letter
of Transmittal or such facsimile, together with the Old Notes (unless such
tender is being effected pursuant to the procedure for book-entry transfer) and
any other required documents, to the Exchange Agent, prior to 5:00 p.m., New
York City time, on the Expiration Date.
The Tender by a holder will constitute an agreement between such holder,
the Company and the Exchange Agent in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal. If less than
all of the Old Notes are tendered, a tendering holder should fill in the amount
of Old Notes being tendered in the appropriate box on the Letter of Transmittal.
The entire amount of Old Notes delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
THE LETTER OF TRANSMITTAL WILL INCLUDE REPRESENTATIONS TO THE COMPANY THAT,
AMONG OTHER THINGS, (1) THE EXCHANGE NOTES ACQUIRED PURSUANT TO THE EXCHANGE
OFFER ARE BEING ACQUIRED IN THE ORDINARY COURSE OF BUSINESS OF THE PERSON
RECEIVING SUCH EXCHANGE NOTES (WHETHER OR NOT SUCH PERSON IS THE HOLDER), (2)
NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS ENGAGED IN, INTENDS TO ENGAGE IN
OR HAS ANY ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN THE
DISTRIBUTION OF SUCH EXCHANGE NOTES, (3) NEITHER THE HOLDER NOR ANY SUCH OTHER
PERSON IS AN "AFFILIATE," AS DEFINED IN RULE 405 UNDER THE SECURITIES ACT, OF
THE COMPANY AND (4) IF THE TENDERING HOLDER IS A BROKER OR DEALER (AS DEFINED IN
THE EXCHANGE ACT) (A) IT ACQUIRED THE OLD NOTES FOR ITS OWN ACCOUNT AS A RESULT
OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES AND (B) IT HAS NOT
ENTERED INTO ANY ARRANGEMENT OR UNDERSTANDING WITH THE COMPANY OR ANY
"AFFILIATE" THEREOF (WITHIN THE MEANING OF RULE 405 UNDER THE SECURITIES ACT) TO
DISTRIBUTE THE EXCHANGE NOTES TO BE RECEIVED IN THE EXCHANGE OFFER. IN THE CASE
OF A BROKER-DEALER THAT RECEIVES EXCHANGE NOTES FOR ITS OWN ACCOUNT IN EXCHANGE
FOR OLD NOTES WHICH WERE ACQUIRED BY IT AS A RESULT OF MARKET-MAKING OR OTHER
TRADING ACTIVITIES, THE LETTER OF TRANSMITTAL WILL ALSO INCLUDE AN
ACKNOWLEDGMENT THAT THE BROKER-DEALER WILL DELIVER A COPY OF THIS PROSPECTUS IN
CONNECTION WITH THE RESALE BY IT OF EXCHANGE NOTES RECEIVED PURSUANT TO THE
EXCHANGE OFFER, HOWEVER, BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS,
SUCH HOLDER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE
MEANING OF THE SECURITIES ACT. SEE "PLAN OF DISTRIBUTION."
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ENSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
ALSO REQUEST THAT THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES EFFECT SUCH TENDER FOR HOLDERS, IN EACH CASE AS SET FORTH
HEREIN AND IN THE LETTER OF TRANSMITTAL.
Any beneficial owner whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such owner's
27
<PAGE> 30
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution"), unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered holder who has
not completed the box entitled "Special Registration Instructions" or "Special
Delivery Instructions" of the Letter of Transmittal or (ii) for the account of
an Eligible Institution. If the Letter of Transmittal is signed by a person
other than the registered holder listed therein, such Old Notes must be endorsed
or accompanied by appropriate bond powers which authorize such person to tender
the Old Notes on behalf of the registered holder, in either case signed as the
name of the registered holder or holders appears on the Old Notes. If the Letter
of Transmittal or any Old Notes or bond powers are signed or endorsed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and unless waived by the Company.
evidence satisfactory to the Company of their authority to so act must be
submitted with such Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding, The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the absolute right to waive an irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms, and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of Old Notes, nor shall any of them incur any liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such irregularities have been cured or waived. Any Old Notes received
by the Exchange Agent that the Company determines are not properly tendered or
the tender of which is otherwise rejected by the Company and as to which the
defects or irregularities have not been cured or waived by the Company will be
returned by the Exchange Agent to the tendering holder unless otherwise provided
in the Letter of Transmittal, as soon as practicable following the Expiration
Date.
In addition, the Company reserves the right in its sole discretion (a) to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, or, as set forth under "-- Conditions of the Exchange
Offer," terminate the Exchange Offer and (b) to the extent permitted by
applicable law, to purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
may differ from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Company understands that the Exchange Agent will make a request
promptly after the date-of this Prospectus to establish accounts with respect to
the Old Notes at the DTC (the "Book-Entry Transfer Facility") for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry deliver of Old Notes by causing such
BookEntry Transfer Facility to transfer such Old Notes into the Exchange Agent's
account with respect to the Old Notes in accordance with the Book-Entry Transfer
Facility's procedures for such transfer. ALTHOUGH DELIVERY OF OLD NOTES MAY BE
EFFECTED THROUGH BOOK-ENTRY TRANSFER INTO THE EXCHANGE AGENT'S ACCOUNT AT THE
BOOK-ENTRY TRANSFER FACILITY, AN APPROPRIATE LETTER OF TRANSMITTAL PROPERLY
COMPLETED AND DULY EXECUTED WITH ANY REQUIRED SIGNATURE GUARANTEE AND ALL OTHER
REQUIRED DOCUMENTS MUST IN EACH CASE BE TRANSMITTED TO AND RECEIVED OR CONFIRMED
BY THE EXCHANGE AGENT AT
28
<PAGE> 31
ITS ADDRESS SET FORTH BELOW ON OR PRIOR TO THE EXPIRATION DATE, OR, IF THE
GUARANTEED DELIVERY PROCEDURES DESCRIBED BELOW ARE COMPLIED WITH, WITH THE TIME
PERIOD PROVIDED UNDER SUCH PROCEDURES. DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY
TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or who cannot complete the procedure for book-entry transfer on
a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmittal, mail or hand delivery)
setting forth the name and address of the holder, the certificate number or
numbers of such holder's Old Notes and the principal amount of such Old
Notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within three New York Stock Exchange ("NYSE") trading
days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof), together with the certificate(s) representing the Old Notes to be
tendered in proper form for transfer (or confirmation of a book-entry
transfer into the Exchange Agent's account at the Depositary of Old Notes
delivered electronically) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer into the Exchange Agent's account at the Depositary of
Old Notes delivered electronically) and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within three NYSE
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Old Notes or, in the case of Old Notes transferred by book-entry
transfer, the name and number of the account at the Depositary to be credited),
(iii) be signed by the Depositor in the same manner as the original signature on
the Letter of Transmittal, by which such Old Notes were tendered (including any
required signature guarantee) or be accompanied by documents of transfer
sufficient to permit the Trustee with respect to the Old Notes to register the
transfer of such Old Notes into the name of the Depositor withdrawing the tender
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer, and no Exchange Notes will be
issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Any Old Notes that have been tendered but are not accepted for
exchange will be returned to the holder thereof without cost to such holder as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer.
29
<PAGE> 32
Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to Exchange Notes for, any Old Notes, and
may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes if, in the Company's judgment, any of the following
conditions has occurred or exists or has not been satisfied: (i) that the
Exchange Offer, or the making of any exchange by a holder, violates applicable
law or any applicable interpretation of the staff of the SEC, (ii) that any
action or proceeding shall have been instituted or threatened in any court or by
or before any governmental agency or body with respect to the Exchange Offer,
(iii) that there has been adopted or enacted any law, statute, rule or
regulation that can reasonably be expected to impair the ability of the Company
to proceed with the Exchange Offer, (iv) that there has been declared by United
States federal or Texas or New York state authorities a banking moratorium; or
(v) that trading on the New York Stock Exchange or generally in the United
States over-the-counter market has been suspended by order of the SEC or any
other governmental agency, in each of clauses (i) through (iv) which, in the
Company's judgment, would reasonably be expected to impair the ability of the
Company to proceed with the Exchange Offer.
If the Company determines that it may terminate the Exchange Offer for any
of the reasons set forth above, the Company may (i) refuse to accept any Old
Notes and return any Old Notes that have been tendered to the holders thereof,
(ii) extend the Exchange Offer and retain all Old Notes tendered prior to the
Expiration Date of the Exchange Offer, subject to the rights of such holders of
tendered Old Notes to withdraw their tendered Old Notes or (iii) waive such
termination event with respect to the Exchange Offer and accept all properly
tendered Old Notes that have not been withdrawn. If such waiver constitutes a
material change in the Exchange Offer, the Company will disclose such change by
means of a supplement to this Prospectus that will be distributed to each
registered holder, and the Company will extend the Exchange Offer for a period
of five to ten business days, depending upon the significance of the waiver and
the manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such period.
EXCHANGE AGENT
The Bank of New York, the Trustee under the Indenture, has been appointed
as Exchange Agent for the Exchange Offer. In such capacity, the Exchange Agent
has no fiduciary duties and will be acting solely on the basis of directions of
the Company. Requests for assistance and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent addressed as follows:
The Bank of New York, Exchange Agent
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission: By Overnight or Hand Delivery:
The Bank of New York (for Eligible Institutions The Bank of New York
only):
Tender and Exchange (212) 815-5915 Tender and Exchange
Department Attention: Remo J. Reale Department
P. O. Box 11248 101 Barclay Street
Church Street Station Confirm by Telephone: Receive and Deliver Window
New York, NY 10286-1248 (212) 815-3703 New York, NY 10286
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
30
<PAGE> 33
SOLICITATION OF TENDERS; FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation pursuant to the Exchange Offer
is being made by mail. Additional solicitations may be made by officers and
regular employees of the Company and its affiliates in person, by telegraph,
telephone or telecopier.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Company will, however,
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket costs and expenses
in connection therewith and will indemnify the Exchange Agent for all losses and
claims incurred by it as a result of the Exchange Offer. The Company may also
pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of this
Prospectus, Letters of Transmittal and related documents to the beneficial
owners of the Old Notes and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees and printing costs, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed by the Company directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company as a result of the consummation of the Exchange Offer.
The expenses of the Exchange Offer will be amortized by the Company over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Old Notes
are urged to consult their financial and tax advisors in making their own
decisions as to what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of the Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights, and subject to the limitations applicable thereto, under the
Indenture and the Registration Rights Agreement, except for any such rights
under the Registration Rights Agreement that by their terms terminate or cease
to have further effect as a result of the malting of this Exchange Offer. See
"Description of the Notes." All untendered Old Notes will continue to be subject
to the restrictions on transfer set forth in the Indenture. The Old Notes may
not be offered, resold, pledged or otherwise transferred, prior to the date that
is two years after the later of July 2, 1997 and the last date on which the
Company or any "affiliate" (within the meaning of Rule 144 of the Securities
Act) of the Company was the owner of such Old Note except (i) to the Company,
(ii) pursuant to a registration statement which has been declared effective
under the Securities Act, (iii) to Qualified Institutional Buyers in reliance
upon the exemption from the registration requirements of the Securities Act
31
<PAGE> 34
provided by Rule 144A, (v) to institutional "accredited investors" (as defined
in Rule 501 (a) (1), (2), (3) or (7) under the Securities Act) in transactions
exempt from the registration requirements of the Securities Act, (v) in
transactions complying with the provisions of Regulation S under the Securities
Act or (vi) pursuant to any other available exemption from the registration
requirements under the Securities Act. To the extent that Old Notes are tendered
and accepted in the Exchange Offer, the liquidity of the trading market for
untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire untendered Old Notes in the
open market or through privately negotiated transactions, through subsequent
exchange offers or otherwise. The Company intends to make any such acquisitions
of Old Notes in accordance with the applicable requirements of the Exchange Act
and the rules and regulations of the SEC thereunder, including Rule 14e-1, to
the extent applicable. The Company has no present plan to acquire any Old Notes
that are not tendered in the Exchange Offer or to file a registration statement
to permit resales of any Old Notes that are not tendered in the Exchange Offer.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange Old
Notes in like principal amount. The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Old Notes,
except that (i) the offering of the Exchange Notes has been registered under the
Securities Act, (ii) the Exchange Notes will not be subject to transfer
restrictions and (iii) the holders of the Exchange Notes will not be entitled to
registration or other rights under the Registration Rights Agreement including
the payment of Liquidated Damages upon failure by the Company to consummate the
Exchange Offer or the occurrence of certain other events. The Old Notes
surrendered in exchange for Exchange Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the Exchange Notes will not result
in a change in the indebtedness of the Company.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 on an actual basis and as adjusted to give effect to the sale
of the Old Notes and the application of the net proceeds therefrom. This table
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the Combined
Financial Statements included elsewhere and incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Credit Facility........................................... $113,000 $ 15,375(1)
8 5/8% Senior Subordinated Notes due 2008................. -- 100,000
-------- --------
Total long-term debt.............................. 113,000 115,375
-------- --------
Stockholders' equity:
Common Stock, $.01 par value, 23,360,903 shares issued and
outstanding............................................ 234 234
Additional paid-in capital................................ 221,907 221,907
Retained earnings......................................... 34,046 34,046
-------- --------
Total stockholders' equity........................ 256,187 256,187
-------- --------
Total capitalization.............................. $369,187 $371,562
======== ========
</TABLE>
- ---------------
(1) On an as adjusted basis, the Company would have had the capacity to borrow
an additional $99.6 million under the Credit Facility.
32
<PAGE> 35
SELECTED COMBINED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
combined statements of operations for each of the five years in the period ended
December 31, 1997 and with respect to the Company's combined balance sheets as
of December 31, 1993, 1994, 1995, 1996 and 1997 are derived from the financial
statements of the Company that have been audited by Arthur Andersen LLP,
independent public accountants. The financial data should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Combined Financial Statements and Notes
thereto included elsewhere and incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas and oil revenues................ $ 37,462 $ 41,755 $ 39,431 $ 64,864 $116,349
Other....................................... 799 467 1,778 1,040 1,297
-------- -------- -------- -------- --------
Total revenues....................... 38,261 42,222 41,209 65,904 117,646
Expenses:
Lease operating............................. 4,173 4,858 5,005 10,800 14,146
Severance tax............................... 304 486 463 1,401 4,233
Depreciation, depletion and amortization.... 23,225 25,365 21,969 33,732 59,081
General and administrative, net............. 2,454 3,460 3,486 6,249 5,825
Nonrecurring charge(1)...................... -- -- 12,000 -- --
-------- -------- -------- -------- --------
Total operating expenses............. 30,156 34,169 42,923 52,182 83,285
Income (loss) from operations................. 8,105 8,053 (1,714) 13,722 34,361
Interest expense, net......................... 1,764 2,102 2,398 2,875 938
-------- -------- -------- -------- --------
Income (loss) before income taxes............. 6,341 5,951 (4,112) 10,847 33,423
Income tax provision (benefit)................ 1,790 597 (3,809) 2,205 10,173
-------- -------- -------- -------- --------
Net income (loss)............................. $ 4,551 $ 5,354 $ (303) $ 8,642 $ 23,250
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(2)..................................... $ 31,330 $ 33,418 $ 32,255 $ 47,454 $ 93,442
Capital expenditures.......................... 58,557 64,996 70,249 154,125 145,055
Ratio of earnings to fixed charges(3)......... 3.3x 2.2x N/M 2.2x 5.0x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Property, plant and equipment, net............ $127,911 $169,714 $216,678 $359,124 $443,738
Total assets.................................. 165,031 201,678 247,496 401,285 491,391
Long-term debt................................ 46,600 65,650 71,862 65,000 113,000
Stockholders' equity.......................... 65,575 88,866 103,236 233,300 256,187
</TABLE>
- ---------------
(1) Represents a nonrecurring non-cash charge incurred in connection with the
reorganization effective in February 1996. See Note 11 to the Company's
Combined Financial Statements.
(2) EBITDA is defined as income (loss) from operations (before nonrecurring
charges) plus depreciation, depletion and amortization. EBITDA should not be
considered as an alternative to income (loss) from operations or net income
(loss), as determined in accordance with generally accepted accounting
principles, as a measure of the Company's operating performance or to net
cash provided by operating, investing and financing activities, as
determined in accordance with generally accepted accounting principles, as a
measure of the Company's ability to meet cash needs. The Company believes
that EBITDA is a measure commonly reported and widely used by investors and
other interested parties as a measure of a company's operating performance
and debt servicing ability because it assists in comparing performance on a
consistent basis without regard to depreciation, depletion and amortization,
which can vary significantly depending upon accounting methods (particularly
when acquisitions are involved) or nonoperating factors (such as historical
cost). Accordingly, this information has been disclosed herein to permit a
more complete comparative analysis of the Company's operating performance
relative to other companies and of the Company's debt servicing ability.
However, EBITDA may not be comparable in all instances to other similar
types of measures used.
(3) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income (loss) before tax plus fixed charges, adjusted to
exclude capitalized interest. Fixed charges consist of interest expense,
whether expensed or capitalized, and the estimated interest component of
rent expense. Due to the $12 million nonrecurring non-cash charge incurred
in the year ended December 31, 1995, earnings did not cover fixed charges by
$7.0 million. If the $12 million non-cash charge is excluded, the ratio of
earnings to fixed charges would have been 1.9x.
33
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's historical financial position and results of operations for each year
of the three-year period ended December 31, 1997. The Company's historical
combined financial statements and notes thereto included elsewhere and
incorporated by reference into this Prospectus contain detailed information that
should be referred to in conjunction with the following discussion.
GENERAL
Houston Exploration was incorporated in December 1985 to conduct certain of
the natural gas and oil exploration and development activities of Brooklyn
Union. The Company initially focused primarily on the exploration and
development of high potential prospects in the Gulf of Mexico. Effective
February 29, 1996, Brooklyn Union implemented a reorganization of its
exploration and production assets by transferring to Houston Exploration certain
onshore producing properties and developed and undeveloped acreage. Subsequent
to the reorganization, the Company has expanded its focus to include lower risk
exploitation and development drilling on the onshore properties transferred or
acquired, in addition to seeking opportunistic acquisitions both onshore and
offshore. On July 2, 1996, the Company acquired certain natural gas and oil
properties and associated pipelines located in Zapata County, Texas (the
"TransTexas Acquisition") from TransTexas. In September 1996, the Company
completed its IPO of 7,130,000 shares of its Common Stock at $15.50 per share,
resulting in net cash proceeds of approximately $101.0 million. Concurrently
with the completion of the IPO, the Company completed the acquisition of
substantially all of the natural gas and oil properties and related assets of
Soxco (the "Soxco Acquisition"). As of December 31, 1997, THEC Holdings Corp., a
wholly owned subsidiary of Brooklyn Union, owned approximately 65% of the
outstanding shares of Common Stock. At December 31, 1997, the Company had net
proved reserves of 337 Bcfe, 98% of which were natural gas and 78% of which were
classified as proved developed.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, oil and
condensate, which are dependent upon numerous factors beyond the Company's
control, such as economic, political and regulatory developments and competition
from other sources of energy. The energy markets have historically been highly
volatile, and future decreases in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, quantities of natural gas and oil reserves that may be economically
produced, and access to capital.
The Company uses the full cost method of accounting for its investment in
natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
natural gas and oil reserves and the lower of cost or fair value of unproved
properties, such excess costs are charged to operations. If a writedown is
required, it would result in a charge to earnings but would not have an impact
on cash flows from operating activities. Once incurred, a writedown of oil and
gas properties is not reversible at a later date even if oil and gas prices
increase.
As of December 31, 1997, the Company estimates, using prices in effect as
of such date, that the ceiling limitation imposed under full cost accounting
rules on total capitalized natural gas and oil property costs exceeded actual
capitalized costs. Natural gas prices have fluctuated substantially from prices
used in reserve valuations for the year ended December 31, 1997. Depending upon
natural gas prices and the results of the Company's drilling programs, the
Company may be required to write down the carrying value of its natural gas and
oil properties.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." The statement specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") and is designed to improve the EPS
34
<PAGE> 37
information provided in the financial statements by simplifying the existing
computation. Primary EPS has been replaced with Basic EPS which is calculated by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. No dilution for any potentially dilutive securities
is included. Fully diluted EPS is now called Diluted EPS and assumes the
conversion of all options, contingent shares and other potentially dilutive
securities. The Company adopted SFAS No. 128 in its December 31, 1997 financial
statements and has presented Diluted EPS for the years 1995 and 1996 which were
previously not required as the dilutive effect of options and contingent shares
was less than 3%. See Note 1 to the Company's Combined Financial Statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure," which consolidates the existing requirements to
disclose certain information about an entity's capital structure, for both
public and nonpublic entities. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components. Also issued in June of 1997
was SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which specifies and revises guidelines for determining an entity's
operating and geographic segments and the type and level of financial
information about those segments to be disclosed. The Company adopted the
provisions of SFAS Nos. 129, 130 and 131 in its 1997 financial statements. The
adoption of SFAS Nos. 129, 130 and 131 did not have a material effect on its
results of operations or the calculation of net income.
The Company incurs certain production gas volume imbalances in the ordinary
course of business and utilizes the entitlements method to account for its gas
imbalances. Under this method, income is recorded based on the Company's net
revenue interest in production or nominated deliveries. Deliveries in excess of
these amounts are recorded as liabilities, while under deliveries are reflected
as assets. Production imbalances are valued using market value. Management does
not believe that the Company has any material overproduced gas balances.
The Company receives reimbursement for administrative and overhead expenses
incurred on the behalf of other working interest owners of properties operated
by the Company. In addition, the Company capitalizes general and administrative
costs and interest expense directly related to its acquisition, exploration and
development activities.
The Company's combined historical financial statements include the
historical results of operations associated with the onshore producing
properties and developed and undeveloped acreage transferred to the Company by
Fuel Resources Inc. ("FRI"), a subsidiary of Brooklyn Union, in the February
1996 reorganization implemented by Brooklyn Union. Accordingly, the Company's
historical results of operations reflect a nonrecurring charge of $12 million
incurred in the year ended December 31, 1995 with respect to remuneration to
which certain employees of FRI were entitled for the increase in the value of
the transferred properties prior to the reorganization. See Notes 1 and 11 to
the Company's Combined Financial Statements.
35
<PAGE> 38
RESULTS OF OPERATIONS
The following table sets forth the Company's historical natural gas and oil
production data during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Production:
Natural gas (MMcf).................................. 21,077 31,215 50,310
Oil (MBbls)......................................... 100 118 171
Total (MMcfe)....................................... 21,677 31,923 51,336
Average sales prices:
Natural Gas (per Mcf)(1)............................ $ 1.79 $ 2.00 $ 2.25
Oil (per Bbl)....................................... 16.54 21.53 18.33
Expenses (per Mcfe):
Lease operating..................................... $ 0.23 $ 0.34 $ 0.28
Severance tax....................................... 0.02 0.04 0.08
Depreciation, depletion and amortization............ 1.01 1.06 1.15
General and administrative, net..................... 0.16 0.20 0.11
</TABLE>
- ---------------
(1) Reflects the effects of hedging. Absent the effects of hedging, average
realized natural gas prices would have been $1.53, $2.35 and $2.45 per Mcf
for the years ended December 31, 1995, 1996 and 1997, respectively.
RECENT FINANCIAL AND OPERATING RESULTS
Comparison of Years Ended December 31, 1996 and 1997
Production. Houston Exploration's production increased 61% from 31,923
MMcfe in 1996 to 51,336 MMcfe in 1997. The increase in production was
attributable to added production from both the TransTexas and the Soxco
Acquisitions, which were completed during the second half of 1996, combined with
newly developed offshore production brought on-line during the second and third
quarters of 1997 and the successful development drilling and workover programs
begun in the latter half of 1996 and continuing through the fourth quarter of
1997 on the Charco Field properties acquired in the TransTexas Acquisition.
Production in the Charco Field increased 179% from approximately 33,000 Mcfe per
day in December 1996 to approximately 92,000 Mcfe per day in December 1997 as 22
development wells were successfully completed and brought on-line during 1997.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased 79%
from $64.9 million in 1996 to $116.3 million in 1997 as a result of the 61%
increase in production combined with a 13% increase in average realized natural
gas prices, from $2.00 per Mcf in 1996 to $2.25 per Mcf for the year ended 1997.
As a result of hedging activities, the Company realized an average gas
price of $2.25 per Mcf for 1997, which was 92% of the $2.45 per Mcf that
otherwise would have been received, resulting in a $9.9 million decrease in
natural gas revenues for the year ended December 31, 1997. During 1996, the
average realized gas price was $2.00 per Mcf which was 85% of the unhedged
average gas price of $2.35, resulting in a decrease in natural gas revenues of
$11.1 million for the year ended 1996.
Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 31% from $10.8 million in 1996 to $14.1 million in 1997. On an Mcfe
basis, lease operating expenses decreased from $0.34 in 1996 to $0.28 in 1997.
The increase in lease operating expenses during 1997 is primarily attributable
to properties acquired in the TransTexas Acquisition and the significant
expansion of operations in the Charco Field combined with the effects of an
industry-wide increase in operating costs. The decrease in the lease operating
expenses per Mcfe resulted from the substantial increase in production during
1997. Severance tax, which is a function of volume and revenues generated from
onshore production, increased 202% from $1.4 million, or $0.04 per Mcfe, in 1996
to $4.2 million, or $0.08 per Mcfe, in 1997. The increase in severance tax is
due to the
36
<PAGE> 39
increase in production from the onshore Charco Field properties combined with
higher gas prices in 1997 as compared to 1996.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 75% from $33.7 million in 1996 to $59.1 million
in 1997. Depreciation, depletion and amortization expense per Mcfe increased 9%
from $1.06 in 1996 to $1.15 in 1997. The increase in depreciation, depletion and
amortization expense was a result of the increased production from acquired as
well as newly developed properties combined with an increased depletion rate.
The increase in the depletion rate is attributable partly to the industry-wide
increase in costs of drilling goods and services, platform and facilities
construction combined with a relatively modest increase in reserves given the
increased capital expenditures from the Company's exploration and development
activities during 1997.
General and Administrative Expenses. General and administrative expenses,
net of overhead reimbursements received from other working interest owners of
$1.0 million and $0.9 million, in 1996 and 1997, respectively, decreased 7% from
$6.2 million in 1996 to $5.8 million in 1997. After excluding the one-time
charge of $0.8 million taken in September 1996 in conjunction with the IPO for
the buyout and termination of stock options granted to certain officers and
directors of Brooklyn Union, general and administrative expense increased 7%
from $5.4 million in 1996 to $5.8 million in 1997. The increase in general and
administrative expense reflects the overall growth and expansion of the Company
and its operations since the second half of 1996 and continuing through the end
of 1997. The Company capitalized general and administrative expenses directly
related to oil and gas exploration and development activities of $5.3 million
and $7.2 million, respectively, in 1996 and 1997. The increase in capitalized
general and administrative expense directly corresponds with the growth of the
Company's technical workforce and the implementation of an incentive
compensation plan. On an Mcfe basis, general and administrative expenses
decreased 45% from $0.20 in 1996 to $0.11 in 1997. The lower rate per Mcfe
during 1997 reflects the increase in the Company's production.
Income Tax Provision. The provision for income taxes increased from an
expense of $2.2 million in 1996 to an expense of $10.2 million in 1997 due to
the increase in pretax income offset by the benefit received from Section 29 tax
credits.
Operating Income and Net Income. Operating income increased 151% to $34.4
million in 1997 from $13.7 million in 1996. Net income increased 171% from $8.6
million in 1996 to $23.3 million in 1997. The significant increase in operating
income and net income was attributable primarily to higher production volumes
and higher net realized natural gas prices combined with lower lease operating
expenses.
Comparison of Years Ended December 31, 1995 and 1996
Production. Houston Exploration's production increased 47% from 21,677
MMcfe in 1995 to 31,923 MMcfe in 1996. The 1996 production increase is
attributed to commencement of production from newly developed offshore
properties during the first half of the year and the Company's two significant
acquisitions during the second half of the year: (i) the TransTexas Acquisition,
which was completed on July 2, 1996, and (ii) the Soxco Acquisition, which was
completed on September 25, 1996 concurrently with the closing of the IPO.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased 65%
from $39.4 million in 1995 to $64.9 million in 1996 as a result of the 47%
increase in production and an increase in average realized natural gas prices of
12% from $1.79 per Mcf in 1995 to $2.00 Mcf in 1996.
As a result of hedging activities, the Company realized an average gas
price of $2.00 per Mcf for 1996, compared to an average price of $2.35 per Mcf
that otherwise would have been received, resulting in a $11.1 million decrease
in natural gas revenues for the year ended December 31, 1996. During 1995, the
average realized gas price was $1.79 per Mcf compared to an unhedged average gas
price of $1.53, resulting in an increase in natural gas revenues of $5.6 million
for the year ended December 31, 1995.
Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 116% from $5.0 million in 1995 to $10.8 million in 1996. On an Mcfe
basis, lease operating expenses increased from $0.23 in 1995 to $0.34 in 1996.
Of the $5.8 million increase in lease operating expenses during 1996, $2.2
million relates
37
<PAGE> 40
directly to properties acquired in the TransTexas Acquisition at the beginning
of the third quarter and includes certain one-time expenses incurred in taking
over operations of these properties, and the remaining $3.6 million reflects
higher initial operating costs associated with bringing new facilities and wells
on-line. Severance tax, which is a function of volume and revenues generated
from onshore production, increased 180% from $0.5 million, or $0.02 per Mcfe, in
1995 to $1.4 million, or $0.04 per Mcfe, in 1996. The increase in severance tax
resulted from the addition of production from the onshore Charco Field
properties combined with an increase in net realized natural gas prices during
the fourth quarter of 1996.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 53% from $22.0 million in 1995 to $33.7 million
in 1996. The increase was attributable to the increase in production during
1996. Depreciation, depletion and amortization expense per Mcfe increased from
$1.01 in 1995 to $1.06 in 1996, primarily as a result of exploratory drilling
which did not add significant new reserves during the period.
General and Administrative Expenses. General and administrative expenses,
net of overhead reimbursements received from other working interest owners of
$1.2 million and $1.0 million for 1995 and 1996, respectively, increased 77%
from $3.5 million in 1995 to $6.2 million in 1996. The Company capitalized
general and administrative expenses directly related to oil and gas exploration
and development activities of $4.1 million and $5.3 million, respectively, in
1995 and 1996. The increase in net general and administrative expenses during
1996 is a result of certain one-time expenses incurred in conjunction with the
combination of offshore and onshore operations and an $0.8 million charge taken
in conjunction with the IPO for the buyout and termination of options to
purchase Common Stock granted to certain officers and directors of Brooklyn
Union under the Company's 1994 Incentive Plan. On an Mcfe basis, general and
administrative expenses increased from $0.16 in 1995 to $0.20 in 1996, or $0.17
per Mcfe excluding the $0.8 million buyout of the options issued under the 1994
Incentive Plan.
Nonrecurring Charge. During 1995, the Company incurred a $12.0 million
nonrecurring charge to reflect the amount of remuneration paid to former
employees of FRI. During 1996 the Company did not incur additional charges
related to the remuneration paid to former FRI employees. See "-- General" and
Note 11 to the Company's Combined Financial Statements.
Income Tax Provision. Income tax expense increased from a benefit of $3.8
million in 1995 to an expense of $2.2 million in 1996. Included in the provision
for 1995 was a credit of $4.2 million related to the $12.0 million nonrecurring
charge. For 1996, the primary difference between the Company's statutory tax
rate of 35% and its effective rate of 20% was due to the utilization of Section
29 credits received for specific onshore properties.
Net Income. The Company's net income increased from a loss of $0.3 million
in 1995 to net income of $8.6 million in 1996. Excluding the effects of the
$12.0 million charge ($7.8 million net of tax), the Company's net income
increased 15% from $7.5 million in 1995 to $8.6 million in 1996. The increase in
net income resulted from increased production from newly developed properties
and production from properties acquired in the TransTexas and Soxco
Acquisitions, combined with an increase in realized natural gas prices. Both
lease operating and general and administrative expenses increased from the prior
year due to certain one-time charges and interest expense reflects third quarter
borrowings, which were repaid with proceeds from the IPO.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions, capital
expenditures and working capital requirements from cash flows from operations,
bank borrowings and, prior to the IPO, capital contributions from Brooklyn
Union. See also "Risk Factors -- Effects of Leverage."
As of December 31, 1997, the Company had a working capital deficit of $5.4
million (which includes the accrued liability of $8.8 million for the Soxco
minimum deferred purchase price which is payable in shares of Common Stock
during the first quarter of 1998) and $15.4 million of available borrowing base
under its Credit Facility. Net cash provided by operating activities for the
year ended December 31, 1997 was $97.3 million
38
<PAGE> 41
compared to $54.1 million for the year ended December 31, 1996. The Company's
cash position was increased during the year ended December 31, 1997 by
borrowings of $79.0 million under the Company's Credit Facility. Funds used in
investing and financing activities consisted of $145.1 million for investments
in property and equipment and principal payments of $31.0 million on long-term
borrowing under the Credit Facility. As a result of these activities, cash and
cash equivalents increased $1.9 million from $2.8 million at December 31, 1996
to $4.7 million at December 31, 1997.
Over the past three years, the Company has spent $390 million (including
$96.9 million expended on the TransTexas and the Soxco acquisitions) to add 294
Bcfe of net proved reserves, representing a finding and development cost of
$1.33 per Mcfe. The Company's primary sources of funds for each of the past
three years are reflected in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating activities............ $55,778 $ 54,065 $97,292
Net borrowings (repayments) under Credit Facility.... 6,212 (6,862) 48,000
Proceeds from sale of common stock................... -- 101,014 297
Capital contributions from Brooklyn Union............ 6,873 6,342 --
</TABLE>
The Company's natural gas and oil capital expenditures for each of the past
three years are reflected in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OFFSHORE:
Acquisitions of properties........................ $18,236 $ 58,578 $ 30,700
Development....................................... 32,228 25,399 19,826
Exploration....................................... 6,355 27,398 42,219
------- -------- --------
56,819 111,375 92,745
ONSHORE:
Acquisitions of properties........................ $ 2,803 $ 59,513 $ 9,920
Development....................................... 8,935 5,844 39,418
Exploration....................................... 869 -- 1,900
------- -------- --------
12,607 65,357 51,238
------- -------- --------
Total..................................... $69,426 $176,732 $143,983
======= ======== ========
</TABLE>
The Company's capital expenditure budget for 1998 of $100 million includes
$55 million and $45 million, respectively, for exploration and development.
These amounts include development costs associated with recently acquired
properties and amounts that are contingent upon drilling success. The Company
will continue to evaluate its capital spending plans through the year. No
significant abandonment or dismantlement costs are anticipated through 1998.
Actual levels of capital expenditures may vary significantly due to a variety of
factors, including drilling results, natural gas prices, industry conditions and
outlook and future acquisitions of properties. The Company believes cash flows
from operations and borrowings under its Credit Facility will be sufficient to
fund these expenditures. The Company will continue to selectively seek
acquisition opportunities for proved reserves with substantial exploration and
development potential both offshore and onshore. The size and timing of capital
requirements for acquisitions is inherently unpredictable. The Company expects
to fund exploration and development through a combination of cash flow from
operations, borrowings under its Credit Facility, or the issuance of equity or
debt securities.
If the Pending Acquisition is completed, the Company intends to pay the
estimated $54.9 million purchase price of the Pending Acquisition using funds
borrowed under the Credit Facility. The Company does not presently intend to
increase its capital expenditure budget if the Pending Acquisition is completed.
39
<PAGE> 42
The Company has entered into the Credit Facility with a syndicate of
lenders led by Chase Bank of Texas, National Association ("Chase") which
provides a maximum loan amount of $150 million, subject to borrowing base
limitations, on a revolving basis. The Credit Facility had a borrowing base of
$130 million prior to the sale of the Old Notes, which was reduced to $115
million upon completion of the sale of the Old Notes. At December 31, 1997, $113
million was borrowed and $1.6 million was committed under outstanding letter of
credit obligations. The Credit Facility matures on July 1, 2000. Advances under
the Credit Facility bear interest, at the Company's election at (i) a
fluctuating rate ("Base Rate") equal to the higher of the Federal Funds Rate
plus 0.5% or Chase's prime rate or (ii) a fixed rate ("Fixed Rate") equal to a
quoted LIBOR rate plus a margin between 0.375% and 1.125% depending on the
amount outstanding under the Credit Facility. Interest is due at calendar
quarters for Base Rate loans and at the earlier of maturity or three months from
the date of the loan for Fixed Rate loans. The Credit Facility contains
covenants of the Company, including certain restrictions on liens and financial
covenants which require the Company to, among other things, maintain (i) an
interest coverage ratio of 2.5 to 1.0 of earnings before interest, taxes and
depreciation to cash interest ("EBITDA") and (ii) a total debt to capitalization
ratio of less than 60%. The Credit Facility also restricts the Company's ability
to purchase or redeem its capital stock or to pledge its oil and gas properties
or other assets. As of December 31, 1997 the Company was in compliance with all
Credit Facility covenants. The borrowing base under the Credit Facility is
determined by Chase in its discretion in accordance with Chase's then current
standards and practices for similar oil and gas loans taking into account such
factors as Chase deems appropriate.
For a description of certain bonding requirements related to offshore
production proposed by the Minerals Management Service, see
"Business -- Environmental Matters."
The Company utilizes derivative commodity instruments to hedge future sales
prices on a portion of its natural gas production to achieve a more predictable
cash flow, as well as to reduce its exposure to adverse price fluctuations of
natural gas. While the use of these hedging arrangements limits the downside
risk of adverse price movements, they may limit future revenues from favorable
price movements. The use of hedging transactions also involves the risk that the
counterparties will be unable to meet the financial terms of such transactions.
Hedging instruments used are swaps, collars and options, and are generally
placed with major financial institutions that the Company believes are minimal
credit risks. The Company accounts for these transactions as hedging activities
and, accordingly, gains or losses are included in natural gas and oil revenues
in the period the hedged production occurs. Unrealized gains and losses on these
contracts, if any, are deferred and offset in the balance sheet against the
related settlement amounts.
As of December 31, 1997, the Company had entered into commodity price
hedging contracts with respect to its gas production as listed below. Natural
gas production during the month of December 1997 was 5,419 MMcf (5,570 MMMBtu).
<TABLE>
<CAPTION>
FIXED PRICE SWAPS COLLARS OPTIONS
-------------------- -------------------------- ----------------------------
NYMEX
CONTRACT
NYMEX PRICE NYMEX
VOLUME CONTRACT VOLUME --------------- VOLUME STRIKE
PERIOD (MMMBTU) PRICE (MMMBTU) FLOOR CEILING (MMMBTU) PRICE PUT/CALL
------ --------- -------- -------- ----- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1998........... 355 $2.07 1,860 $2.73 $3.88 155 $2.01 Put
February 1998.......... 340 $2.07 1,120 $2.65 $3.16 140 $2.01 Put
February 1998.......... 560 $3.50 Call
March 1998............. 355 $2.07 930 $2.25 $2.75 155 $2.01 Put
</TABLE>
40
<PAGE> 43
Subsequent to December 31, 1997, the Company entered into additional
commodity price hedging contracts as listed below (as of April 14, 1998):
<TABLE>
<CAPTION>
FIXED PRICE SWAPS COLLARS OPTIONS
-------------------- -------------------------- ----------------------------
NYMEX
CONTRACT
NYMEX PRICE NYMEX
VOLUME CONTRACT VOLUME --------------- VOLUME STRIKE
PERIOD (MMMBTU) PRICE (MMMBTU) FLOOR CEILING (MMMBTU) PRICE PUT/CALL
------ --------- -------- -------- ----- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 1998............. -- -- 930 $2.20 $2.58 -- -- --
April 1998............. -- -- 900 $2.28 $2.58 -- -- --
May 1998............... -- -- 2,480 $2.28 $2.77 -- -- --
June 1998.............. -- -- 2,400 $2.27 $2.77 -- -- --
July 1998.............. -- -- 1,860 $2.27 $2.79 -- -- --
August 1998............ -- -- 1,860 $2.27 $2.79 -- -- --
September 1998......... -- -- 1,800 $2.27 $2.79 -- -- --
</TABLE>
As of April 14, 1998, the Company had no commodity hedging contracts
extending beyond September 1998. The Company has entered into basis swaps with
respect to more than 50% of its indicated NYMEX hedged volume.
These hedging transactions are settled based upon the average of the
reported settlement prices on the New York Mercantile Exchange (the "NYMEX") for
the last three trading days of a particular contract month (the "settlement
price"). With respect to any particular swap transaction, the counterparty is
required to make a payment to the Company in the event that the settlement price
for any settlement period is less than the swap price for such transaction, and
the Company is required to make payment to the counterparty in the event that
the settlement price for any settlement period is greater than the swap price
for such transaction. For any particular collar transaction, the counterparty is
required to make a payment to the Company if the settlement price for any
settlement period is below the floor price for such transaction, and the Company
is required to make payment to the counterparty if the settlement price for any
settlement period is above the ceiling price for such transaction. For any
particular floor transaction, the counterparty is required to make a payment to
the Company if the settlement price for any settlement period is below the floor
price for such transaction. The Company is not required to make any payment in
connection with a floor transaction. For option contracts, the Company has the
option, but not the obligation, to buy contracts at the strike price up to the
day before the last trading day for that NYMEX contract.
The Company periodically enters into basis swaps (either as part of a
particular hedging transaction or separately) tied to a particular NYMEX-based
transaction to eliminate basis risk. Because substantially all of the Company's
natural gas production is sold under spot contracts, that have historically
correlated with the swap price, the Company believes that it has no material
basis risk with respect to gas swaps that are not coupled with basis swaps.
41
<PAGE> 44
BUSINESS
OVERVIEW
Houston Exploration is an independent natural gas and oil company engaged
in the exploration, development, exploitation and acquisition of domestic
natural gas and oil properties. The Company's offshore properties are located
primarily in the shallow waters (up to 600 feet) of the Gulf of Mexico, and its
onshore properties are located in South Texas, the Arkoma Basin, East Texas and
West Virginia. The Company has utilized its geological and geophysical expertise
to grow its reserve base through a combination of high potential exploratory
drilling in the Gulf of Mexico and lower risk, high impact exploitation and
development drilling onshore. The Company believes that the lower risk projects
and more stable production associated with its onshore properties complement its
high potential exploratory prospects in the Gulf of Mexico by balancing risk and
reducing volatility.
The Company has achieved significant growth in net proved reserves,
production, revenues and EBITDA over the past five years. The Company has
increased net proved reserves at a compound annual rate of 30% from 92 Bcfe at
December 31, 1992 to 337 Bcfe at December 31, 1997. During this period, annual
production increased at a compound annual rate of 30% from 14 Bcfe in 1992 to 51
Bcfe in 1997. Average daily production during the month of December 1997 was 179
MMcfe per day. The Company's oil and gas revenues and EBITDA have increased from
$22 million in 1992 to $116 million in 1997, and its EBITDA increased from $17
million to $93 million in the same period. At December 31, 1997, Houston
Exploration reported net proved reserves of 337 Bcfe with a discounted present
value of cash flows before income taxes ("PV-10%") of $377 million.
The Company believes that its primary strengths are its high quality
reserves, its substantial inventory of high potential exploration, exploitation
and development opportunities, its expertise in generating new prospects, its
geographic focus and its low-cost operating structure. Approximately 98% of the
Company's net proved reserves at December 31, 1997 were natural gas and
approximately 78% were classified as proved developed. The Company operates over
90% of its production.
The geographic focus of the Company's operations in the Gulf of Mexico and
core onshore areas enables it to manage a large asset base with a relatively
small number of employees and to add and operate production at relatively low
incremental costs. The Company achieved lease operating expenses (excluding
severance taxes) of $0.28 per Mcfe of production and net general and
administrative expenses of $0.11 per Mcfe of production for the year ended
December 31, 1997. The Company believes that these expense levels are among the
lowest within its peer group.
BUSINESS STRATEGY
The Company's strategy is to continue to increase its reserves, production
and cash flow by pursuing internally generated exploration prospects, primarily
in the Gulf of Mexico, by conducting development and exploitation drilling on
its onshore and offshore properties and by making selective opportunistic
acquisitions. Over the past five years, the Company has added 400 Bcfe of net
proved reserves through exploration, acquisitions and exploitation and
development. During this period, the Company has produced a total of 151 Bcfe,
and total net proved reserves added due to extensions, discoveries and revisions
were approximately 168% of cumulative production. Total net proved reserves
added during this period including acquisitions were approximately 265% of
cumulative production. During 1997, the Company increased production by more
than 60%, from 32 Bcfe in 1996 to 51 Bcfe in 1997. The Company focuses on the
following elements in implementing this strategy:
High Potential Exploratory and Development Drilling in the Gulf of Mexico
The Company plans to drill approximately 15 exploratory wells in the Gulf
of Mexico in 1998, the successful completion of any one of which could
substantially increase the Company's reserves. Over the past five years, the
Company has drilled 20 successful exploratory wells and 19 successful
development wells in the Gulf of Mexico, representing a historical success rate
of 74%. The Company believes it has assembled a four
42
<PAGE> 45
year inventory of exploration and development drilling opportunities in the Gulf
of Mexico, principally in shallow waters. The Company holds interests in 79
lease blocks, representing 394,093 gross (292,837 net) acres, in federal and
state waters in the Gulf of Mexico, of which 28 have current operations. The
Company has a 100% working interest in 38 of these lease blocks and a 50% or
greater working interest in 22 other lease blocks. The Company anticipates that
approximately $68 million of its $100 million 1998 capital expenditure budget
(excluding acquisitions) will be spent on offshore projects. In addition, the
Company intends to continue its participation in federal lease sales and to
actively pursue attractive farm-in opportunities as they become available. The
Company's management believes that the Gulf of Mexico area remains attractive
for future exploration and development activities due to the availability of
geologic data, remaining reserve potential and the infrastructure of gathering
systems, pipelines, platforms and providers of drilling services and equipment.
Based on 1997 annual production, the Company's offshore reserves have a reserve
to production ratio of 5.4 years. During December 1997, average net production
from the Company's Gulf of Mexico properties was approximately 62 MMcfe per day.
Lower Risk, High Impact Exploitation and Development Drilling Onshore
The Company owns significant onshore natural gas and oil properties in
South Texas, the Arkoma Basin of Oklahoma and Arkansas, East Texas and West
Virginia, accounting for approximately 65% of its net proved reserves at
December 31, 1997. Complementing the Company's offshore properties, the
Company's onshore properties are characterized by relatively longer reserve
lives and more predictable production. Over the past five years, the Company has
drilled or participated in the drilling of 63 successful development wells and
six successful exploratory wells onshore representing a historical drilling
success rate of 76%. One example of the successful implementation of the
Company's onshore strategy is in the Charco Field in South Texas, where the
Company has increased net production from an average of 38 MMcfe per day in July
1996, immediately following its acquisition of such properties, to an average 92
MMcfe per day in December 1997. During 1997, the Company produced 20 Bcfe, net
to the Company's interest, from the Charco Field and added 40 Bcfe in net proved
reserves. The Company has identified an extensive inventory of more than 100
potential onshore drilling locations, of which approximately 70 are located in
the Charco Field. The Company anticipates that approximately $32 million of its
$100 million 1998 capital expenditure budget (excluding acquisitions) will be
spent on onshore projects, including the drilling of approximately 25 wells.
Based on 1997 annual production, the Company's onshore reserves have a reserve
to production ratio of 7.4 years. During December 1997, average net production
from the Company's onshore properties was approximately 117 MMcfe per day.
Opportunistic Acquisitions
The Company's primary strategy to grow its reserves through the drillbit is
supplemented by the Company's continuing pursuit of opportunistic acquisitions
of properties with unexploited reserve potential. The Company targets properties
(i) that it can operate, (ii) that are either in the Gulf of Mexico or onshore
in existing core operating areas or in new geographic areas in which the Company
believes it can establish a substantial concentration of properties and
operations, and (iii) that provide a base for further exploration and
development. The Company has a successful track record of building its reserves
through opportunistic acquisitions onshore and in the Gulf of Mexico and
successfully exploiting those reserves. In particular, the Company has drilled
25 successful wells (74% success rate) in the Charco Field since acquiring its
properties in the field in July 1996. See "Prospectus Summary -- Pending
Acquisition."
High Percentage of Operated Properties
The Company seeks to operate properties in which it has a significant
ownership interest. By operating these properties, the Company can manage
production performance while controlling operating expenses and the timing and
amount of capital expenditures. Properties operated by the Company account for
approximately 90% of its Gulf of Mexico production and approximately 95% of its
onshore production. The Company currently has two offshore jackup rigs and two
land rigs under long-term contracts, which allow the Company to manage the
timing of the drilling of its wells. The Company also pursues cost savings
through the use of outside contractors for much of its offshore field operations
activities. As a result of these and other factors, the
43
<PAGE> 46
Company achieved lease operating expense (excluding severance taxes) of $0.28
per Mcfe of production and net general and administrative expense of $0.11 per
Mcfe of production for the year ended December 31, 1997.
Use of Advanced Technology for In-House Prospect Generation
The Company generates virtually all of its exploration prospects utilizing
in-house geological and geophysical expertise. The Company uses advanced
technology, including 3-D seismic and in-house computer-aided exploration
technology, to reduce risks, lower costs and prioritize drilling prospects. The
Company has acquired approximately 2,400 square miles of 3-D seismic data,
including 3-D seismic surveys on 65 of its offshore lease blocks and on possible
lease and acquisition prospects, and 73,500 linear miles of offshore 2-D seismic
data. Since the acquisition of its Charco Field properties in 1996, the Company
has purchased and commenced interpretation of 3-D seismic data covering 148
square miles of the field. In 1998, the Company anticipates the acquisition of
30 square miles of 3-D seismic data on its recently acquired East Texas acreage.
The Company has 13 geologists/geophysicists with average industry experience of
approximately 28 years and 10 geophysical workstations for use in interpreting
3-D seismic data. The availability of 3-D seismic data for Gulf of Mexico
properties at reasonable costs has enabled the Company to identify exploration
and development prospects in the Company's existing inventory of properties and
to define possible lease and acquisition prospects.
Geographically Focused Operations
Focusing drilling activities on properties in relatively concentrated
offshore and onshore areas permits the Company to utilize its base of
geological, engineering, exploration and production experience in the regions.
The Company currently operates in five areas of geographic concentration -- the
Gulf of Mexico, South Texas, the Arkoma Basin, East Texas, and West
Virginia -- and continues to evaluate and may add additional core areas in the
future. The Company is currently evaluating an acquisition that would add a new
core area of operations onshore in South Louisiana. See "Prospectus
Summary -- Pending Acquisition." The geographic focus of the Company's
operations allows it to manage a large asset base with a relatively small number
of employees and enables the Company to add production at relatively low
incremental costs. For example, in the Charco Field, the Company has reduced
lease operating expense (excluding severance taxes) by 50%, from $0.38 per Mcfe
for the six month period beginning on July 1, 1996, when the Company acquired
its Charco Field properties, and ending December 31, 1996 to $0.19 per Mcfe for
the six month period ended December 31, 1997.
The following table sets forth information regarding the Company's reserves
associated with its properties in the Gulf of Mexico, the Charco Field in South
Texas and the Company's other onshore properties:
<TABLE>
<CAPTION>
NET PROVED RESERVES
AT DECEMBER 31, 1997
PERCENT OF -----------------------------
TOTAL GAS OIL TOTAL
RESERVES (MMCF) (MBBLS) (MMCFE)
---------- ------- ------- -------
<S> <C> <C> <C> <C>
Gulf of Mexico............................. 35% 112,739 869 117,953
Charco Field............................... 38% 126,575 50 126,875
Other Onshore.............................. 27% 91,287 158 92,235
------- ----- -------
330,601 1,077 337,063
======= ===== =======
</TABLE>
GULF OF MEXICO PROPERTIES
The Company holds interests in 79 offshore blocks, of which 28 have current
operations, and operates 18 of these blocks, accounting for approximately 90% of
the Company's offshore production. The following table lists the Company's
average working interest, net proved reserves and the operator for the Company's
eight
44
<PAGE> 47
largest offshore properties as of December 31, 1997, representing 77% of the
Company's Gulf of Mexico proved reserves and 65% of its offshore production:
<TABLE>
<CAPTION>
NET PROVED RESERVES AT DECEMBER 31, 1997
----------------------------------------------------
AVERAGE
GAS OIL TOTAL WORKING
FIELD (MMCF) (MBBLS) (MMCFE) INTEREST OPERATOR
----- ------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
East Cameron Blocks 82/83............ 18,526 140 19,366 97.8% Company
Mustang Island Blocks 858/868........ 18,343 329 20,317 79.0% Company
West Cameron Blocks 76/77/60/61
Unit............................... 10,826 73 11,264 10.9% Third Party
Matagorda Island Block 651........... 10,586 6 10,622 79.6% Company
High Island Block 38................. 7,655 79 8,129 40.0% Third Party
Mustang Island Block 807............. 7,892 23 8,030 100.0% Company
Mustang Island Block 759............. 6,591 15 6,681 25.0% Third Party
Mustang Island Block 785............. 5,914 -- 5,914 72.5% Company
All Other Gulf of Mexico (10
fields)............................ 26,406 204 27,630
------- --- -------
Total Gulf of Mexico....... 112,739 869 117,953
======= === =======
</TABLE>
During 1997, the Company drilled six successful exploratory wells and one
successful development well on its Gulf of Mexico properties. During this same
period, the Company drilled three exploratory wells and one development well
that were not successful. Capital spending associated with the Company's Gulf of
Mexico properties during 1997 was $92.7 million, including $42.2 million for
exploratory drilling, $19.8 million for development drilling and $30.7 million
for leasehold and lease acquisitions. During 1997, the Company acquired one
producing property, Mustang Island 868, for $2.6 million.
During 1998, the Company intends to focus on exploratory drilling in the
Gulf of Mexico and plans to drill approximately 15 exploratory wells, along with
limited development drilling. The Company's planned exploratory projects are
located in East Cameron Blocks 82/83, West Cameron Block 174, Mustang Island
Blocks A-113/114 and 138/139, High Island Block 115, South Timbalier Block 318
and Brazos Block A-40. As of April 14, 1998, the Company was drilling or
participating in the drilling of exploratory wells on East Cameron Block 83 and
Galveston Island Block 144. The Company drilled one unsuccessful exploratory
well in the first quarter of 1998. The following is a summary description of the
Company's exploration and development activity during 1997. The Company is the
operator of each of these properties except for High Island Block 38 and Eugene
Island Block 64.
Mustang Island Blocks 858/868. The Company holds an 82.5% working interest
in Mustang Island Block 858 and a 65% working interest in Mustang Island Block
868. The property has three producing wells, the first of which commenced
production in July 1996. During November 1997, the Company completed the
workover of one well and commenced drilling on a development well and an
exploratory well on the property. At December 31, 1997, the Company was
continuing to drill both wells toward targeted objectives at depths between
14,000 and 15,000 feet; the exploratory well was logged and determined to be
unproductive in January 1998, and the development well encountered mechanical
difficulties and was plugged and abandoned in late February 1998. During
December 1997, the block produced at an average rate of 6,100 Mcfe/d, net to the
Company, which reflects production downtime due to drilling rigs on location. In
December 1997, the Company completed the purchase of a 65% working interest in
Mustang Island Block 868, a neighboring block which includes the platform and
facilities used for production from Mustang Island Block 858. The Company
believes the acquisition will enable it to control and improve the efficiency of
operations for the two properties. The Company owns substantial leasehold
interests in adjacent blocks and is planning additional exploratory and
development drilling during 1998.
East Cameron Blocks 82/83. The Company holds an average working interest of
97.8% in East Cameron Blocks 82 and 83. The property currently has one producing
platform on Block 82 and two satellite platforms. In February 1997, the Company
began drilling an exploratory well on Block 83, which was successfully
45
<PAGE> 48
completed in June 1997 after experiencing a period of uncontrolled gas flow.
During December 1997, the production from the combined platforms averaged 12,200
Mcfe/d, net to the Company.
Mustang Island Block 807. The Company holds a 100% working interest in
Mustang Island Block 807. The Block has one well, the initial discovery well,
which during December 1997 produced at an average of 4,500 Mcfe/d, net to the
Company. Platform construction was completed during the first months of 1997 and
initial production began in June 1997.
Galveston Island Blocks 252/272. The Company holds an average working
interest of 43.9% in Galveston Island Block 252/272. The property has two
platforms and one satellite platform at Galveston Island Block 272. In late
February 1997, the Company began drilling an exploratory well which was
successfully completed and brought on-line in May 1997. During December 1997,
the platforms were producing at a combined rate averaging 4,100 Mcfe/d, net to
the Company.
East Cameron Block 185. The Company acquired a 100% working interest in
East Cameron Block 185 in March 1996. The Company successfully drilled and
completed an exploratory well during the third quarter of 1997, and completed
the workover of another well on the property. During December 1997, production
averaged 5,300 Mcfe/d, net to the Company.
Mustang Island Block 738. The Company holds a 49.9% working interest in
Mustang Island Block 738. The property has two producing wells which came
on-line in March 1996. During the fourth quarter of 1997, the Company drilled an
additional development well which was unsuccessful. During December 1997,
production averaged 1,100 Mcfe/d, net to the Company.
High Island Block 38. The Company holds a 40% working interest in High
Island Block 38. The Company participated in the successful drilling of an
exploratory well that was completed in the third quarter of 1997. Production
facilities were completed in January 1998 and initial production began in late
January at an initial flow rate between 4,400 and 7,300 Mcfe/d, net to the
Company.
Eugene Island Block 64. The Company acquired a 25% working interest in
Eugene Island Block 64 and participated in the drilling of an exploratory well
which was successfully completed in November 1997. Production facilities were
completed and initial production commenced in the first quarter of 1998.
ONSHORE PROPERTIES
The Company also owns significant onshore natural gas and oil properties in
South Texas, the Arkoma Basin of Oklahoma and Arkansas, East Texas and West
Virginia. These properties represent interests in 1,104 gross (732 net) wells,
approximately 95% of which the Company is the operator of record, and 166,463
gross (126,611 net) acres.
The following table lists the Company's average working interest and net
proved reserves for the Company's core onshore areas of operation as of December
31, 1997, representing 99% of the Company's onshore reserves:
<TABLE>
<CAPTION>
NET PROVED RESERVES AT
DECEMBER 31, 1997
AVERAGE -----------------------------
WORKING GAS OIL TOTAL
FIELD INTEREST (MMCF) (MBBLS) (MMCFE)
----- -------- ------- ------- -------
<S> <C> <C> <C> <C>
Charco Field (South Texas).................. 95% 126,575 50 126,875
Chismville/Massard Field (Arkansas)......... 73% 48,079 -- 48,079
Wilburton, Panola and Surrounding Fields
(Oklahoma)................................ 23% 7,666 -- 7,666
Willow Springs and Surrounding Fields (East
Texas).................................... 53% 9,731 91 10,277
Appalachian Area (West Virginia)............ 60% 25,811 67 26,213
</TABLE>
During 1997, the Company participated in the drilling of 33 successful
development wells and two successful exploratory wells on its onshore
properties. During this same period, the Company participated in
46
<PAGE> 49
the drilling of eight development wells and two exploratory wells that were not
successful. Capital spending associated with the Company's onshore drilling
program during 1997 was approximately $51.2 million, including $39.4 million for
development, $1.9 million for exploration and $9.9 million for leasehold and
lease acquisitions. During 1997 the Company did not make any acquisitions of
onshore producing properties.
For 1998 the Company has budgeted funds to drill approximately 15 wells in
the Charco Area of South Texas, five wells in the Arkoma Basin, two wells in
East Texas and two wells in West Virginia. The Company has identified enough
additional development and exploratory projects on its existing acreage to
maintain an active drilling program for the next four to six years.
The following is a description of several of the Company's most significant
onshore properties:
Charco Field. The Charco Field is located in Zapata County, Texas. The
Company acquired its properties in the Charco Field in July 1996 in the
TransTexas Acquisition. The Company owns a 95% working interest in the
approximately 165 active wells on such properties, all of which are operated by
the Company. During December 1997, the Company's Charco Field properties had
average production of 92,000 Mcfe/d, net to the Company. The Company has
purchased and commenced interpretation of 3-D seismic data covering 148 square
miles of its Charco Field properties. The Company commenced an active drilling
and workover program beginning in the fourth quarter of 1996 to fully exploit
this property and currently has two drilling rigs under long-term contract.
During 1997, the Company successfully drilled and completed 22 development wells
and drilled five unsuccessful development wells. Subsequent to year end, the
Company has drilled five successful and one unsuccessful development well and is
currently drilling two new development wells.
Chismville/Massard Field. The Chismville/Massard Field is located in Logan
and Sebastian Counties, Arkansas. The Company owns working interests in
approximately 149 active wells, of which it operates 80 wells. Working interests
range from 11% to 100% and average approximately 73%. During 1997, the Company
successfully completed eight gross (5.8 net) development wells and three gross
(2.9 net) unsuccessful development wells. During December 1997, production
averaged 11,700 Mcfe/d, net to the Company.
Willow Springs and Surrounding Fields. The Willow Springs Field is located
in Gregg County, Texas, with surrounding fields located in Panola and Harrison
Counties, Texas. The Company owns working interests in 63 active wells, of which
it operates 20 wells. Working interests range from 3% to 100% and average
approximately 53%. During 1997, the Company participated in the drilling of one
gross (0.4 net) successful development well in this area. During December 1997,
production averaged 3,100 Mcfe/d, net to the Company.
Wilburton, Panola and Surrounding Fields. The Wilburton and Panola Fields
are located in Latimer County, Oklahoma. The Company owns working interest in 51
active wells, of which it operates 18 wells. Working interests range from 1% to
63% and average approximately 23%. During 1997, the Company participated in the
successful drilling of two exploratory wells in which it had a small combined
working interest of 8%. In 1998, the Company participated in one successful
development well, currently being completed, in which it has a working interest
of 11%. During December 1997, production averaged 5,000 Mcfe/d, net to the
Company.
Appalachian Area. The Belington, Clarksburg and Seneca Upshur Fields are
located in Barbour, Randolph, Upshur and Mingo Counties, West Virginia. The
Company owns working interests in 670 wells, substantially all of which are
operated by the Company. Working interests range from 6% to 100% and average
approximately 60%. During 1997, the Company drilled and successfully completed
two development wells in this area. During December 1997, production averaged
5,200 Mcfe/d, net to the Company.
ADDITIONAL FUTURE PROJECTS
In addition to the properties described above, the Company has accumulated
a large inventory of offshore leases comprised of 251,307 undeveloped gross
(215,514 net) acres. These leases are under review by the Company's geologists
and geophysicists based upon 3-D seismic data acquired in recent years. The
Company
47
<PAGE> 50
has established a team of geologists and geophysicists to continually evaluate
unleased acreage offshore which will be available at upcoming lease sales. The
Company is also actively pursuing farm-ins from other companies, interests in
other companies' joint ventures and potential acquisitions. Finally, the Company
is also evaluating its producing properties for workovers and recompletions
which it will undertake in the next several years.
NATURAL GAS AND OIL RESERVES
The following table summarizes the estimates of the Company's historical
net proved reserves as of December 31, 1995, 1996 and 1997, and the present
values attributable to these reserves at such dates. The reserve data and
present values as of December 31, 1997 were prepared by Netherland, Sewell &
Associates, Inc. ("NSA") and Miller and Lents, Ltd. ("Miller and Lents"),
independent petroleum engineering consultants. The reserve data and present
values as of December 31, 1996 and 1995 were prepared by NSA, Miller and Lents,
Ryder Scott Company ("Ryder Scott") and Huddleston & Co., Inc. ("Huddleston").
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Proved Reserves(1):
Natural gas (MMcf).................................... 195,946 320,474 330,601
Oil (MBbls)........................................... 889 1,131 1,077
Total (MMcfe)......................................... 201,280 327,260 337,063
Present value of future net revenues before income
taxes(2).............................................. $206,574 $577,000 $377,065
Standardized measure of discounted future net cash
flows(3).............................................. $171,459 $452,582 $315,380
</TABLE>
- ---------------
(1) NSA and Miller and Lents prepared reserve data and present values with
respect to properties comprising approximately 73% and 27%, respectively, of
the present values attributable to the Company's proved reserves as of
December 31, 1997. NSA, Miller and Lents, Ryder Scott and Huddleston
prepared reserve data and present values with respect to properties
comprising approximately 47%, 30%, 23%, and 0%, respectively, of the present
values attributable to the Company's proved reserves as of December 31,
1996, and 14%, 52%, 32%, and 2%, respectively, of the present values
attributable to the Company's proved reserves as of December 31, 1995.
(2) The present value of future net revenues attributable to the Company's
reserves was prepared using prices in effect at the end of the respective
periods presented, discounted at 10% per annum on a pretax basis. Average
prices per Mcf of natural gas, used in making such present value
determinations as of December 31, 1995, 1996 and 1997 were $2.06, $3.41 and
$2.31, respectively. Average prices per Bbl of oil used in making such
present value determinations as of December 31, 1995, 1996 and 1997 were
$17.29, $22.94 and $17.23, respectively. Such amounts reflect the effects of
the Company's hedging contracts.
(3) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10% per
annum. Such amounts reflect the effects of the Company's hedging contracts.
In accordance with applicable requirements of the Commission, estimates of
the Company's proved reserves and future net revenues are made using sales
prices estimated to be in effect as of the date of such reserve estimates and
are held constant throughout the life of the properties (except to the extent a
contract specifically provides for escalation). Estimated quantities of proved
reserves and future net revenues therefrom are affected by gas prices, which
have fluctuated widely in recent years. There are numerous uncertainties
inherent in estimating natural gas and oil reserves and their estimated values,
including many factors beyond the control of the producer. The reserve data set
forth in this Prospectus represent only estimates. Reservoir engineering is a
subjective process of estimating underground accumulations of natural gas and
oil that cannot be measured in an exact manner. 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 of different
48
<PAGE> 51
engineers, including those used by the Company, may vary. In addition, estimates
of reserves are subject to revision based upon actual production, results of
future development and exploration activities, prevailing natural gas and oil
prices, operating costs and other factors, which revision may be material.
Accordingly, reserve estimates are often different from the quantities of
natural gas and oil that are ultimately recovered and are highly dependent upon
the accuracy of the assumptions upon which they are based. The Company's
estimated proved reserves have not been filed with or included in reports to any
federal agency.
The present value of future net revenues before income taxes and the
standardized measure of discounted future net cash flows set forth in this
Prospectus do not reflect any adjustment for after program-payout working
interests held by the Company's President and Chief Executive Officer in certain
properties of the Company. The amounts expected to be payable in respect of such
after program-payout working interests would not have a material effect on the
information presented. See "Certain Transactions."
DRILLING ACTIVITY
The following table sets forth the drilling activity of the Company on its
properties for the years ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
------------ ------------ -------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C>
OFFSHORE DRILLING ACTIVITY:
Exploratory:
Productive.............................. 1 1.0 6 4.2 6 3.7
Non-Productive.......................... -- -- 4 2.2 3 2.3
-- --- -- --- -- ----
Total........................... 1 1.0 10 6.4 9 6.0
Development:
Productive.............................. 7 2.8 1 0.5 1 0.2
Non-Productive.......................... -- -- -- -- 1 0.8
-- --- -- --- -- ----
Total........................... 7 2.8 1 0.5 2 1.0
ONSHORE DRILLING ACTIVITY:
Exploratory:
Productive.............................. 3 0.5 1 0.1 2 0.1
Non-Productive.......................... -- -- 3 2.2 2 0.6
-- --- -- --- -- ----
Total........................... 3 0.5 4 2.3 4 0.7
Development:
Productive.............................. 12 7.4 9 6.5 33 29.1
Non-Productive.......................... 5 2.5 1 1.0 8 7.7
-- --- -- --- -- ----
Total........................... 17 9.9 10 7.5 41 36.8
</TABLE>
49
<PAGE> 52
PRODUCTIVE WELLS
The following table sets forth the number of productive wells in which the
Company owned an interest as of December 31, 1997.
<TABLE>
<CAPTION>
COMPANY TOTAL
OPERATED NON-OPERATED PRODUCTIVE
COMPANY WELLS WELLS WELLS
OPERATED -------------- ------------- --------------
PLATFORMS GROSS NET GROSS NET GROSS NET
--------- ----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
OFFSHORE
Gas....................... 18 56 35.8 12 2.6 68 38.4
Oil....................... -- -- -- 4 0.5 4 0.5
-- --- ----- --- ---- ----- -----
Total........... 18 56 35.8 16 3.1 72 38.9
-- --- ----- --- ---- ----- -----
ONSHORE
Gas....................... 949 695.6 151 33.6 1,100 729.2
Oil....................... 2 1.9 2 0.5 4 2.4
--- ----- --- ---- ----- -----
Total........... 951 697.5 153 34.1 1,104 731.6
--- ----- --- ---- ----- -----
</TABLE>
Productive wells consist of producing wells capable of production,
including gas wells awaiting connections. Wells that are completed in more than
one producing horizon are counted as one well.
ACREAGE DATA
The following table sets forth the approximate developed and undeveloped
acreage in which the Company held a leasehold mineral or other interest as of
December 31, 1997. Undeveloped acreage includes leased acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of natural gas and oil, regardless of whether or not such
acreage contains proved reserves:
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
------------------ ------------------
GROSS NET GROSS NET
------- ------- ------- -------
<S> <C> <C> <C> <C>
Offshore(1)................................. 142,786 77,323 251,307 215,514
Onshore..................................... 157,132 120,914 9,331 5,697
------- ------- ------- -------
Total............................. 299,918 198,237 260,638 221,211
======= ======= ======= =======
</TABLE>
- ---------------
(1) Offshore includes acreage in federal and state waters.
MARKETING AND CUSTOMERS
Substantially all of the Company's production is sold at market prices. The
Company sold 38% and 27% of its natural gas production in 1997 and 1996,
respectively, to H&N Gas Ltd., an unaffiliated third party. Prior to October
1996, the Company agreed, subject to certain conditions, to sell substantially
all of its subsequently developed or acquired gas production, to an affiliate of
Brooklyn Union, PennUnion Energy Services, L.L.C. ("PennUnion"). The gas sales
agreement with PennUnion was terminated in September 1996 when Brooklyn Union
sold its interest in PennUnion; however, PennUnion still remains a purchaser of
the Company's natural gas production. The gas production sold to PennUnion is
sold at market prices, based upon an index price adjusted to reflect the point
of delivery of such production. During 1996 and 1995 sales to PennUnion and
BRING Gas Services Corp. ("BRING"), predecessor to PennUnion and then an
affiliate of Brooklyn Union, accounted for 40% and 46% of total revenues,
respectively. In 1997, sales to PennUnion accounted for less than 10% of total
revenues. The Company believes that the prices at which it sold gas to PennUnion
and BRING were similar to those it would be able to obtain in the open market.
No customer other than H&N Gas Ltd., PennUnion and BRING purchased more than 10%
of the Company's natural gas production during the past three years. The Company
believes that the loss of any such customer
50
<PAGE> 53
would not have a material adverse effect on the Company's operations. See Note 9
to the Company's Combined Financial Statements.
The Company enters into commodity swaps with unaffiliated third parties for
portions of its natural gas production to achieve more predictable cash flows
and to reduce its exposure to short-term fluctuations in gas prices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
Most of the Company's natural gas is transported through gas gathering
systems and gas pipelines which are not owned by the Company. Transportation
space on such gathering systems and pipelines is occasionally limited and at
times unavailable due to repairs or improvements being made to such facilities
or due to such space being utilized by other gas shippers with priority
transportation agreements. While the Company's inability to market its natural
gas has been subject to limitations or delays only on an infrequent basis, if
transportation space is restricted or is unavailable, the Company's cash flow
from the affected properties could be adversely affected. See "-- Regulation"
and "Risk Factors -- Operating Risks of Natural Gas and Oil Operations."
ABANDONMENT COSTS
The Company is responsible for the payment of abandonment costs on the
natural gas and oil properties pro rata to its working interest. The Company
provides for its expected future abandonment liabilities by accruing for such
costs as a component of depletion, depreciation and amortization as the
properties are produced. As of December 31, 1997, total undiscounted abandonment
costs estimated to be incurred through the year 2008 were approximately $7.0
million for properties in the federal and state waters and are not considered
significant for onshore properties. Estimates of abandonment costs and their
timing may change due to many factors including actual drilling and production
results, inflation rates, and changes in environmental laws and regulations.
The Minerals Management Service ("MMS") requires lessees of Outer
Continental Shelf properties to post bonds in connection with the plugging and
abandonment of wells located offshore and the removal of all production
facilities. Operators in the Outer Continental Shelf waters of the Gulf of
Mexico are currently required to post an area wide bond of $3 million or
$500,000 per producing lease. The Company is presently exempt from any
requirement by MMS to provide supplemental bonding on its offshore leases,
although no assurance can be made that it will continue to satisfy the
requirements for such exemption in the future. Whether or not the Company
qualifies for such exemption, the Company does not believe that the cost of any
such bonding requirements will materially affect the Company's financial
condition or results of operations. Under certain circumstances, the MMS has the
authority to suspend or terminate operations on federal leases for failure to
comply with applicable bonding requirements or other regulations applicable to
plugging and abandonment. Any such suspensions or terminations of the Company's
operations could have a material adverse effect on the Company's financial
condition and results of operations.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company makes only a
cursory review of title to farmout acreage and to undeveloped natural gas and
oil leases upon execution of the contracts. Prior to the commencement of
drilling operations, a thorough title examination is conducted and curative work
is performed with respect to significant defects. To the extent title opinions
or other investigations reflect title defects, the Company, rather than the
seller of the undeveloped property, is typically responsible for curing any such
title defects at its expense. If the Company were unable to remedy or cure any
title defect of a nature such that it would not be prudent to commence drilling
operations on the property, the Company could suffer a loss of its entire
investment in the property. The Company has obtained title opinions on
substantially all of its producing properties and believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the oil and gas industry. Prior to completing an acquisition of
producing natural gas and oil leases, the Company obtains title opinions on the
most significant leases. The Company's natural gas and oil properties are
subject to customary royalty interests, liens for current taxes and other
51
<PAGE> 54
burdens which the Company believes do not materially interfere with the use of
or affect the value of such properties.
THIRD PARTY CONTRACTORS
In an effort to control costs, the Company entered into a contract with
Operators & Consulting Services, Inc. ("OCS") pursuant to which OCS provides
professional services to the Company in the areas of drilling, production and
construction for offshore properties. OCS provides (i) engineering and field
supervision for well design, drilling, completion and workover operations; (ii)
supervision of the daily production operations and field personnel to operate
and maintain production facilities; and (iii) coordination and review of third
party engineering and fabrication work, and installation supervision of
platforms, production facilities and pipelines. The Company has maintained this
contractual relationship with OCS since 1989.
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties. The
Company's competitors include major integrated oil and gas companies and
numerous independent oil and gas companies, individuals and drilling and income
programs. Many of its competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the oil and gas
business for a much longer time than the Company. Such companies may be able to
pay more for productive natural gas and oil properties and exploratory prospects
and to define, evaluate, bid for and purchase a greater number of properties and
prospects than the Company's financial or human resources permit. The Company's
ability to acquire additional properties and to discover reserves in the future
will be dependent upon its ability to evaluate and select suitable properties
and to consummate transactions in this highly competitive environment.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's operations are subject to hazards and risks inherent in
drilling for and production and transportation of natural gas and oil, such as
fires, natural disasters, explosions, encountering formations with abnormal
pressures, blowouts, cratering, pipeline ruptures, and spills, any of which can
result in loss of hydrocarbons, environmental pollution, personal injury claims,
and other damage to properties of the Company and others. Additionally, certain
of the Company's natural gas and oil operations are located in an area that is
subject to tropical weather disturbances, some of which can be severe enough to
cause substantial damage to facilities and possibly interrupt production. As
protection against operating hazards, the Company maintains insurance coverage
against some, but not all, potential losses. The Company's coverages include,
but are not limited to, operator's extra expense, to include loss of well,
blowouts and certain costs of pollution control, physical damage on certain
assets, employer's liability, comprehensive general liability, automobile and
worker's compensation. The Company believes that its insurance is adequate and
customary for companies of a similar size engaged in operations similar to those
of the Company, but losses could occur for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. The occurrence of an event
that is not fully covered by insurance could have an adverse impact on the
Company's financial condition and results of operations.
REGULATION
The availability of a ready market for 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 state
regulations governing environmental quality and pollution control, state limits
on allowable rates of production by a well or proration unit, the supply 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.
52
<PAGE> 55
Regulation of Oil and Gas Exploration and Production. Exploration and
production operations of the Company are subject to various types of regulation
at the federal, state and local levels. Such regulation includes requiring
permits for the drilling of wells, maintaining bonding requirements in order to
drill or operate wells, and regulating the location of wells, the method of
drilling and casing wells, the surface use and restoration of properties upon
which wells are drilling and the plugging and abandonment of wells. The
Company's operations are also subject to various conservation laws and
regulations. These include the regulation of the size of drilling and spacing
units or proration units and the density of wells which may be drilled and
unitization or pooling of oil and gas properties. In this regard, some states
allow the forced pooling or integration of tracts to facilitate exploration
while other states rely on voluntary pooling of lands and leases. In addition,
state conservation laws establish maximum rates of production from natural gas
and oil wells, generally prohibit the venting or flaring of natural gas and
impose certain requirements regarding the ratability of production. The effect
of these regulations is to limit the amounts of natural gas and oil the
Company's operator or the Company can produce from its wells, and to limit the
number of wells or the locations of which the Company can drill. Legislation
affecting the oil and gas industry also is under constant review for amendment
or expansion. Generally, state-established allowables have been influenced by
overall natural gas market supply and demand in the United States, as well as
the specific "nominations" for natural gas from the parties who produce or
purchase gas from the field and other factors deemed relevant by the agency. The
Company cannot predict whether further changes will be made in how these states
set allowables or what impact, if any, such further changes might have. In
addition, numerous departments and agencies, both federal and state, are
authorized by statute to issue rules and regulations binding on the oil and gas
industry and its individual members, some of which carry substantial penalties
for failure to comply. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and, consequently, affects its
profitability. Inasmuch as such laws and regulations are frequently expanded,
amended or reinterpreted, the Company is unable to predict the future cost or
impact of complying with such regulations.
Natural Gas Marketing and Transportation. Federal legislation and
regulatory controls in the United States have historically affected the price of
the natural gas produced by the Company and the manner in which such production
is marketed. The Federal Energy Regulatory Commission (the "FERC") has
jurisdiction over the transportation and sale for resale of natural gas in
interstate commerce by natural gas companies under the Natural Gas Act of 1938
(the "NGA"). Although maximum selling prices of natural gas were formerly
regulated under the NGA and the Natural Gas Policy Act of 1978 (the "NGPA"), on
July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol
Act") amended the NGPA to remove completely by January 1, 1993 price and
non-price controls for all "first sales" of domestic natural gas, which include
all sales by the Company of its own production. Consequently, sales of the
Company's natural gas production currently may be made at market prices, subject
to applicable contract provisions. The FERC's jurisdiction over natural gas
transportation was unaffected by the Decontrol Act.
In July 1994, the FERC eliminated a regulation that had rendered virtually
all sales of natural gas by pipeline and distribution company affiliates, such
as the Company, to be deregulated first sales. Although several parties
challenged the FERC's action, in 1996 the United States Court of Appeals for the
District of Columbia Circuit (the "D.C. Circuit Court") upheld the FERC's
elimination of the regulation. As a result, all sales by the Company of gas for
resale in interstate commerce, other than sales by the Company of its own
production, are now subject to NGA jurisdiction. This includes, for example,
sales for resale of gas purchased from third parties. The Company does not
anticipate this change will have any significant current adverse effects in
light of the market based sales authority under existing blanket certificates.
Such sales are subject to the future possibility of greater federal oversight,
however, including the possibility the FERC might prospectively impose more
restrictive conditions on such sales.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to natural gas buyers and
sellers on an open and nondiscriminatory basis. The FERC's efforts have
indirectly but significantly altered the marketing and pricing of natural gas.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A and 636-B
(collectively, "Order
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<PAGE> 56
No. 636"), which, among other things, required interstate pipelines to
"restructure" to provide transportation separate or "unbundled" from the
pipelines' sales of natural gas. Also, Order No. 636 required pipelines to
provide open-access transportation on a basis that is equal for all natural gas
supplies. In most instances, the result of the Order No. 636 and related
initiatives has been to substantially reduce or bring to an end the interstate
pipelines' traditional role as wholesalers of natural gas in favor of providing
only storage and transportation services. The FERC has issued final orders in
the individual pipeline restructuring proceedings relating to the implementation
of Order No. 636, and has performed a series of one year reviews to determine
whether refinements are required regarding individual pipeline implementations
of Order No. 636. While a number of the individual pipeline restructuring
proceedings were appealed to the federal courts of appeal, only a few are
currently pending on appeal and those cases generally deal with limited
pipeline-specific issues.
Several parties appealed various parts of Order No. 636, and in July 1996
the D.C. Circuit Court issued its decision in those appeals. The D.C. Circuit
Court largely upheld the basic tenets of Order No. 636, including the
requirements that interstate pipelines "unbundle" their sales of gas from
transportation and provide open-access transportation on a basis that is equal
for all gas suppliers. The D.C. Circuit Court remanded several relatively narrow
issues for further explanation by the FERC. On remand, in Order No. 636-C, the
FERC reaffirmed the holding of Order No. 636 that pipelines should be entitled
to recover 100 percent of their prudently incurred GSR costs. In addition, the
FERC reduced the contract matching cap for the right-of-first-refusal mechanism
to five years. The FERC also decided not to limit a pipeline's no-notice service
to its bundled sales customers at the time of restructuring, and reaffirmed that
pipelines should focus on individual customers, rather than customer classes, in
mitigating the effects of SFV rate design. Order No. 636-C is currently pending
on rehearing the FERC.
Although Order No. 636 does not regulate natural gas producers such as the
Company, the FERC has stated that Order No. 636 is intended to foster increased
competition within all phases of the natural gas industry. It is unclear what
impact, if any, increased competition within the natural gas industry under
Order No. 636 will have on the Company and its natural gas marketing efforts.
While Order No. 636 could provide the Company with additional market access and
more fairly applied transportation service rates, terms and conditions, it could
also subject the Company to more restrictive pipeline imbalance tolerances and
greater penalties for violation of those tolerances. The Company does not
believe, however, that it will be affected by Order No. 636, or by any action
taken by the FERC on rehearing of Order No. 636-C, materially differently than
other natural gas producers and marketers with which it competes.
The FERC issued a statement of policy in January 1996 concerning
alternatives to its traditional cost-of-service ratemaking methodology. This
policy statement articulates the criteria that the FERC will use to evaluate
proposals to charge market-based rates for the transportation of natural gas,
and also provides that the FERC will consider proposals for negotiated rates for
individual shippers of natural gas so long as a cost-of-service-based rate also
is available. In a related policy statement, the FERC also requested comments on
whether it should allow gas pipelines the flexibility to negotiate the terms and
conditions of transportation service with prospective shippers. The Company
cannot predict what further action the FERC will take on these matters; however,
the Company does not believe that it will be affected by any action taken
materially differently than other natural gas producers and marketers with which
it competes.
The FERC has recently commenced a reexamination of certain of its
transportation-related policies, including the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary markets. The Company cannot predict what action the
FERC will take on these matters, nor can it accurately predict whether the
FERC's actions will achieve the goal of increasing competition in markets in
which the Company's natural gas is sold. However, the Company does not believe
that it will be affected by any action taken materially differently than other
natural gas producers and marketers with which it competes.
The FERC has also issued a policy statement on how interstate natural gas
pipelines can recover the costs of new pipeline facilities. While the FERC's
policy statement on new construction cost recovery affects the Company only
indirectly, in its present form, the new policy should enhance competition in
natural gas markets and facilitate construction of gas supply laterals. The FERC
has also issued numerous decisions that
54
<PAGE> 57
address how it intends to regulate natural gas gathering facilities owned (or
previously owned but either "spun down" to an affiliate or "spun off" to a
non-affiliate) by interstate pipeline companies after Order No. 636.
Specifically, the FERC has approved the spin down or spin off by numerous
interstate pipelines of their gathering facilities. These approvals were given
despite the strong protests of a number of producers concerned that any
diminution in FERC's oversight of interstate pipeline-related gathering services
might result in a denial of open access or otherwise subject producers to a
pipeline's monopoly power. The FERC has stated that in the future it may
regulate gathering activities if a gatherer acts in concert with its pipeline
affiliate in a manner that frustrates the FERC's effective regulation of a
pipeline. It is unclear what effect the FERC's new gathering policy will have on
producers such as the Company and the Company cannot predict what further action
the FERC will take in this regard.
On February 28, 1996, the FERC issued a Statement of Policy regarding the
application of its jurisdiction under the NGA and OCSLA over new natural gas
facilities and services on the Outer Continental Shelf. In its Policy Statement,
the FERC concluded that it will retain its existing primary function test to
determine whether particular facilities on the Outer Continental Shelf
constitute gathering facilities exempt from the FERC's NGA jurisdiction.
However, the FERC added a new factor to its primary function test for facilities
that are designed to collect gas produced in water depths of 200 meters or more.
Such facilities now will be presumed to qualify as gathering facilities up to
the point or points of potential connection with the interstate pipeline grid.
Downstream of that point, the facilities will be evaluated under the existing
primary function test. Existing interstate pipelines and gathering facilities
would retain their present status barring some change in circumstances. On June
14, 1996, the Commission dismissed all requests for rehearing of its February
28, 1996 order. With respect to this policy statement, the Company does not
believe that it will be affected by any action taken materially differently than
other natural gas producers and marketers with which it competes.
The Fifth Circuit Court of Appeals recently remanded a FERC decision which
declared certain offshore facilities to be subject to its jurisdiction. The
Fifth Circuit decision required the FERC to revisit its methodology for
determining whether it has jurisdiction over offshore natural gas pipeline
facilities. It is not clear whether a revised FERC policy regarding its
jurisdiction over offshore natural gas pipeline facilities will have a material
effect on producers such as the Company and the Company cannot predict what this
new policy would entail.
On July 17, 1996, the FERC issued Order No. 587 which revised the FERC's
regulations to require interstate natural gas pipelines to follow standardized
procedures issued by the Gas Industry Standards Board ("GISB") for certain
business practices, i.e., nominations, allocations, balancing, measurement,
invoicing, capacity release and electronic communication between the pipelines
and those with whom they do business. On January 30, 1997, in Order No. 587-B,
the FERC incorporated into its regulations a second set of GISB standards that
would, inter alia, require interstate pipelines to conduct business transactions
and provide other information according to Internet protocols and to abide by
certain business practice standards dealing with nomination, flowing gas and
capacity release. On March 4, 1997, the FERC issued Order No. 587-C which
amended the FERC's regulations to adopt standards requiring interstate pipelines
to publish certain information on Internet web pages and to implement new
business practice standards covering nominations and flowing gas. The intent of
these standards adopted pursuant to Order Nos. 587, et seq., is to establish a
more efficient and integrated pipeline grid which will reduce the variations in
pipeline business practices and allow buyers to obtain and transport gas from
all potential sources of supply more easily and efficiently. The FERC has denied
requests for rehearing of Order Nos. 587, et seq. An appeal of Order No. 587 is
pending before the D.C. Circuit Court. With respect to GISB issues, the Company
does not believe that it will be affected by any action taken materially
differently than other natural gas producers and marketers with which it
competes.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective, or their effect, if any, on the Company's
operations. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the generally less stringent
regulatory approach recently pursued by the FERC and Congress will continue
indefinitely into the future.
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<PAGE> 58
Offshore Leasing. Certain operations the Company conducts are on federal
oil and gas leases, which the MMS administers. The MMS issues such leases
through competitive bidding. These leases contain relatively standardized terms
and require compliance with detailed MMS regulations and orders pursuant to the
Outer Continental Shelf Lands Act ("OCSLA") (which are subject to change by the
MMS). For offshore operations, lessees must obtain MMS approval for exploration
plans and development and production plans prior to the commencement of such
operations. In addition to permits required from other agencies (such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS prior to the commencement of
drilling. The MMS has promulgated regulations requiring offshore production
facilities located on the Outer Continental Shelf to meet stringent engineering
and construction specifications, and has recently proposed additional
safety-related regulations concerning the design and operating procedures for
Outer Continental Shelf production platforms and pipelines. The MMS also has
issued regulations restricting the flaring or venting of natural gas, and has
recently proposed to amend such regulations to prohibit the flaring of liquid
hydrocarbons and oil without prior authorization. Similarly, the MMS has
promulgated other regulations governing the plugging and abandonment of wells
located offshore and the removal of all production facilities. To cover the
various obligations of lessees on the Outer Continental Shelf, the MMS generally
requires that lessees post substantial bonds or other acceptable assurances that
such obligations will be met. The cost of such bonds or other surety can be
substantial and there is no assurance that the Company can obtain bonds or other
surety in all cases. See "-- Environmental Matters."
In addition, the MMS is conducting an inquiry into certain contract
settlement agreements from which producers on MMS leases have received
settlement proceeds that are royalty bearing and the extent to which producers
have paid the appropriate royalties on those proceeds. The MMS has recently
issued a final rule governing valuation for royalty purposes of gas produced
from federal and Indian leases to primarily address allowances for
transportation of gas. The amendments clarify the methods by which gas royalties
and deductions for gas transportation are calculated. The Company does not
believe that these amended regulations will affect the Company materially
differently than other natural gas producers and marketers with which it
competes.
The MMS has recently issued a notice of proposed rulemaking in which it
proposes to amend its regulations governing the calculation of royalties and the
valuation of natural gas produced from federal leases. The principal feature in
the amendments, as proposed, would establish an alternative market-index based
method to calculate royalties on certain natural gas production sold to
affiliates or pursuant to non-arm's-length contracts. The MMS has proposed this
rulemaking to facilitate royalty valuation in light of changes in the natural
gas marketing environment. The Company cannot predict what action the MMS will
take on these matters, nor can it predict at this state of the rulemaking
proceeding how the Company might be affected by amendments to the regulations.
The OCSLA requires that all pipelines operating on or across the Outer
Continental Shelf provide open-access, non-discriminatory service. Although the
FERC has opted not to impose the regulations of Order No. 509, which implements
these requirements to the OCSLA, on gatherers and other nonjurisdictional
entities, the FERC has retained the authority to exercise jurisdiction over
those entities if necessary to permit non-discriminatory access to services on
the Outer Continental Shelf. If the FERC were to apply Order No. 509 to
gatherers in the Outer Continental Shelf, eliminate the exemption of gathering
lines, and redefine its jurisdiction over gathering lines, then these acts could
result in a reduction in available pipeline space for existing shippers, such as
the Company, in the Gulf of Mexico and elsewhere.
Oil Sales and Transportation Rates. Sales of crude oil, condensate and gas
liquids by the Company are not regulated and are made at market prices. The
price the Company receives from the sale of these products is affected by the
cost of transporting the products to market. Effective as of January 1, 1995,
the FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which would generally index such rates
to inflation, subject to certain conditions and limitations. These regulations
were affirmed by the D.C. Circuit Court on May 10, 1996. Because of the
uncertainty surrounding the indexing methodology, as well as the possibility of
the use of cost-of-service ratemaking and market-based rates, the
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<PAGE> 59
Company is not able at this time to predict the effects of these regulations, if
any, on the Company's oil producing operations.
Safety Regulation. The Company's gathering operations are subject to safety
and operational regulations relating to the design, installation, testing,
construction, operation, replacement, and management of facilities. Pipeline
safety issues have recently been the subject of increasing focus in various
political and administrative arenas at both the state and federal levels. In
addition, the major federal pipeline safety law is subject to change this year
as it is considered for reauthorization by Congress. For example, federal
legislation addressing pipeline safety issues has been introduced, which, if
enacted, would establish a federal "one call" notification system. Additional
pending legislation would, among other things, increase the frequency with which
certain pipelines must be inspected, as well as increase potential civil and
criminal penalties for violations of pipeline safety requirements. The Company
believes its operations, to the extent they may be subject to current natural
gas pipeline safety requirements, comply in all material respects with such
requirements. The Company cannot predict what effect, if any, the adoption of
this or other additional pipeline safety legislation might have on its
operations, but the industry could be required to incur additional capital
expenditures and increased costs depending upon future legislative and
regulatory changes.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, require remedial measures to prevent
pollution from former operations, such as pit closure and plugging abandoned
wells, and impose substantial liabilities for pollution resulting from the
Company's operations. In addition, these laws, rules and regulations may
restrict the rate of oil and natural gas production below the rate that would
otherwise exist. The regulatory burden on the oil and gas industry increases the
cost of doing business and consequently affects its profitability. Changes in
environmental laws and regulations occur frequently, and any changes that result
in more stringent and costly waste handling, disposal and clean-up requirements
could have a significant impact on the operating costs of the Company, as well
as the oil and gas industry in general. Management believes that the Company is
in substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements will not
have a material adverse impact on the Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the original conduct, on certain classes of persons who are
considered to be responsible for the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the disposal site or
sites where the release occurred and companies that disposed or arranged for the
disposal of the hazardous substances. Under CERCLA, such persons may be subject
to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to natural
resources and for the costs of certain health studies, and it is not uncommon
for neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of hazardous
substances.
The Oil Pollution Act of 1990 (the "OPA"), as amended by the Coast Guard
Authorization Act of 1996, (collectively, "OPA"), and regulations thereunder
impose a variety of requirements on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills in
"waters of the United States." A "responsible party" includes the owner or
operator of a facility or vessel, or the lessee or permittee of the area in
which an offshore facility is located. The term "waters of the United States"
has been broadly defined to include not only the waters of the Gulf of Mexico
but also inland water bodies, including wetlands, playa lakes and intermittent
streams. The OPA also requires owners and operators of offshore facilities to
establish and maintain evidence of oil spill financial responsibility ("OSFR")
for costs attributable to oil spills. Under the Coast Guard Authorization Act of
1996, the definition of offshore facility includes facilities located in coastal
inland waters, such as bays or estuaries. OPA requires a minimum of $35 million
in
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OSFR for offshore facilities located on the Outer Continental Shelf and a
minimum of $10 million for offshore facilities located landward of the seaward
boundary of a State. This amount is subject to upward regulatory adjustment up
to $150 million. Responsible parties for more than one offshore facility are
required to provide OSFR only for their offshore facility requiring the highest
OSFR. On March 25, 1997, the Minerals Management Service proposed regulations
for establishing the amount of OSFR to be required for particular facilities.
Under the proposed rule, the amount of OSFR will increase as the volume of a
facility's worst-case oil spill increases. Accordingly, for Outer Continental
Shelf facilities with worst-case spills of less than 35,000 barrels, only $35
million in OSFR will be required; for worst-case spills of over 35,000 barrels,
$70 million will be required; for worst-case spills of over 70,000 barrels, $105
million will be required; and for worst-case spills of over 105,000 barrels,
$150 million will be required. In addition, all OSFR below $150 million remains
subject to upward regulatory adjustment if warranted by the particular
operational, environmental, human health or other risks involved with a
facility. Although the current environmental regulation has had no material
adverse effect of the Company, the impact of the recently adopted and proposed
regulatory changes, and of future environmental regulatory developments such as
stricter environmental regulation and enforcement policies, cannot presently be
quantified.
OPA imposes a variety of additional requirements on responsible parties for
vessels or oil and gas facilities related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United States.
OPA assigns liability to each responsible party for oil spill removal costs and
a variety of public and private damages from oil spills. While liability limits
apply in some circumstances, a party cannot take advantage of liability limits
if the spill is caused by gross negligence or willful misconduct or resulted
from violation of a federal safety, construction or operating regulation. If a
party fails to report a spill or to cooperate fully in the cleanup, liability
limits likewise do not apply. OPA establishes a liability limit for offshore
facilities of all removal costs plus $75 million. Few defenses exist to the
liability for oil spills imposed by OPA. OPA also imposes other requirements on
facility operators, such as the preparation of an oil spill contingency plan.
Failure to comply with ongoing requirements or inadequate cooperation in a spill
event may subject a responsible party to civil or criminal enforcement actions.
As of this date, the Company is not the subject of any civil or criminal
enforcement actions under the OPA.
In addition, the OCSLA authorizes regulations relating to safety and
environmental protection applicable to lessees and permittees operating in the
Outer Continental Shelf. Specific design and operational standards may apply to
Outer Continental Shelf vessels, rigs, platforms, vehicles and structures.
Violations of lease conditions or regulations issued pursuant to OCSLA can
result in substantial civil and criminal penalties, as well as potential court
injunctions curtailing operations and the cancellation of leases. Such
enforcement liabilities can result from either governmental or private
prosecution. As of this date, the Company is not the subject of any civil or
criminal enforcement actions under OCSLA.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and gas
wastes into navigable waters. Permits must be obtained to discharge pollutants
to state and federal waters. The FWPCA provides for civil, criminal and
administrative penalties for any unauthorized discharges of oil and other
hazardous substances in reportable quantities and, along with the OPA, imposes
substantial potential liability for the costs of removal, remediation and
damages. State laws for the control of water pollution also provide varying
civil, criminal and administrative penalties and liabilities in the case of a
discharge of petroleum or its derivatives into state waters. In January 1995,
the U.S. Environmental Protection Agency ("EPA") issued general permits
prohibiting the discharge of produced water and produced sand derived from oil
and gas point source facilities to coastal waters in Louisiana and Texas,
effective February 8, 1995. However, concurrent with this action, EPA Region VI
issued an administrative order effectively delaying the prohibition on
discharges of produced water and produced sands to January 1, 1997, unless an
earlier compliance date is required by the State. Although the costs to comply
with zero discharge mandates under federal or state law may be significant, the
entire industry will experience similar costs and the Company believes that
these costs will not have a material adverse impact on the Company's financial
conditions and operations. Some oil and gas exploration and production
facilities are required to obtain permits for their storm water discharges.
Costs may be associated with treatment of wastewater or developing storm water
pollution prevention plans. Further, the Coastal Zone Management Act
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authorizes state implementation and development of programs of management
measures for nonpoint source pollution to restore and protect coastal waters.
EMPLOYEES
As of December 31, 1997, the Company had 104 full time employees, 60 of
whom are located at the Company's headquarters in Houston, Texas and the
remainder of whom are located at field offices. None of the Company's employees
are represented by a labor union. The Company contracts with OCS to conduct all
of the day to day operations of the Company's offshore properties. See "-- Third
Party Contractors."
OFFICES
The Company currently leases approximately 71,100 square feet of office
space in Houston, Texas, where its principal offices are located. In addition,
the Company maintains field operations offices in the areas where it operates
onshore properties.
LEGAL PROCEEDINGS
The properties purchased in the TransTexas Acquisition are subject to a
judgment lien imposed on substantially all of TransTexas' properties in the
aggregate amount of $18 million. TransTexas has agreed to indemnify the Company
with respect to any loss arising from such judgment lien. TransTexas has
appealed the judgment to which such liens relate, and has posted a bond to
ensure payment of such judgment pending the completion of such appeal. The bond,
in the approximate amount of $18 million, is secured by an irrevocable letter of
credit. The $18 million judgment against TransTexas has been reversed, a
decision which, if upheld, will result in the release of the related judgment
lien. As a result of such arrangements, the Company believes that the properties
purchased in the TransTexas Acquisition are not subject to any material risk
that any such judgment against TransTexas will not be paid.
The Company is not a party to any other material pending legal proceedings,
other than ordinary routine litigation incidental to its business that
management believes will not have a material adverse effect on its financial
condition or results of operations.
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MANAGEMENT
DIRECTORS
The names of the Directors of the Company, and certain additional
information with respect to each of them, are set forth below.
<TABLE>
<CAPTION>
YEAR FIRST
BECAME A
NAME AGE POSITION WITH THE COMPANY DIRECTOR
---- --- ------------------------- ----------
<S> <C> <C> <C>
James G. Floyd....................... 61 President and Chief Executive Officer
and Director 1986
Robert B. Catell..................... 60 Chairman of the Board of Directors 1986
Gordon F. Ahalt...................... 69 Director 1996
Russell D. Gordy..................... 46 Director 1986
Craig G. Matthews.................... 54 Director 1993
James Q. Riordan..................... 70 Director 1996
Lester H. Smith...................... 55 Director 1996
Donald C. Vaughn..................... 61 Director 1997
</TABLE>
James G. Floyd has been President and Chief Executive Officer and a
Director of the Company since 1986. Mr. Floyd was President of Seagull E&P Inc.
("Seagull") and a Director of Seagull Energy Corporation, Seagull's parent, from
1981 to 1986. Mr. Floyd was general manager of the offshore division of Houston
Oil and Minerals Corporation ("Houston Oil and Minerals") from 1978 to 1981. Mr.
Floyd joined Houston Oil and Minerals in 1972 after five years as an independent
geologist. Mr. Floyd began his career with Amoco Production Company in 1962. Mr.
Floyd holds a B.S. and an M.S. in geology from the University of Florida.
Robert B. Catell has been Chairman of the Board of Directors of the Company
since 1986. Mr. Catell has been Chairman of the Board and Chief Executive
Officer of Brooklyn Union since 1996 and of KeySpan since September 1997 and was
Chief Executive Officer and President of Brooklyn Union from 1991 to 1996. Mr.
Catell has been associated with Brooklyn Union since 1958 and has been an
officer of Brooklyn Union since 1974. He is also the Chairman of the Board of
Taylor Gas Liquids, Ltd., a publicly traded royalty trust based in Canada. Mr.
Catell received both his Bachelor's and Master's Degrees in Mechanical
Engineering from City College of New York. He holds a Professional Engineer's
License in New York State, and attended Columbia University's Executive
Development Program and Harvard Business School's Advanced Management Program.
Mr. Catell is Trustee of Brooklyn Law School, Independence Savings Bank and
Kingsborough Community College Foundation, Inc.; Chairman and Director of
Alberta Northeast Inc. and Boundary Gas, Inc.; Past Chairman of Energy
Association of New York State; Director and Past Chairman, American Gas
Association; Director of The Business Council of New York State, Inc., Gas
Research Institute, New York City Partnership and New York State Energy Research
and Development Authority.
Gordon F. Ahalt has been a Director of the Company since 1996. Mr. Ahalt
has been President of G.F.A. Inc., a petroleum industry financial and management
consulting firm, since 1982. Mr. Ahalt is a consultant to Brooklyn Union and
W.H. Reaves Co., Inc. Mr. Ahalt serves as a Director for the Bancroft and
Ellsworth Convertible Funds, the Harbinger Group and Cal Dive International. Mr.
Ahalt received a B.S. in Petroleum Engineering in 1951 from the University of
Pittsburgh, attended New York University's Business School and is a graduate of
Harvard Business School's Advanced Management Program. He worked for Amoco
Corporation from 1951 to 1955, Chase Manhattan Bank from 1955 to 1972, White
Weld & Co., Inc. from 1972 to 1973, Chase Manhattan Bank from 1974 through 1976,
served as President and Chief Executive Officer of International Energy Bank
London from 1977 to 1979 and as Chief Financial Officer of Ashland Oil Inc. from
1980 to 1981.
Russell D. Gordy has been a Director of the Company since 1986. Mr. Gordy
has been Managing General Partner of S.G. Interests, a private firm specializing
in oil and gas investments, since 1992. Prior to forming S.G. Interests, Mr.
Gordy was Managing Partner of Northwind Exploration, a private oil and gas firm
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<PAGE> 63
formed in 1981 to specialize in exploration along the Texas and Louisiana Gulf
Coast. From 1974 to 1981 Mr. Gordy served in various financial capacities for
Houston Oil and Minerals. Mr. Gordy holds a B.B.A. in accounting from Sam
Houston State University and is a C.P.A. Mr. Gordy is a member of the Board of
Directors, or equivalent governing body in the case of partnerships or limited
liability companies, of SG Interests I-IV, Gordy Oil Company, Gordy Gas
Corporation, San Juan Compression, L.L.C., SG Interests, Inc., SG Methane
Company, Inc., Gainee Gas Company L.L.C., Rock Creek Ranch, Inc. and Lone Star
Land & Cattle Company.
Craig G. Matthews has been a Director of the Company since 1993. Mr.
Matthews has been President and Chief Operating Officer of Brooklyn Union since
May 1996 and of KeySpan since September 1997, was Executive Vice President of
Brooklyn Union from 1994 to 1996, and was Executive Vice President and Chief
Financial Officer of Brooklyn Union from 1991 to 1994. Mr. Matthews joined
Brooklyn Union in 1965. He graduated from Rutgers University in 1965 with a
Bachelor's Degree in Civil Engineering, and acquired an M.S. Degree in
Industrial Management from Polytechnic University. Mr. Matthews is a member of
the Board of Directors for the Brooklyn Philharmonic, the Public Utilities
Reports, Inc., the Brooklyn Chamber of Commerce, Neighborhood Housing Services,
Greater Jamaica Development Corp., Regional Plan Association, Polytechnic
University, Prospect Park Alliance, the National and New York Advisory Board of
the Salvation Army and Inform. Mr. Matthews is the Treasurer of the Society of
Gas Lighters.
James Q. Riordan has been a Director of the Company since 1996 and a
Director of KeySpan and its predecessor, Brooklyn Union, since 1991. Mr. Riordan
is the retired Vice Chairman and Chief Financial Officer of Mobil Corp. He
joined Mobil Corp. in 1957 as Tax Counsel and was named Director and Chief
Financial Officer in 1969. Mr. Riordan served as Vice Chairman of Mobil Corp.
from 1986 until his retirement in 1989. He joined Bekaert Corporation in 1989
and was elected its President, and served as President until his retirement in
1992. Mr. Riordan is a Director of Dow Jones & Co., Inc., Tri-Continental
Corporation and the Public Broadcasting Service; Director/Trustee of the mutual
funds in the Seligman Group of investment companies; Trustee for the Committee
for Economic Development and The Brooklyn Museum; and Member of the Policy
Council of the Tax Foundation.
Lester H. Smith has been a Director of the Company since 1996. Mr. Smith is
Chairman of the Board and President of Smith Energy Company, an independent oil
and gas exploration company, and Chairman of the Board of Founders
International, Ltd., an international downhole drilling tool company. Mr. Smith
has been active in the energy business as an independent since 1973. He attended
the University of Oklahoma where he majored in finance. Mr. Smith is Chairman of
the Board of SG Interests, Inc., SG Methane Company, and Utah Coal and Lumber
Company, and a member of the Board of Directors, or equivalent governing body in
the case of partnerships or limited liability companies, of SG Interests I-V, SG
Gathering, Inc. and Gainee Gas Company, L.L.C.
Donald C. Vaughn has been President, Chief Operating Officer and member of
the board of directors of Dresser Industries, Inc. ("Dresser") since 1996. Prior
to his appointment as President and Chief Operating Officer, Mr. Vaughn served
as Executive Vice President of Dresser, responsible for Dresser's Petroleum
Products and Services and Engineering Services Segment, from November 1995 to
December 1996; Senior Vice President of Operations of Dresser from January 1992
to November 1995; and Chairman, President and Chief Executive Officer of The
M.W. Kellogg Company from November 1983 to June 1996. Mr. Vaughn joined M.W.
Kellogg in 1958 and is a registered professional engineer in the State of Texas.
He has been recognized as a distinguished engineering alumnus of Virginia
Polytechnic Institute, from which he holds a B.S. degree in civil engineering.
Mr. Vaughn serves as a director on the boards of several Dresser joint venture
companies, including Dresser-Rand Company, Ingersoll-Dresser Pump Company and
Bredero-Shaw.
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<PAGE> 64
EXECUTIVE OFFICERS
Set forth below is certain information concerning the executive officers of
the Company, including the business experience of each during the past five
years.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James G. Floyd........................ 61 President and Chief Executive Officer
and Director
Randall J. Fleming.................... 56 Senior Vice President -- Exploration
and Production
Thomas W. Powers...................... 53 Senior Vice President -- Business
Development and Finance and
Treasurer
Charles W. Adcock..................... 44 Vice President -- Project Development
Sammye L. Dees........................ 62 Vice President -- Land
James F. Westmoreland................. 42 Vice President, Chief Accounting
Officer, Comptroller and Secretary
</TABLE>
Information regarding the business experience of James G. Floyd is set
forth above under the heading "Directors."
Randall J. Fleming has been Senior Vice President -- Exploration and
Production of the Company since October 1995 and was Vice
President -- Exploration of the Company from 1986 to 1995. Mr. Fleming was Vice
President -- Geology of Seagull from 1981 to 1986 and was an exploration
geologist at Houston Oil and Minerals from 1976 to 1981. Prior to such time, Mr.
Fleming was an exploration geologist for Superior Oil Company and Sinclair Oil
Company. Mr. Fleming holds a B.A. and M.S. in geology from the University of
Alabama.
Thomas W. Powers has been Senior Vice President -- Business Development and
Finance of the Company since October 1995 and Treasurer since May 1996. Mr.
Powers was General Manager of Diversification for Brooklyn Union from 1991 to
1995 and Executive Vice President and Chief Operating Officer of Fuel Resources
Inc. ("FRI"), a Brooklyn Union subsidiary, from 1986 to 1991. Prior to joining
Brooklyn Union, Mr. Powers was Manager of Corporate Development for Anglo
Energy. He holds a B.S. in Economics from Bowling Green University and an M.B.A.
from Long Island University.
Charles W. Adcock has been Vice President -- Project Development of the
Company since 1996. Mr. Adcock held the same position with FRI, the Brooklyn
Union subsidiary that previously owned the Company's onshore properties, from
1993 to 1996. Prior to joining FRI, Mr. Adcock worked at NERCO Oil & Gas as
Reservoir Engineering Specialist. Prior to NERCO, he held various engineering
positions with Apache, ANR Production and Aminoil U.S.A. Mr. Adcock is a
Registered Professional Engineer in the State of Texas, and received his B.S. in
Civil Engineering from Texas A&M University and an M.B.A. from the University of
St. Thomas.
Sammye L. Dees has been Vice President -- Land of the Company since 1986.
Ms. Dees was Vice President -- Land of Seagull from 1981 to 1986, and was Land
Manager, Offshore Division, of Houston Oil and Minerals from 1974 to 1981. Prior
to joining Houston Oil and Minerals, Ms. Dees worked for Allied Chemical
Corporation. Ms. Dees is a Certified Petroleum Landman and attended Stephen F.
Austin University.
James F. Westmoreland has been Vice President, Chief Accounting Officer,
Comptroller and Secretary of the Company since October 1995 and was Vice
President and Comptroller of the Company from 1986 to 1995. Mr. Westmoreland was
supervisor of natural gas and oil accounting at Seagull from 1983 to 1986. Mr.
Westmoreland holds a B.B.A. in accounting from the University of Houston.
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<PAGE> 65
EMPLOYMENT AGREEMENTS
Messrs. Floyd, Fleming, Powers, Westmoreland and Adcock entered into
employment agreements with the Company effective as of September 19, 1996,
pursuant to which they serve as executive officers of the Company.
Such employment agreements provide for Messrs. Floyd, Fleming, Powers,
Westmoreland and Adcock to receive annual base salaries of $390,000, $250,000,
$160,000, $150,000 and $140,000, respectively. Under such agreements, Messrs.
Floyd, Fleming, Powers, Westmoreland and Adcock are entitled to annual incentive
bonuses of 70%, 60%, 55%, 55% and 55%, respectively, of base salary if the
Company meets financial targets established by the Board of Directors. In
addition, Messrs. Floyd, Fleming, Powers, Westmoreland and Adcock are entitled
to participate in such incentive compensation and other programs as are adopted
by the Company's Board of Directors, including the Company's 1996 Stock Option
Plan. The initial term of each employment agreement extends to the third
anniversary of the effective date of such agreement; provided, however, that the
term of each agreement is automatically extended one year on each anniversary
unless notice that the agreement will not be extended is given by either party
at least 60 days prior to such anniversary.
Each of the employment agreements is subject to early termination by the
Company for cause or upon the death or disability of the employee and is subject
to early termination by the employee for any reason. If an employment agreement
is terminated without cause by the Company or with good reason (including
certain changes in control of the Company) by the employee, the Company is
obligated to pay such employee a lump-sum severance payment of 2.99 times the
employee's then current annual rate of total compensation. Based upon their
current annual rate of compensation, Messrs. Floyd, Fleming, Powers,
Westmoreland and Adcock would be entitled to lump sum severance payments of
$1,166,100, $747,500, $478,400, $448,500 and $418,600, respectively, if
terminated without cause or by the employee for good reason.
CERTAIN TRANSACTIONS
TRANSACTIONS BETWEEN THE COMPANY AND BROOKLYN UNION AND AFFILIATES
The Company was incorporated in December 1985 to conduct certain of the
natural gas and oil exploration and development activities of Brooklyn Union.
The Company has focused since its inception primarily on the exploration and
development of high potential prospects in the Gulf of Mexico. Effective
February 29, 1996, Brooklyn Union implemented a reorganization of its
exploration and production assets by transferring to the Company certain onshore
producing properties and developed and undeveloped acreage not previously owned
by the Company. Brooklyn Union has advised the Company that it does not
currently intend to engage in the domestic exploration for or production of
natural gas and oil except through ownership of Common Stock of the Company. In
September of 1997, Brooklyn Union became a wholly owned subsidiary of KeySpan
Energy Corporation.
Effective January 1, 1997, the Company entered into an agreement to sell to
a subsidiary of Brooklyn Union certain interests in onshore producing wells of
the Company that produce from formations that qualify for tax credits under
Section 29 of the Internal Revenue Code ("Section 29"). Section 29 provides for
a tax credit from non-conventional fuel sources such as oil produced from shale
and tar sands and natural gas produced from geopressured brine, Devonian shale,
coal seams and tight sands formations. Brooklyn Union acquired an economic
interest in wells that are qualified for the tax credits and in exchange, the
Company (i) retained a volumetric production payment and a net profits interest
of 100% in the properties, (ii) received a cash down payment of $1.4 million and
(iii) receives a quarterly payment of $0.75 for every dollar of tax credit
utilized. The Company manages and administers the daily operations of the
properties in exchange for an annual management fee of $100,000. At December 31,
1997, the balance sheet effect of this transaction was a $1.4 million reduction
to the full cost pool for the down payment. The income statement effect for the
year ended December 31, 1997 was a reduction to income tax expense of $1.2
million representing benefits received from the Section 29 tax credits.
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<PAGE> 66
The Company was included in the consolidated federal income tax returns
filed by Brooklyn Union during all periods in which it was a wholly owned
subsidiary of Brooklyn Union ("Affiliation Years"). The Company and Brooklyn
Union are parties to an agreement (the "Tax Sharing Agreement") providing for
the manner of determining payments with respect to federal income tax
liabilities and benefits arising during the Affiliation Years. Under the Tax
Sharing Agreement, the Company paid to or received from Brooklyn Union an amount
equal to the Company's share of Brooklyn Union's consolidated federal income tax
liability, generally determined on a separate return basis, for the years ended
and the portion of 1996 preceding consummation of the IPO, and Brooklyn Union
paid the Company for any reduction in Brooklyn Union's consolidated federal
income tax liability resulting from utilization or deemed utilization of
deductions, losses, and credits arising in such periods which are attributable
to the Company, in each case net of any amounts theretofore paid or credited by
Brooklyn Union or the Company to the other with respect thereto. In the event
that Brooklyn Union's consolidated federal income tax liability for any
Affiliation Year is adjusted upon audit or otherwise, the Company will bear any
additional liability or receive any refund which is attributable to adjustments
of items of income, deduction, gain, loss or credit of the Company. Brooklyn
Union shall permit the Company to participate in any audits or litigation with
respect to the Affiliation Years, but Brooklyn Union will otherwise have
exclusive and sole responsibility and control over any such proceedings. As of
September 1996, the Company ceased to be included in the consolidated federal
income tax returns filed by Brooklyn Union.
Under a Registration Rights Agreement entered into between the Company and
Brooklyn Union, the Company will file, upon the request of Brooklyn Union, a
registration statement under the Securities Act for the purpose of enabling
Brooklyn Union to offer and sell any securities of the Company which Brooklyn
Union may hold. Brooklyn Union may exercise these rights at any time. The
Company will bear the costs of any registered offering, except that Brooklyn
Union will pay any underwriting commissions relating to any such offering, any
transfer taxes and any costs of complying with foreign securities laws at
Brooklyn Union's request, and each will pay for its counsel and accountants. The
Company has the right to require Brooklyn Union to delay any exercise by
Brooklyn Union of its rights to require registration and other actions for a
period of up to 180 days if, in the judgment of the Company, the Company or any
offering by the Company then being conducted or about to be conducted would be
adversely affected. The Company has also granted Brooklyn Union the right to
include its securities in certain registration statements covering offerings by
the Company, and the Company will pay all costs of such offerings other than
underwriting commissions and transfer taxes attributable to the securities sold
on behalf of Brooklyn Union. The Company has agreed to indemnify Brooklyn Union,
its officers, directors, agents, any underwriter, and each person controlling
any of the foregoing, against certain liabilities under the Securities Act or
the securities laws of any state or country in which securities of the Company
are sold.
The Company reimburses Brooklyn Union for certain general and
administrative costs. During the years ended December 31, 1995, 1996 and 1997,
the Company paid Brooklyn Union $0.7 million, $0.6 million and $0.1 million,
respectively, in general and administrative reimbursements.
TRANSACTIONS BETWEEN THE COMPANY AND MANAGEMENT
The Company entered into new employment agreements with Messrs. Floyd,
Fleming, Powers, Adcock and Westmoreland at the time of the IPO. These
employment agreements replaced the Company's previous employment agreements with
such officers.
The Company's previous employment agreement with Mr. Floyd, its President
and Chief Executive officer, provided Mr. Floyd with the option to obtain up to
a 5% working interest in certain exploration prospects of the Company,
exercisable prior to the commencement of drilling of the initial well on any
such prospect. During 1995 and 1996, affiliates of Mr. Floyd obtained a 5%
working interest in 144 wells (including 142 wells in the Charco field) operated
by the Company pursuant to such agreement. During 1995, 1996 and 1997,
affiliates of the Company's President and Chief Executive Officer paid $0.7
million, $1.4 million and $3.3 million, respectively, in expenses attributable
to working interests owned in properties operated by the Company, and received
$0.9 million, $1.6 million and $3.9 million, respectively, in distributions
attributable to such working interests. The termination of the Company's
previous employment agreement with Mr. Floyd at
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the time of the IPO terminated Mr. Floyd's right to obtain working interests on
any further properties, but did not affect working interests in properties of
the Company acquired by Mr. Floyd or his affiliates prior to the date of
termination.
The Company loaned Mr. Floyd the $3.1 million purchase price for his
purchase of a 5% working interest in the properties purchased by the Company in
the TransTexas Acquisition. In addition, the Company has agreed to loan Mr.
Floyd, on a revolving basis, the amounts required to fund the expenses
attributable to Mr. Floyd's working interest. Mr. Floyd is required to repay
amounts owed under the loan in the amount of 65% of all distributions received
by Mr. Floyd in respect of such working interest, as distributions are received.
Amounts outstanding under such loan bear interest at an interest rate equal to
the Company's cost of borrowing under the Credit Facility. Mr. Floyd's
obligations under the agreement are secured by a pledge of his working interest
in, and the production from, such properties. As of December 31, 1997, the
outstanding balance owed by Mr. Floyd under the agreement was $3.7 million and
the loan will mature on July 2, 2006.
The Company's previous employment agreement with Mr. Floyd also provided
for the assignment to Mr. Floyd of a 2% net profits interest in all exploration
prospects of the Company at the time such properties were acquired by the
Company. The Company assigned a 2% net profits interest to Mr. Floyd in two
properties acquired by the Company in 1995. No assignments were made in 1996 or
1997. The termination of the Company's previous employment agreement with Mr.
Floyd at the time of the IPO terminated Mr. Floyd's right to receive any further
assignments but did not affect net profits interests in properties of the
Company assigned to Mr. Floyd prior to the date of termination.
The Company's previous employment agreement with Mr. Floyd also provided
for the assignment to certain key employees designated by Mr. Floyd of
overriding royalty interests equivalent to a four percent net revenue interest
in certain properties of the Company at the time such properties were acquired
by the Company. The Company assigned overriding royalty interests to Mr.
Fleming, Ms. Dees and Mr. Westmoreland in two properties acquired by the Company
in 1995. No assignments were made in 1996 or 1997. The termination of the
Company's previous employment agreement with Mr. Floyd at the time of the IPO
terminated all rights to any further assignments but did not affect overriding
royalty interests in properties of the Company assigned to key employees prior
to the date of termination.
The Company's previous employment agreement with Mr. Floyd also provided
for the assignment of a 6.75% after program-payout working interest in the
leases upon which the Company began drilling an exploratory well (whether or not
successful) during a calendar year. As of the date of this Prospectus, Mr. Floyd
had not received any distributions under this arrangement. The termination of
the Company's previous employment agreement with Mr. Floyd at the time of the
IPO terminated Mr. Floyd's right to receive any further assignments but did not
affect after program-payout working interests on properties of the Company
assigned to Mr. Floyd prior to the date of termination. On September 19, 1996,
Mr. Floyd exchanged certain after program-payout working interests received
under his previous employment agreement for 145,161 shares of Common Stock with
a value of approximately $2.3 million.
SOXCO ACQUISITION
On September 25, 1996, the Company acquired substantially all of the
natural gas and oil properties and related assets of Soxco in the Soxco
Acquisition. Under an agreement with Soxco, Lester H. Smith had received a 1.25%
net profits interest, proportionately reduced for Soxco's interest, in all
properties in which Soxco had participated. Upon the sale by Soxco of its
properties, Mr. Smith exercised his right to sell all such net profits interests
on the same economic terms to be received by Soxco in the transaction. Mr. Smith
received approximately $90,000 in cash, 13,553 initial shares of Common Stock
and the right to receive additional shares of Common Stock with a value of
approximately $100,000 upon payment of the minimum deferred purchase price of
the Soxco Acquisition. The Company delivered 5,674 shares of Common Stock in
satisfaction of Mr. Smith's right to receive such additional shares as part of
its payment of the deferred purchase price of the Soxco Acquisition in the first
quarter of 1998. In connection with the sale by Soxco of its properties, the
Company granted three demand and certain piggyback registration rights with
respect to the shares of Common Stock issued in connection with the transaction.
Such registration rights are subject to certain conditions.
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<PAGE> 68
DESCRIPTION OF THE NOTES
GENERAL
The Exchange Notes will be issued, and the Old Notes were issued, pursuant
to an Indenture (the "Indenture") between the Company and The Bank of New York,
as trustee (the "Trustee"), in a private transaction that is not subject to the
registration requirements of the Securities Act. See "Notice to Investors." The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and prospective
Holders of Notes are referred to the Indenture and the Trust Indenture Act for a
statement of such terms. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and the definitions
therein of certain terms used below. Definitions of certain capitalized terms
used in the Indenture and in the following summary are set forth below under
"-- Certain Definitions." For purposes of this summary, the term "Company"
refers only to The Houston Exploration Company and not to any of its
Subsidiaries.
The Exchange Notes will be issued solely in exchange for an equal principal
amount of Old Notes pursuant to the Exchange Offer. The form and terms of the
Exchange Notes will be identical in all material respects to the form and terms
of the Old Notes except that the offering of the Exchange Notes has been
registered under the Securities Act, and the Exchange Notes will therefore not
be subject to transfer restrictions, registration rights and certain provisions
relating to the payment of Liquidated Damages under certain circumstances. See
"-- Registration Rights; Liquidated Damages."
The Old Notes and the Exchange Notes will constitute a single series of
debt securities under the Indenture. If the Exchange Offer is consummated,
holders of Old Notes who do not exchange their Old Notes for Exchange Notes will
vote together with holders of the Exchange Notes for all relevant purposes under
the Indenture. In that regard, the Indenture requires that certain actions by
the holders thereunder (including following an Event of Default) must be taken,
and certain rights must be exercised, by specified minimum percentages of the
aggregate principal amount of the outstanding securities issued under the
Indenture. In determining whether holders of the requisite percentage in
principal amount have given any notice, consent or waiver or taken any other
action permitted under the Indenture, any Old Notes that remain outstanding
after the Exchange Offer will be aggregated with the Exchange Notes, and the
holders of such Old Notes and the Exchange Notes will vote together as a single
series for all such purposes. Accordingly, all references herein to specified
percentages in aggregate principal amount of the outstanding Notes shall be
deemed to mean, at any time after the Exchange Offer is consummated, such
percentages in aggregate principal amount of the Old Notes and the Exchange
Notes then outstanding.
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to Senior Debt. See "Risk
Factors -- Subordination of Notes."
Restrictions in the Indenture on the ability of the Company and its
Restricted Subsidiaries to incur additional Indebtedness, to make Asset Sales,
to enter into transactions with Affiliates and to enter into mergers,
consolidations or sales of all or substantially all of its assets, may make more
difficult or discourage a takeover of the Company, whether favored or opposed by
the management of the Company. The Indenture may not afford holders of Notes
protection in all circumstances from the adverse aspects of a leveraged
transaction, reorganization, restructuring, merger or similar transaction.
As of the date hereof, the Company has one Subsidiary, which constitutes a
Restricted Subsidiary for the purposes of the Indenture. Under certain
circumstances, the Company will be able to designate current and future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to many of the restrictive covenants set forth in the Indenture.
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<PAGE> 69
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100.0 million and
will mature on January 1, 2008. Interest on the Notes accrues at the rate of
8 5/8% per annum and is payable semi-annually in arrears on January 1 and July
1, commencing on July 1, 1998, to Holders of record on the immediately preceding
December 15 and June 15. Interest on the Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
date of original issuance, March 2, 1998. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months. Principal, premium, if any,
Liquidated Damages, if any, and interest on the Notes will be payable at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payment of Liquidated
Damages, if any, or interest may be made by check mailed to the Holders of the
Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments with respect to Global Notes and Certificated
Securities the Holders of whom have given wire transfer instructions to the
Company and its paying agent prior to the applicable record date for such
payment will be required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof. Until otherwise
designated by the Company, the Company's office or agency will be the office of
the Trustee maintained for such purpose. The Company may change such office or
agency without prior notice to Holders of the Notes, and any of its Subsidiaries
may act as Paying Agent or Registrar. The Notes will be issued in denominations
of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the
Company's option prior to January 1, 2003. Thereafter, the Notes will be subject
to redemption for cash at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice to each Holder of Notes to be
redeemed, at the following redemption prices (expressed as percentages of
principal amount thereof) if redeemed during the 12-month period beginning on
January 1 of each of the years indicated below, in each case together with any
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.............................................. 104.313%
2004.............................................. 102.875%
2005.............................................. 101.438%
2006 and thereafter............................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or before January 1, 2001,
the Company may (but will not have the obligation to) redeem for cash up to 35%
of the original aggregate principal amount of the Notes at a redemption price of
108.625% of the principal amount thereof, in each case plus any accrued and
unpaid interest and Liquidated Damages, if any, thereon to the redemption date,
with the net proceeds of an Equity Offering; provided that at least 65% of the
original aggregate principal amount of the Notes remains outstanding immediately
after the occurrence of such redemption; and provided, further, that such
redemption will occur within 90 days of the date of the closing of such Equity
Offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee will deem fair and appropriate; provided
that no Notes of $1,000 or less will be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note will state the portion of the principal amount thereof
to be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, interest will cease to
accrue on Notes or portions of them called for redemption unless the Company
defaults in the payment thereof.
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<PAGE> 70
RANKING AND SUBORDINATION
The payment of principal of, premium, if any, and interest on, the Notes
and any other payment obligations of the Company in respect of the Notes
(including any obligation to repurchase the Notes) is subordinated in certain
circumstances in right of payment, as set forth in the Indenture, to the prior
payment in full in cash of all Senior Debt, whether outstanding on the date of
the Indenture or thereafter incurred.
Upon any payment or distribution of property or securities to creditors of
the Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, or in an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of Senior Debt
will be entitled to receive payment in full of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt, whether or not a
claim for such interest would be allowed in a proceeding) before the Holders of
the Notes will be entitled to receive any payment with respect to the Notes, and
until all Obligations with respect to Senior Debt are paid in full, any
distribution to which the Holders of the Notes would be entitled shall be made
to the holders of Senior Debt (except that Holders of the Notes may receive
payments made from the trust described under "-- Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment (whether by redemption, purchase,
retirement, defeasance or otherwise) upon or in respect of the Notes (except
from the trust described under "-- Legal Defeasance and Covenant Defeasance") if
(i) a default in the payment of the principal of, premium, if any, or interest
on Designated Senior Debt occurs ("payment default") or (ii) any other default
occurs and is continuing with respect to Designated Senior Debt that permits, or
with the giving of notice or passage of time or both (unless cured or waived)
will permit, holders of the Designated Senior Debt as to which such default
relates to accelerate its maturity ("non-payment default") and (solely with
respect to this clause (ii)) the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any Designated
Senior Debt. Cash payments on the Notes shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated or a default of the type described
in clause (viii) under the caption "Events of Default and Remedies" has occurred
and is continuing. No new period of payment blockage may be commenced unless and
until 360 days have elapsed since the date of commencement of the payment
blockage period resulting from the immediately prior Payment Blockage Notice. No
nonpayment default in respect of Designated Senior Debt that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage Notice unless
such default shall have been cured or waived for a period of no less than 90
days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency of the Company, Holders of the Notes may recover
less ratably than creditors of the Company who are holders of Senior Debt. After
giving effect to the sale of the Notes and the application of the net proceeds
therefrom, $15.4 million of Senior Debt, $42.4 million of trade payables and
other accrued liabilities and no senior subordinated debt other than the Notes
would have been outstanding as of December 31, 1997. The Indenture limits,
subject to certain financial tests, the amount of additional Indebtedness,
including Senior Debt, that the Company and its Subsidiaries can incur. See "--
Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock."
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders",
the Company is not required to make any mandatory redemption, purchase or
sinking fund payments with respect to the Notes prior to the maturity date.
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<PAGE> 71
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
The Indenture provides that upon the occurrence of a Change of Control,
each Holder of Notes will have the right to require the Company to repurchase
all or any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase (the "Change of Control Payment"). Within 30
days following any Change of Control, the Company will mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase the Notes pursuant to the procedures required
by the Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
The Change of Control Offer will remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Offer
Period (the "Change of Control Purchase Date"), the Company will purchase all
Notes validly tendered and not properly withdrawn pursuant to the Change of
Control Offer. Payment for any Notes so purchased will be made in the same
manner as interest payments are made on the Notes.
"Change of Control" means the occurrence of any of the following: (i) any
"Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act),
other than the Permitted Holders, is or becomes the beneficial owner (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have a "beneficial ownership" of all shares that any such Person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of 35% or more of the total
voting power of the Voting Stock of the Company, provided however that the
Permitted Holders beneficially own (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act), directly or indirectly, in the aggregate a lesser percentage
of the total voting power of the Voting Stock of the Company than such other
person (for purposes of this definition, such other person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a parent
corporation, if such other person is the beneficial owner (as defined above),
directly or indirectly, or more than 35% of the voting power of the Voting Stock
of such parent corporation and the Permitted Holders beneficially own (as
defined in this proviso), directly or indirectly, in the aggregate a lesser
percentage of the Voting Stock of such parent corporation); (ii) the sale,
lease, transfer, conveyance or other disposition (other than by way of merger or
consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "Person" or group of related Persons (a "Group") (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than
the Permitted Holders; (iii) the adoption of a plan relating to the liquidation
or dissolution of the Company; or (iv) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the Company
was approved by a vote of a majority of the directors of the Company then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors then in office.
"Permitted Holders" means THEC Holding Corp., Brooklyn Union, KeySpan and
(to the extent it has consummated a merger, consolidation or other business
combination transaction with KeySpan) Long Island Lighting Company, and any
successor or Affiliate of any such Person.
If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest and Liquidated Damages, if any, will be paid to the Person in whose
name a Note is registered at the close of business on such record date, and no
additional interest will be payable to Holders who tender Notes pursuant to the
Change of Control Offer.
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<PAGE> 72
On the Change of Control Purchase Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof validly tendered
and not properly withdrawn pursuant to the Change of Control Offer, (ii) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all Notes or portions thereof so validly tendered and not properly
withdrawn and (iii) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions thereof being purchased by the Company. The Paying
Agent will promptly mail to each Holder of the Notes so validly tendered and not
properly withdrawn the Change of Control Payment for such Notes and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Note equal in principal amount to any unpurchased portion
of the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture
provides that, prior to complying with the provisions of this covenant, but in
any event within 30 days following a Change of Control, the Company will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the repurchase
of the Notes required by this covenant. The Company will publicly announce the
results of the Change of Control Offer on the Change of Control Purchase Date.
Except as described above, the Indenture does not contain provisions that
permit the Holders of Notes to require the Company to redeem the Notes in the
event of a takeover, recapitalization or similar restructuring, including an
issuer recapitalization or similar transaction with management. In addition, the
existence of the Holder's right to require the Company to repurchase such
Holder's Notes upon the occurrence of a Change of Control may or may not deter a
third party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
The Company's ability to repurchase Notes pursuant to a Change of Control
Offer may be limited by a number of factors. The Credit Agreement provides that
certain change of control events with respect to the Company would constitute a
default thereunder permitting the lending parties thereto to accelerate the
Indebtedness thereunder. In addition, certain events that may obligate the
Company to offer to repay all outstanding obligations under the Credit Agreement
may not constitute a Change of Control under the Indenture. However, the Company
may not have sufficient resources to repay Indebtedness under the Credit
Agreement and the Company may not have sufficient resources to repurchase
tendered Notes. Furthermore, any future credit agreements or other agreements
relating to Senior Debt to which the Company may become a party may contain
similar restrictions and provisions. In the event a Change of Control occurs at
a time when the Company is directly or indirectly prohibited from purchasing
Notes, the Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the purchase of Notes will remain prohibited. The failure by the
Company to purchase tendered Notes may constitute a breach of the Indenture
which would, in turn, constitute a default under the Credit Agreement and could
lead to the acceleration of the indebtedness thereunder.
The definition of Change of Control includes a phrase relating to the sale,
lease or transfer of "all or substantially all" of the assets of the Company and
its Restricted Subsidiaries, taken as a whole. Although there is a developing
body of case law interpreting the phrase "substantially all," there is no
precise definition of the phrase under applicable law. Accordingly, the ability
of a Holder of Notes to require the Company to repurchase such Notes as a result
of a sale, lease or transfer of less than all of the assets of the Company and
its Restricted Subsidiaries taken as a whole to another Person or group may be
uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets or Equity Interests sold or otherwise disposed of (evidenced
by a resolution of the Board of Directors of such entity set forth in an
Officers' Certificate delivered to the Trustee) and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
from such Asset Sale, plus all other Asset Sales since the date of the
Indenture, on a cumulative basis, is in the form of cash, Cash Equivalents,
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properties and capital assets to be used by the Company or any Restricted
Subsidiary in the Oil and Gas Business or oil and gas properties owned or held
by another Person which are to be used in the Oil and Gas Business of the
Company or its Restricted Subsidiaries, or any combination thereof (collectively
the "Cash Consideration"); provided that the amount of (x) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any Subsidiary Guarantee) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any non Cash Consideration
received by the Company or any such Restricted Subsidiary from such transferee
that are converted into cash by the Company or such Restricted Subsidiary within
90 days after such Asset Sale, shall be deemed to be cash for purposes of this
provision to the extent of the cash received.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company (or the Restricted Subsidiary, as applicable) may apply, or enter
into binding contracts (subject only to obtaining required governmental
approvals) irrevocably committing the Company or such Restricted Subsidiary to
apply, such Net Proceeds to an investment in another business, the making of a
capital expenditure or the acquisition of other tangible assets, in each case in
the Oil and Gas Business, or the Company (or the Restricted Subsidiary, as
applicable) may apply such Net Proceeds to the permanent reduction of Senior
Debt. Any Net Proceeds from Asset Sales that are not applied or invested or
committed to be applied or invested, as provided in the preceding sentence of
this paragraph will be deemed to constitute "Excess Proceeds." On the 361st day
after an Asset Sale, if the aggregate amount of Excess Proceeds exceeds $10.0
million, the Company will be required to make an offer to all Holders of Notes
and, to the extent required by the terms thereof, to all holders or lenders of
Pari Passu Indebtedness (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes and any such Pari Passu Indebtedness to which the
asset sale offer applies that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest and, with respect to the Notes or similar
securities, Liquidated Damages or comparable amounts in the case of similar
securities, if any, thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture or the agreements governing the Pari Passu
Indebtedness, as applicable. To the extent that the aggregate amount of Notes
and Pari Passu Indebtedness so validly tendered and not properly withdrawn
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Notes surrendered by Holders thereof and other
Pari Passu Indebtedness surrendered by holders or lenders thereof, collectively,
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and
Pari Passu Indebtedness to be purchased on a pro rata basis on the basis of the
aggregate principal amount of tendered Notes and Pari Passu Indebtedness. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
The Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Asset Sale Offer Period"). No later
than five Business Days after the termination of the Asset Sale Offer Period
(the "Asset Sale Purchase Date"), the Company will purchase the principal amount
of Notes and Pari Passu Indebtedness required to be purchased pursuant to this
covenant (the "Asset Sale Offer Amount") or, if less than the Asset Sale Offer
Amount has been so validly tendered, all Notes and Pari Passu Indebtedness
validly tendered in response to the Asset Sale Offer. Payment for any Notes and
Pari Passu Indebtedness so purchased will be made in the same manner as interest
payments are made on the Notes and Pari Passu Indebtedness, respectively.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
and Liquidated Damages will be paid to the Person in whose name a Note is
registered at the close of business on such record date, and no additional
interest will be payable to Holders who tender Notes pursuant to the Asset Sale
Offer.
On or before the Asset Sale Purchase Date, the Company will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Notes and Pari Passu Indebtedness or portions thereof
so validly tendered and not properly withdrawn pursuant to the Asset Sale Offer,
or if less
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than the Asset Sale Offer Amount has been validly tendered and not properly
withdrawn, all Notes and Pari Passu Indebtedness so validly tendered and not
properly withdrawn. The Company will deliver to the Trustee an Officers'
Certificate stating that such Notes or portions thereof were accepted for
payment by the Company in accordance with the terms of this covenant and, in
addition, the Company will deliver all certificates and notices required, if
any, by the agreements governing the Pari Passu Indebtedness. The Company, the
Depositary or the Paying Agent, as the case may be, will promptly (but in any
case not later than five days after the Asset Sale Purchase Date) mail or
deliver to each tendering Holder of Notes or holder or lender of Pari Passu
Indebtedness, as the case may be, an amount equal to the purchase price of the
Notes or Pari Passu Indebtedness so validly tendered and not properly withdrawn
by such Holder or lender, as the case may be, and accepted by the Company for
purchase, and the Company will promptly issue a new Note, and the Trustee, upon
delivery of an Officers' Certificate from the Company will authenticate and mail
or deliver such new Note to such Holder, in a principal amount equal to any
unpurchased portion of the Note surrendered. In addition, the Company will take
any and all other actions required by the agreements governing the Pari Passu
Indebtedness. Any Note not so accepted will be promptly mailed or delivered by
the Company to the Holder thereof. The Company will publicly announce the
results of the Asset Sale Offer on the Asset Sale Purchase Date.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes pursuant to any Asset Sale Offer.
The Credit Agreement provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar provisions or may contain restrictions on
the Company's ability to purchase Notes. In the event a Change of Control or an
Asset Sale Offer occurs at a time when the Company is prohibited from purchasing
the Notes by the terms of such agreements relating to other Senior Debt, the
Company could seek the consent of its lenders to the purchase or could attempt
to refinance the borrowings that contain such prohibition. If the Company does
not obtain such a consent or repay such borrowings, the Company may remain
prohibited from purchasing the Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the Indenture
which may, in turn, constitute a default under such other agreements. In such
circumstances, the subordination provisions in the Indenture would restrict
payments to the Holders of the Notes.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any distribution on account of the Company's or any of its
Restricted Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving the Company)
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire
or retire for value any Equity Interests of the Company or any Restricted
Subsidiary of the Company; (iii) prepay, purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness that is subordinated to the Notes,
except a scheduled repayment of principal or a payment of principal at stated
maturity; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed
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Charge Coverage Ratio test set forth in the first paragraph of the covenant
described under "-- Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture, does not exceed the sum of, without
duplication, (i) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit or loss, less
100% of such deficit or loss), plus (ii) to the extent not included in the
amount described in clause (i) above, 100% of the aggregate net cash
proceeds and the fair market value of marketable securities (as determined
in good faith by the Company) received after the date of the Indenture by
the Company from the issue or sale of, or from additional capital
contributions in respect of, Equity Interests of the Company (but excluding
cash proceeds and marketable securities received from the sale of Equity
Interests to members of management or directors of the Company and its
Restricted Subsidiaries after the Issue Date to the extent such amounts
have been applied to make Restricted Payments in accordance with clause
(vi) of the next succeeding paragraph) or of debt securities of the Company
that have been converted into or exchanged for Equity Interests of the
Company (other than Equity Interests (or debt securities) sold to a
Subsidiary of the Company and other than Disqualified Stock or debt
securities that have been converted into or exchanged for Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that was
made after the date of the Indenture is sold to an unaffiliated purchaser
for cash or marketable securities or otherwise liquidated or repaid for
cash or marketable securities, the lesser of the cash proceeds and/or the
fair market value of such marketable securities (as determined in good
faith by the Company), as the case may be, and the amount of the Restricted
Investment, which amount was included in the calculation of the amount of
Restricted Payments, plus (iv) the amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from (A) payments of
dividends or interest or other transfers of assets to the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries, (B) the redesignation
of Unrestricted Subsidiaries as Restricted Subsidiaries or (C) the receipt
of proceeds by the Company or any Restricted Subsidiary from the sale or
other disposition of any portion of any Investment in an Unrestricted
Subsidiary not to exceed the amount of Investments previously made by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary, which
amount was included in the calculation of the amount of Restricted Payments
under this clause (c) and not otherwise included in the calculation of
Consolidated Net Income, plus (v) $5.0 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the making of any Restricted Investment in exchange for, or out
of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of, or from substantially concurrent additional
capital contributions in respect of, Equity Interests of the Company (other than
Disqualified Stock); provided that the amount of any such cash proceeds that are
utilized for any such Restricted Investment shall be excluded from clause
(c)(ii) of the preceding paragraph; (iii) the redemption, repurchase, retirement
or other acquisition of any Equity Interests of the Company in exchange for, or
out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of, or from substantially concurrent additional
capital contributions (other than from a Subsidiary of the Company) in respect
of, other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c)(ii) of the preceding paragraph; (iv) the defeasance, redemption
or repurchase of subordinated Indebtedness with the net cash proceeds from (X)
an incurrence of Permitted Refinancing Indebtedness or (Y) the substantially
concurrent sale (other than to a Subsidiary of the Company) of, or from
substantially concurrent additional capital contributions (other than from a
Subsidiary of the Company) in respect of, Equity Interests of the Company (other
than Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such defeasance, redemption
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or repurchase shall be excluded from clause (c)(ii) of the preceding paragraph;
(v) any dividend or other distribution made by any Wholly Owned Subsidiary of
the Company to another Wholly Owned Subsidiary of the Company or to the Company;
and (vi) the repurchase, retirement or other acquisition or retirement for value
of common Equity Interests of the Company held by any future, present or former
employee or director of the Company or any of the Company's Restricted
Subsidiaries pursuant to any management equity plan or stock option plan or any
other management or employee benefit plan or agreement in connection with the
termination of such person's employment for any reason (including by reason of
death or disability); provided, however, that the aggregate Restricted Payments
made under this clause (vi) do not exceed in any calendar year $2.5 million
(with unused amounts in any calendar year being carried over to succeeding
calendar years subject to a maximum (without giving effect to the following
proviso) of $7.5 million in any calendar year); provided further that such
amount in any calendar year may be increased by an amount not to exceed (A) the
cash proceeds received by the Company from the sale of Equity Interests of the
Company to members of management or directors of the Company and its Restricted
Subsidiaries that occurs after the Issue Date (to the extent the cash proceeds
from the sale of such Equity Interests have not otherwise been applied to the
payment of Restricted Payments by virtue of the preceding paragraph (c)), plus
(B) the cash proceeds of key man life insurance policies received by the Company
and its Restricted Subsidiaries after the Issue Date, less (C) the amount of any
Restricted Payments made pursuant to clauses (A) and (B) of this subparagraph
(vi); provided however that in the case of any transaction described in clauses
(ii) through (iv) and clause (vi) no Default or Event of Default will have
occurred and be continuing immediately after such transaction. In determining
the aggregate amount of Restricted Payments made after the date of the
Indenture, 100% of the amounts expended pursuant to the foregoing clauses (i)
and (vi) shall be included in such calculation and none of the amounts expended
pursuant to the foregoing clauses (ii), (iii), (iv) and (v) shall be included in
such calculation.
As of the date hereof and as of the issue date of the Notes, all of the
Company's Subsidiaries were Restricted Subsidiaries. The Board of Directors may
designate any Subsidiary to be an Unrestricted Subsidiary if such designation
would not cause a Default. For purposes of making such determination, all
outstanding Investments by the Company and its Restricted Subsidiaries (except
to the extent repaid in cash) in the Subsidiary so designated will be deemed to
be Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or the
applicable Restricted Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the Company
will deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculation required by this covenant were computed, which calculations may be
based upon the Company's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness) and that the Company will not
issue any shares of Disqualified Stock and will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock; provided, however, that the
Company may incur Indebtedness (including Acquired Indebtedness) or issue shares
of Disqualified Stock if: (i) the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.5 to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had
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been incurred, or the Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period; and (ii) no Default or Event of
Default will have occurred and be continuing or would occur as a consequence
thereof.
The foregoing provisions will not apply to:
(i) the incurrence by the Company of Indebtedness under the Credit
Agreement, so long as the aggregate principal amount of all Indebtedness
outstanding under the Credit Agreement does not, at any one time, exceed
the greater of (i) $150 million (less any amounts outstanding under the
Credit Agreement on the Issue Date after giving effect to the repayment of
Indebtedness under the Credit Agreement from the proceeds of the Offering)
(or, if there is any permanent reduction in the aggregate principal amount
permitted to be borrowed under the Credit Agreement, such lesser aggregate
principal amount) and (ii) 30% of Adjusted Consolidated Net Tangible Assets
determined immediately after the incurrence of such Indebtedness (including
the application of the proceeds therefrom);
(ii) the incurrence by the Company of Indebtedness represented by the
Notes or by the Restricted Subsidiaries of Subsidiary Guarantees;
(iii) the guarantee by any Subsidiary Guarantor of any Indebtedness
that is permitted by the Indenture to be incurred by the Company at the
time such Indebtedness was incurred;
(iv) the incurrence by the Company or any Restricted Subsidiary of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness of such entity that was permitted by the Indenture to be
incurred (including Indebtedness previously incurred pursuant to this
clause (iv), but excluding Indebtedness under clauses (i), (iii), (v),
(vi), and (ix));
(v) the incurrence by the Company or any Restricted Subsidiary of
intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries or between or among any Restricted Subsidiary;
provided, however, that (i) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person
other than a Restricted Subsidiary and (ii) any sale or other transfer of
any such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary will be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be; provided, further, that if the Company is
the obligor on such Indebtedness, such Indebtedness is expressly
subordinate to the payment in full of all Obligations with respect to the
Notes;
(vi) the incurrence, assumption or creation of Hedging Obligations of
the Company or a Restricted Subsidiary pursuant to interest rate protection
obligations, but only to the extent that the stated aggregate notional
amounts of such obligations do not exceed 105% of the aggregate principal
amount of the Indebtedness covered by such interest rate protection
obligations; the incurrence, assumption or creation of Hedging Obligations
under currency exchange contracts entered into in the ordinary course of
business for the purpose of limiting risks that arise in the ordinary
course of business of the Company and its Restricted Subsidiaries; and the
incurrence, assumption or creation of hedging arrangements that the Company
or a Restricted Subsidiary enters into in the ordinary course of business
in the Oil and Gas Business for the purpose of protecting its production
against fluctuations in oil or natural gas prices;
(vii) Indebtedness or Disqualified Stock of Persons that are acquired
by the Company or any of its Restricted Subsidiaries or merged into a
Restricted Subsidiary in accordance with the terms of the Indenture;
provided that such Indebtedness or Disqualified Stock is not incurred in
contemplation of such acquisition or merger; and provided further that
after giving effect to such acquisition, the Company would be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of this
covenant;
(viii) all Indebtedness of the Company and its Restricted Subsidiaries
in existence on the date of the Indenture; and
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(ix) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness in an aggregate principal amount of up to $40 million (which
shall be in addition to amounts which may be incurred pursuant to clauses
(i) through (viii) above).
In the event that Indebtedness falls within more than one category of
permitted Indebtedness under the Indenture, the Company will determine the
applicable category and such Indebtedness will only be counted once. If
Indebtedness is issued at less than the principal amount thereof, the amount of
such Indebtedness for purposes of the above limitations shall equal the amount
of the liability as determined in accordance with GAAP.
The Indenture provides that the Company will not permit any Unrestricted
Subsidiary to incur any Indebtedness other than Non-Recourse Debt; provided,
however, if any such Indebtedness ceases to be Non-Recourse Debt, such event
shall be deemed to constitute an incurrence of Indebtedness by the Company or a
Restricted Subsidiary.
No Layering
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes and (ii) the Subsidiary Guarantors, if
any, will not directly or indirectly incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to Senior Debt and senior in any respect in right of payment to
the Subsidiary Guarantees, if any; provided, however, that the foregoing
limitations will not apply to distinctions between categories of Indebtedness
that exist by reason of any Liens arising or created in accordance with the
provisions of the Indenture in respect of some but not all such Indebtedness.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or
suffer to exist or become effective any Lien securing Indebtedness of any kind
(other than Permitted Liens) upon any of its property or assets, now owned or
hereafter acquired, unless all payments under the Notes are secured by such Lien
prior to, or (if such Indebtedness is pari passu with the Notes) on an equal and
ratable basis with, the Indebtedness so secured for so long as such Indebtedness
is secured by such Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i) (a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the Credit Agreement
as in effect as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Credit Agreement as in effect
on the date of the Indenture, (c) the Indenture and the Notes, (d) any
instrument governing Acquired Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Acquired Indebtedness was incurred
in connection with or in contemplation of such acquisition), which encumbrance
or restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the
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Person, so acquired, provided that the Consolidated Cashflow of such Person is
not taken into account in determining whether such acquisition was permitted by
the terms of the Indenture, (e) purchase money obligations for property acquired
in the ordinary course of business that impose restrictions of the nature
described in clause (iii) above on the property so acquired, (f) by reason of
customary non-assignment provisions in leases and licenses entered into in the
ordinary course of business and consistent with past practices, (g) agreements
relating to the financing of the acquisition of real or tangible personal
property acquired after the date of the Indenture, provided, that such
encumbrance or restriction relates only to the property which is acquired and in
the case of any encumbrance or restriction that constitutes a Lien, such Lien
constitutes a Purchase Money Lien, (h) applicable law or (i) customary
restrictions contained in asset sale agreements limiting the transfer of such
assets pending the closing of such sale.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into or make any contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is in the
ordinary course of business, (ii) the terms of such Affiliate Transaction are
fair and reasonable to the Company or such Restricted Subsidiary, as the case
may be, and are at least as favorable as the terms which could be obtained by
the Company or such Restricted Subsidiary, as the case may be, in a comparable
transaction made on an arm's-length basis between unaffiliated parties and (iii)
the Company delivers to the Trustee (a) with respect to any Affiliate
Transaction entered into after the date of the Indenture involving aggregate
consideration in excess of $2.5 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clauses (i) and (ii) above and that such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $10.0 million, an opinion as to the fairness to the
Company or such Restricted Subsidiary of such Affiliate Transaction from a
financial point of view issued by an investment banking firm of national
standing; provided that the following will not be deemed to be Affiliate
Transactions: (a) reasonable fees and compensation paid to, and indemnity
provided on behalf of, officers and directors of the Company or any Restricted
Subsidiary as determined in good faith by the appropriate Board of Directors or
senior management; (b) transactions with customers, clients, suppliers, joint
venture partners or purchasers or sellers of goods or services, in each case in
the ordinary course of business (including, without limitation, pursuant to
joint venture agreements) and otherwise in compliance with the terms of the
Indenture and which comply with the terms of clause (ii) above; (c) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary (including, without
limitation, any such employment agreements entered into prior to the date of the
Indenture); (d) transactions between or among the Company and/or its Restricted
Subsidiaries; (e) Restricted Payments and Permitted Investments that are
permitted by the provisions of the Indenture described above under the caption
"-- Restricted Payments" and the definition of Permitted Investment; and (f) any
contracts, agreements or understandings existing as of the date of the Indenture
and any amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto or any replacement agreement thereof so long
as any such amendment or replacement agreement is not more disadvantageous to
the holders of the Notes in any material respect than the original agreement as
in effect on the date of the Indenture).
Limitation as to Unrestricted Subsidiaries
The Indenture provides that the Company will not permit any Unrestricted
Subsidiary to create, assume, incur, guarantee or otherwise become liable in
respect of any Indebtedness except Non-Recourse Debt. The Company and its
Restricted Subsidiaries will not designate, create or purchase any Unrestricted
Subsidiary, unless the Board of Directors of the Company shall have made a
determination (as set forth in the resolution approving such designation,
creation or purchase) that the designation, creation and operation of the
Unrestricted Subsidiary is not reasonably expected to materially and adversely
affect the financial condition,
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business, or operations of the Company and its Restricted Subsidiaries taken
together as a whole (which resolution shall be conclusive evidence of compliance
with this provision).
Limitation on Guarantees of Indebtedness by Restricted Subsidiaries
(a) The Indenture provides that the Company will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of the Company unless
(i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Subsidiary Guarantee of
such Restricted Subsidiary except that with respect to a guarantee of
Indebtedness of the Company (A) if the Notes are subordinated in right of
payment to such Indebtedness, the Subsidiary Guarantee under the supplemental
indenture shall be subordinated to such Restricted Subsidiary's guarantee with
respect to such Indebtedness substantially to the same extent as the Notes are
subordinated to such Indebtedness under the Indenture and (B) if such
Indebtedness is by its express terms subordinated in right of payment to the
Notes, any such guarantee of such Restricted Subsidiary with respect to such
Indebtedness shall be subordinated in right of payment to such Restricted
Subsidiary's Subsidiary Guarantee with respect to the Notes substantially to the
same extent as such Indebtedness is subordinated to the Notes; (ii) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee of the Notes; and (iii) such Restricted Subsidiary shall
deliver to the Trustee an opinion of counsel to the effect that (A) such
Subsidiary Guarantee has been duly executed and authorized and (B) such
Subsidiary Guarantee constitutes a valid, binding and enforceable obligation of
such Restricted Subsidiary, except insofar as enforcement thereof may be limited
by bankruptcy, insolvency or similar laws (including, without limitation, all
laws relating to fraudulent transfers) and except insofar as enforcement thereof
is subject to general principles of equity; provided that this paragraph (a)
shall not be applicable to any guarantee of any Restricted Subsidiary (x) that
(A) existed at the time such Person became a Restricted Subsidiary of the
Company and (B) was not incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary of the Company or (y) that
guarantees the payment of Obligations of the Company under the Credit Agreement
or any other Senior Debt of the Company and any refunding, refinancing or
replacement thereof, in whole or in part, provided that such refunding,
refinancing or replacement thereof constitutes Senior Debt of the Company.
(b) Notwithstanding the foregoing and the other provisions of the
Indenture, any Subsidiary Guarantee shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon (i) any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's Capital Stock in, or all or substantially all the assets of, such
Restricted Subsidiary whether by way of merger, consolidation or otherwise
(which sale, exchange or transfer is not prohibited by the Indenture), provided
that the Net Proceeds of such sale or other disposition are applied in
accordance with the covenant described under the caption "Repurchase at the
Option of Holders -- Asset Sales," or (ii) the release or discharge of the
guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such guarantee.
Line of Business
The Company will not, and will not permit any Subsidiary to, engage in any
line of business other than the Oil and Gas Business, except to the extent as
would not be material to the Company and its Subsidiaries taken as a whole.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes, within 15 days after it is or would have
been required to file such with the Commission, (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-K and 10-Q if the Company was required to file such
Forms, including a "Management's Discussion and Analysis of
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Financial Condition and Results of Operations" and, with respect to the annual
information only, reports thereon by the certified independent accountants of
the Company and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company was required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, the Company will file copies of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. In addition, the Company has agreed
that, until the effectiveness of the registration statement relating to the
Exchange Offer pursuant to the Registration Rights Agreement, it will furnish to
the Holders and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company shall not, in a single transaction
or series of related transactions, consolidate or merge with or into (whether or
not the Company is the surviving corporation), or directly and/or indirectly
through its Restricted Subsidiaries sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets
determined on a consolidated basis for the Company and its Restricted
Subsidiaries taken as a whole in one or more related transactions, to another
Person unless (i) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made, is a corporation organized or existing under the laws of
one of the states of the United States or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made assumes all the obligations
of the Company, under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; (iv) the Company
or the entity or Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock"; and (v) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel addressed to the Trustee with respect to the foregoing
matters. Each Subsidiary Guarantor, if any, unless it is the other party to the
transactions described above, shall have confirmed by supplemental indenture
that its Subsidiary Guarantee shall apply to such Person's obligations under the
Indenture and the Notes. Subject to the provisions of the succeeding sentence
relating to sales of Subsidiary Guarantors, the Indenture provides that no
Subsidiary Guarantor may consolidate with, or merge with or into (whether or not
such Subsidiary Guarantor is the surviving Person), another Person other than
the Company or another Subsidiary Guarantor whether or not affiliated with such
Subsidiary Guarantor, unless (i) subject to the provisions of the following
sentence, the Person formed by or surviving any such consolidation or merger (if
other than such Subsidiary Guarantor) assumes all the obligations of such
Subsidiary Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee in respect of the Notes, the Indenture
and the Guarantees; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; and (iii) the Company delivers to the
Trustee an Officers' Certificate and an Opinion of Counsel addressed to the
Trustee with respect to the foregoing matters. The Indenture provides that in
the event of a sale or other disposition of all or substantially all of the
assets of a Subsidiary Guarantor to a third party, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the Capital
Stock of a Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of
a sale or other disposition, by way of such a merger, consolidation or
otherwise, of all of the Capital Stock of such Subsidiary Guarantor) or the
Person acquiring the property (in the event of a sale or other disposition of
all or substantially all of the assets of such Subsidiary Guarantor) will be
released from and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the covenant described under the
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caption "Repurchase at the Option of Holders -- Asset Sales." Further,
notwithstanding the foregoing, the merger of the Company with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
jurisdiction shall be permitted.
EFFECTIVENESS OF COVENANTS
The covenants described under "-- Restricted Payments," "-- Incurrence of
Indebtedness and Issue of Preferred Stock" "-- No Layering," "-- Liens,"
"-- Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries,"
"-- Transactions with Affiliates" and "-- Limitation as to Unrestricted
Subsidiaries," will no longer be in effect upon the Company reaching Investment
Grade Status.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes; (ii) default in payment when due
of the principal of or premium, if any, on the Notes; (iii) failure by the
Company to comply with the provisions described under the captions
"-- Repurchase at the Option of Holders -- Change of Control," "-- Repurchase at
the Option of Holders -- Asset Sales," "-- Restricted Payments," or "-- Merger,
Consolidation or Sale of Assets"; (iv) failure by the Company or a Subsidiary
Guarantor, if any, for 60 days after notice from the Trustee or the Holders of
at least 25% in principal amount of the then outstanding Notes to comply with
any of its other agreements in the Indenture or the Notes; (v) except as
permitted by the Indenture, any Subsidiary Guarantee shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any reason
to be in full force and effect or a Subsidiary, or any Person acting on behalf
of such Subsidiary, shall deny or disaffirm its obligations under its Subsidiary
Guarantee; (vi) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries), other than Indebtedness owed to the Company or a
Wholly Owned Subsidiary, whether such Indebtedness or guarantee now exists, or
is created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such Indebtedness
prior to the expiration of the grace period provided in such Indebtedness on the
date of such default unless being contested in good faith by appropriate
proceedings (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $10.0 million or more; (vii)
failure by the Company or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $10.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; and (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries or group of Restricted Subsidiaries that, together taken (as of the
latest audited consolidated financial statements for the Company and its
Subsidiaries), would constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company, any Significant Subsidiary
or any group of Restricted Subsidiaries that, taken together (as of the latest
audited consolidated financial statements for the Company and its Subsidiaries),
would constitute a Significant Subsidiary, all outstanding Notes will become due
and payable without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
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The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, premium and Liquidated Damages, if any, on the
Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, will have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
and the Subsidiary Guarantors' obligations, if any, discharged with respect to
the outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders
of outstanding Notes to receive payments in respect of the principal of,
premium, if any, and interest and Liquidated Damages, if any, on such Notes when
such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations will not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including nonpayment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages,
if any, on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company will have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable U.S. federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel will confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company will have delivered to the Trustee an opinion of counsel
in the United States reasonably acceptable to the Trustee confirming that the
Holders of the outstanding Notes will not recognize income, gain or loss for
U.S. federal income tax purposes as a result of such Covenant Defeasance and
will be subject to U.S. federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default will have
occurred and be continuing on the date of such deposit (other than a Default or
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Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that on the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
the Notes over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Notes or the Subsidiary Guarantees, if any, may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Notes then outstanding (including consents obtained in connection with a
tender offer or exchange offer for Notes), and, subject to certain exceptions,
any existing default or compliance with any provision of the Indenture, the
Notes or the Subsidiary Guarantees, if any, may be waived with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change
the time for payment of interest or Liquidated Damages, if any, on any Note,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest or Liquidated Damages, if any, on the Notes (except
a rescission of acceleration of the Notes from a non payment default by the
Holders of at least a majority in aggregate principal amount of the Notes and a
waiver of the payment default that resulted from such acceleration), (v) make
any Note payable in money other than that stated in the Notes, (vi) make any
change in the provisions of the Indenture relating to waivers of past Defaults
or the rights of Holders of Notes to receive payments of principal of or
premium, if any, or interest or Liquidated Damages, if any, on the Notes, (vii)
waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders") or (viii) make any change in the
foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of the Indenture (which relate to subordination) will require the
consent of the Holders of at least 66 2/3% in principal amount of Notes then
outstanding if such amendment would adversely affect the rights of Holders of
such Notes. However, no amendment may be made to the subordination provisions of
the Indenture that adversely affects the rights of any holder of Senior Debt
then outstanding
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unless the holders of such Senior Debt (or any group or representative thereof
authorized to give a consent) consent to such change.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture, the Notes or
the Subsidiary Guarantees, if any, to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's or any
Subsidiary Guarantor's obligations to Holders of Notes in the case of a merger
or consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Notes (including additional Subsidiary Guarantees) or
that does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act or to
provide for the succession of a successor Trustee.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days or apply to the Commission for permission to
continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default will
occur (which will not be cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes, unless such Holder will have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Old Notes held by Qualified Institutional Buyers are in the form of one
registered global note without interest coupons (the "U.S. Global Note"). The
U.S. Global Note was deposited on the date of the closing of the sale of the Old
Notes with the Trustee, as custodian for The Depository Trust Company ("DTC"),
in New York, New York, and will continue to be registered in the name of DTC or
its nominee, in each case for credit to the accounts of DTC's Direct and
Indirect Participants (as defined below). The Old Notes sold in offshore
transactions in reliance on Regulation S, if any, are in the form of one
registered, global book-entry note without interest coupons (the "Reg S Global
Note"). The Reg S Global Note was deposited with the Trustee, as custodian for
DTC, in New York, New York, and registered in the name of a nominee of DTC (a
"Nominee") for credit to the accounts of Indirect Participants at the Euroclear
System ("Euroclear") and Cedel Bank, societe anonyme ("CEDEL"). During the
40-day period commencing on the day after the later of the offering date and the
original Issue Date (as defined) of the Notes (the "40-Day Restricted Period"),
beneficial interests in the Reg S Global Note may be held only through Euroclear
or CEDEL. The U.S. Global Note and the Reg S Global Note are referred to herein
together as the "Global Old Notes."
The Exchange Notes also will be issued in the form of one or more Global
Notes (the "Global Exchange Notes" and, together with the Global Old Notes, the
"Global Notes"). The Global Exchange Notes will be deposited on the original
date of issuance of the Exchange Notes with, or on behalf of, DTC and registered
in the name of Cede & Co., as nominee.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See
"-- Transfer of Interests in Global Notes for Certificated Notes."
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Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
Depositary Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Direct Participants. The Direct Participants
include securities brokers and dealers (including the Initial Purchasers),
banks, trust companies, clearing corporations and certain other organizations,
including Euroclear and Cedel. Access to DTC's system is also available to other
entities that clear through or maintain a direct or indirect, custodial
relationship with a Direct Participant (collectively, the "Indirect
Participants"). DTC may hold securities beneficially owned by other persons only
through the Direct Participants or Indirect Participants and such other persons'
ownership interest and transfer of ownership interest will be recorded only on
the records of the Direct Participant and/or Indirect Participant, and not on
the records maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes allocated by the Initial Purchasers to such Direct
Participants, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the Reg
S Global Notes may hold their interests therein directly through Euroclear or
CEDEL or indirectly through organizations that are participants in Euroclear or
CEDEL. After the expiration of the 40-Day Restricted Period (but not earlier),
investors may also hold interests in the Reg S Global Notes through
organizations other than Euroclear and CEDEL that are Direct Participants in the
DTC system. Morgan Guaranty Trust Company of New York, Brussels office is the
operator and depository of Euroclear and Citibank, N.A. is the operator and
depository of CEDEL (each a "Nominee" of Euroclear and CEDEL, respectively).
Therefore, they will each be recorded on DTC's records as the holders of all
ownership interests held by them on behalf of Euroclear and CEDEL, respectively.
Euroclear and CEDEL will maintain on their records the ownership interests, and
transfers of ownership interests by and between, their own customers' securities
accounts. DTC will not maintain records of the ownership interests of, or the
transfer of ownership interests by and between, customers of Euroclear or CEDEL.
All ownership interests in any Global Notes, including those of customers'
securities accounts held through Euroclear or CEDEL, may be subject to the
procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form, of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in a Global Note to pledge such interest to persons
or entities that are not Direct Participants in DTC, or to otherwise take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Notes see "-- Transfers of Interests in Global Notes for
Certificated Notes."
EXCEPT AS DESCRIBED IN "-- TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
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DELIVERY OF NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED
OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company and the Trustee will treat
the persons in whose names the Notes are registered (including Notes represented
by Global Notes) as the owners thereof for the purpose of receiving payments and
for any and all other purposes whatsoever. Payments in respect of the principal,
premium, Liquidated Damages, if any, and interest on Global Notes registered in
the name of DTC or its nominee will be payable by the Trustee to DTC or its
nominee as the registered holder under the Indenture. Consequently, neither the
Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Direct Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee or the Company. Neither the Company nor the Trustee will be liable for
any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Notes, and the Company and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Notes through Euroclear or CEDEL) who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the Notes through Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described herein, cross-market transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the Notes
through Euroclear or CEDEL, on the other hand, will be effected by Euroclear's
or CEDEL's respective Nominee through DTC in accordance with DTC's rules on
behalf of Euroclear or CEDEL; however, delivery of instructions relating to
crossmarket transactions must be made directly to Euroclear or CEDEL, as the
case may be, by the counterparty in accordance with the rules and procedures of
Euroclear or CEDEL and within their established deadlines (Brussels time for
Euroclear and UK time for CEDEL). Indirect Participants who hold interest in the
Notes through Euroclear and CEDEL may not deliver instructions directly to
Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction
meets its settlement requirements, deliver instructions to its respective
Nominee to deliver or receive interests on Euroclear's or CEDEL's behalf in the
relevant Global Note in DTC, and make or receive payment in accordance with
normal procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or CEDEL during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and CEDEL customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in a Reg
S Global Note
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to a DTC Participant until the European business day for Euroclear or CEDEL
immediately following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
as to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"-- Transfers of Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Reg S Global Note and in the U.S.
Global Note among Direct Participants, Euroclear and CEDEL, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Initial
Purchasers or the Trustee will have any responsibility for the performance by
DTC, Euroclear or CEDEL or their respective Direct and Indirect Participants of
their respective obligations under the rules and procedures governing any of
their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
Transfers of Interests in One Global Note for Interests in Another Global
Note
Prior to the expiration of the 40-Day Restricted Period, an Indirect
Participant who holds an interest in the Reg S Global Note through Euroclear or
CEDEL will be permitted to transfer its interest to a U.S. Person who takes
delivery in the form of an interest in U.S. Global Notes only if such exchange
occurs in connection with a transfer of the Notes pursuant to Rule 144A and the
transferor first delivers to the Trustee a written certificate (in the form
provided in the Indenture) to the effect that the Notes are being transferred to
a person who the transferor reasonably believes is a "qualified institutional
buyer" within the meaning of Rule 144A, purchasing for its own account or the
account of a "qualified institutional buyer" in a transaction meeting the
requirements of Rule 144A and in accordance with all applicable securities laws
of the states of the United States and other jurisdictions.
Beneficial interests in a U.S. Global Note may be transferred to a person
who takes delivery in the form of an interest in the Reg S Global Note, only if
the transferor first delivers to the Trustee a written certificate (in the form
provided in the Indenture) to the effect that such transfer is being made in
accordance with Rule 903 or 904 of Regulation S and if requested by the Company
or the Trustee, the delivery of an opinion of counsel, certification and/or
other information satisfactory to them. If such transfer occurs prior to the
expiration of the 40-Day Restricted Period, the interest transferred will be
held immediately thereafter through Euroclear or CEDEL.
Transfers involving an exchange of a beneficial interest in the Reg S
Global Note for a beneficial interest in the U.S. Global Note or vice versa will
be effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the one Global Note and a corresponding increase in the
principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
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Transfers of Interests in Global Notes for Certificated Notes
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC (x)
notifies the Company that it is unwilling or unable to continue as depositary
for the Global Notes and the Company thereupon fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Certificated Notes or (iii)
there shall have occurred and be continuing a Default or an Event of Default
with respect to the Notes. In any such case, the Company will notify the Trustee
in writing that, upon surrender by the Direct and Indirect Participants of their
interest in such Global Note, Certificated Notes will be issued to each person
that such Direct and Indirect Participants and the DTC identify as being the
beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless the Company
determines otherwise in compliance with applicable law.
Neither the Company nor the Trustee will be liable for any delay by the
holder of any Global Note or DTC in identifying the beneficial owners of Notes,
and the Company and the Trustee may conclusively rely on, and will be protected
in relying on, instructions from the holder of the Global Note or DTC for all
purposes.
Transfers of Certificated Notes for Interests in Global Notes
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and, in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer, it has complied
with the restrictions on transfer described under "Notice to Investors."
Same Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available same day
funds to the accounts specified by the holder of interests in such Global Note.
With respect to Certificated Notes, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available same day funds to the accounts specified by
the holders thereof or, if no such account is specified, by mailing a check to
each such holder's registered address. The Company expects that secondary
trading in the Certificated Notes will also be settled in immediately available
funds.
GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE
The Indenture, the Notes and the Subsidiary Guarantees will be governed by
the laws of the State of New York, without regard to the principles of conflicts
of laws.
The Indenture provides that the Company will appoint CT Corporation as the
Company's agent for service of process in any suit, action or proceeding with
respect to the Indenture, the Notes or the Subsidiary Guarantees and for any
actions brought under U.S. federal or state securities laws brought in any U.S.
federal or state court located in the City of New York and submit to such
jurisdiction.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture and the
foregoing summary of the terms of the Notes. Reference is made to the Indenture
for a full disclosure of all such terms, as well as any other capitalized terms
used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary or is designated a
Restricted Subsidiary of such specified Person, including, without limitation,
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Restricted Subsidiary of such
specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination, (A) the sum of (i) discounted future net cash
flows from proved oil and gas reserves of the Company and its Restricted
Subsidiaries, calculated in accordance with Commission guidelines (before any
federal or state income tax), as estimated by independent petroleum engineers as
of a date no earlier than the date of the Company's latest annual consolidated
financial statements (or, in the case that the date of determination is after
the end of the first fiscal quarter of the Company's the fiscal year, as
estimated by the Company's engineers as of a date no earlier than the end of the
most recent fiscal quarter, which estimates shall be confirmed in writing by a
report by independent petroleum engineers in accordance with Commission
guidelines in the event of a Material Change if the amount of Adjusted
Consolidated Net Tangible Assets is required to be computed under the
Indenture), (ii) the Net Working Capital on a date no earlier than the date of
the Company's latest consolidated annual or quarterly financial statements, and
(iii) with respect to each other tangible asset of the Company or its Restricted
Subsidiaries, the greater of (a) the net book value of such other tangible asset
on a date no earlier than the date of the Company's latest consolidated annual
or quarterly financial statements, and (b) (A) the appraised value, as estimated
by a qualified independent appraiser, of such other tangible asset, as of a date
no earlier than the date that is three years prior to the date of determination
(or such later date on which the Company shall have a reasonable basis to
believe that there has occurred a material decrease in value since the
determination of such appraised value), minus (B) minority interests.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback,
including any disposition by means of a merger, consolidation or similar
transaction and including the issuance, sale or other transfer of any of the
capital stock of any Restricted Subsidiary of such person) other than to the
Company or to any of its Wholly Owned Subsidiaries (including the receipt of
proceeds of insurance paid on account of the loss of or damage to any asset and
awards of compensation for any asset taken by condemnation, eminent domain or
similar proceeding, but excluding the receipt of proceeds of business
interruption insurance or environmental damage insurance or similar types of
policies) that have a fair market value (as determined in good faith by the
Board of Directors) in excess of $1.0 million or for net cash proceeds in excess
of $1.0 million; and (ii) the issuance of Equity Interests in any Restricted
Subsidiary or Unrestricted Subsidiary or the sale of any Equity Interests in any
Restricted Subsidiary or Unrestricted Subsidiary, in each case, in one or a
series of related transactions, provided, that notwithstanding the foregoing,
the term "Asset Sale" shall not include: (a) the sale, lease, conveyance,
disposition or other transfer of all or substantially all of the assets of the
Company, as permitted pursuant to the covenant described under "Merger,
Consolidation or Sale of Assets," (b) the abandonment, farmout, lease or
sublease of developed or undeveloped oil and gas properties in the ordinary
course of
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business, (c) a transfer of assets by the Company to a Wholly Owned Subsidiary
of the Company or by a Wholly Owned Subsidiary of the Company to the Company or
to another Wholly Owned Subsidiary of the Company, (d) an issuance of Equity
Interests by a Wholly Owned Subsidiary of the Company to the Company or to
another Wholly Owned Subsidiary of the Company, (e) the making of Permitted
Investments, (f) any cash dividend, distribution, Investment or payment made
pursuant to the first or second paragraph of the "Restricted Payments" covenant,
(g) the trade or exchange by the Company or any Restricted Subsidiary of the
Company of any oil and gas property or interest therein owned or held by the
Company or such Restricted Subsidiary for any oil and gas property or interest
therein owned or held by another Person, including any cash or Cash Equivalents
necessary in order to achieve an exchange of equivalent value; provided that any
such cash or Cash Equivalents received by the Company or such Restricted
Subsidiary will be subject to the provisions described in the second paragraph
under "-- Repurchase at the Option of Holders -- Asset Sales," which the Board
of Directors of the Company determine in good faith to be of approximately
equivalent value, (h) the sale or transfer of hydrocarbons or other mineral
products or surplus or obsolete equipment in the ordinary course of business,
(i) the sale of oil and gas properties in connection with tax credit
transactions complying with sec. 29 of the Internal Revenue Code or (j) the sale
or transfer (whether or not in the ordinary course of business) of any oil and
gas property or interest therein to which no proved reserves are attributable at
the time of such sale or transfer.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended, to the extent the lease payments during such extension
period are required to be capitalized on a balance sheet as a liability in
accordance with GAAP).
"Board of Directors" means the Board of Directors of the Company, or any
authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of a limited liability company or similar entity, any
membership or similar interests therein, (iii) in the case of an association or
business entity, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock, (iv) in the case of a
partnership, partnership interests (whether general or limited) and (v) any
other interest or participation that confers on a Person the right to receive a
share of the profits and losses of, or distributions of assets of, the issuing
Person.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof having maturities of not more than one year from the
date of acquisition, (ii) certificates of deposit and eurodollar time deposits
with maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight bank deposits,
in each case with any domestic commercial bank having capital and surplus in
excess of $500 million, (iii) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (i)
and (ii) above entered into with any financial institution meeting the
qualifications specified in clause (ii) above, (iv) commercial paper having a
rating of at least P1 from Moody's Investors Service, Inc. (or its successor) or
a rating of at least A1 from Standard & Poor's Ratings Services (or its
successor) and (v) investments in money market or other mutual funds all of
whose assets comprise securities of types described in clauses (i) through (iv)
above.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cashflow" means, with respect to the Company and its
Restricted Subsidiaries for any period, the sum of, without duplication, (i) the
Consolidated Net Income for such period, plus (ii) to the
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extent deducted from Consolidated Net Income for such period, the Fixed Charges
for such period plus (iii) Consolidated Income Taxes for such period, plus (iv)
consolidated depreciation, amortization, depletion and other non-cash charges of
the Company and its Restricted Subsidiaries required to be reflected as expenses
on the books and records of the Company, and (v) excluding the impact of foreign
currency translations. Notwithstanding the foregoing, Consolidated Income Taxes
of, and the depreciation, depletion and amortization and other non-cash charges
of, a Restricted Subsidiary of a Person shall be added to Consolidated Net
Income to compute Consolidated Cashflow only to the extent that the Net Income
of such Restricted Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Restricted
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Income Taxes" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Subsidiaries (to the extent such income or profits were included in
computing Consolidated Net Income for such period), regardless of whether such
taxes or payments are required to be remitted to any governmental authority.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of, or any dividends or other distributions from,
any Unrestricted Subsidiary, to the extent otherwise included, shall be
excluded, whether or not distributed to the Company or one of its Restricted
Subsidiaries, (iii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (which
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iv) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, and (v) the cumulative effect of a change in accounting principles
shall be excluded.
"Credit Agreement" means, collectively, (i) that certain Credit Agreement,
as in effect on the date of the Indenture, by and among the Company, the lenders
that may be from time to time parties thereto and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National Association), as
agent, as the foregoing may from time to time be amended, renewed, supplemented
or otherwise modified at the option of the parties thereto, including increases
in the principal amount thereof; and (ii) any successors to or replacements of
(as designated by the Board of Directors of the Company in its sole judgment,
and evidenced by a resolution) such Credit Agreement, as such successors or
replacements may from time to time be amended, renewed, supplemented, modified
or replaced, including increases in the principal amount thereof.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Depositary" means, with respect to the Notes issuable or issued in whole
or in part in global form, the Person specified in the Indenture as the
Depositary with respect to the Notes, until a successor shall have been
appointed and become such Depositary pursuant to the applicable provision of the
Indenture, and, thereafter, "Depositary" shall mean or include such successor.
"Designated Senior Debt" means (i) the Credit Agreement and (ii) any Senior
Debt permitted under the Indenture which, at the date of determination, has an
aggregate principal amount outstanding of, or under
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which, at the date of determination, the holders thereof are committed to lend
up to, at least $25 million and is specifically designated by the Company in the
instrument evidencing or governing such Senior Debt as "Designated Senior Debt"
for purposes of the Indenture.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable) or upon the happening of any event, matures or is mandatorily
redeemable (other than in connection with a Change of Control or Asset Sale) for
any consideration other than Capital Stock, pursuant to a sinking fund
obligation or otherwise, is convertible or is exchangeable for Indebtedness or
Disqualified Stock or redeemable (other than in connection with a Change of
Control or Asset Sale) for any consideration other than Capital Stock at the
option of the holder thereof, in whole or in part, in each case on or prior to
the date that is 91 days after (x) the date on which the Notes mature or (y) on
which there are no Notes outstanding.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private offering (other than on Form
S-8 or any other form relating to securities issuable under any benefit plan of
the Company) of Equity Interests other than Disqualified Stock of the Company or
any successor by merger to the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" means the offer that may be made by the Company pursuant
to the Registration Rights Agreement to exchange new Notes for Notes.
"Existing Indebtedness" means the Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the Credit Agreement) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), and (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period,
and (iii) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or one of its Restricted Subsidiaries (whether or
not such guarantee or Lien is called upon), and (iv) the product of (a) all
dividend payments, whether or not in cash (other than any such non-cash dividend
in the form of Equity Interests which do not provide for the payment of cash
dividends prior to any stated maturity of the principal of the Notes), on any
series of preferred stock of any such Person or one of its Restricted
Subsidiaries payable to a party other than the Company or a Wholly Owned
Subsidiary, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state,
provincial and local statutory tax rate of such Person, expressed as a decimal,
in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cashflow of such Person and its Restricted
Subsidiaries for such period to the Fixed Charges of such Person and its
Restricted Subsidiaries for such period. In the event that the Company or any of
its Restricted Subsidiaries incurs, assumes, guarantees, redeems or repays any
Indebtedness (other than the incurrence or repayment of revolving credit
borrowings used for working capital, except to the extent that a repayment is
accompanied by a permanent reduction in revolving credit commitments) or issues
preferred stock subsequent to the commencement of the four-quarter reference
period for which the Fixed Charge
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Coverage Ratio is being calculated but prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee, redemption or
repayment of Indebtedness, or such issuance or redemption of preferred stock, as
if the same had occurred at the beginning of the applicable four-quarter
reference period. For purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and shall give pro forma effect to the Consolidated Cashflow and
Indebtedness and preferred stock of the Person which is the subject of any such
acquisition and any cost savings or expense reductions attributable at the time
of such computation or to be attributable in the future to such acquisition,
shall be included in such computation, to the extent that such adjustments would
be permitted under Article 11 of Regulation S-X and Consolidated Cashflow for
such reference period shall be calculated without giving effect to clause (iv)
of the proviso set forth in the definition of Consolidated Net Income, (ii) the
net proceeds of Indebtedness incurred or Disqualified Stock issued by the
referent Person pursuant to the first paragraph of the covenant described under
the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock" during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
been received by the referent Persons or any of its Restricted Subsidiaries on
the first day of the four-quarter reference period and applied to its intended
use on such date, (iii) the Consolidated Cashflow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, and (iv) the Fixed
Charges attributable to discontinued operations, as determined in accordance
with GAAP, and operations or businesses disposed of prior to the Calculation
Date, shall be excluded, but only to the extent that the obligations giving rise
to such Fixed Charges will not be obligations of the referent Person or any of
its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency exchange swap agreements,
interest rate or currency exchange cap agreements and interest rate or currency
exchange collar agreements and (ii) other agreements or arrangements designed to
protect such Person against fluctuations in currency exchange or interest rates.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Indebtedness" means, with respect to any Person, without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or in respect of any
Production Payment or the balance deferred and unpaid of the purchase price of
any property or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing indebtedness (other than in the case of letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person), the maximum fixed repurchase price of Disqualified
Stock issued by such Person in each case, if held by any Person other than the
Company or a Wholly Owned Subsidiary of the Company, obligations of such Person
in
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respect of production imbalances, Attributable Debt of such Person, and, to the
extent not otherwise included, the guarantee by such Person of any indebtedness
of any other Person; provided, however that indebtedness shall not include gas
balancing liabilities incurred in the ordinary course of business and consistent
with past practice.
"Investment Grade Status," with respect to the Company, shall occur when
the Notes receive a rating of "BBB-" or higher from Standard & Poor's Ratings
Group or a rating of "Baa3" or higher from Moody's Investors Service, Inc.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations, but
excluding trade credit), advances or capital contributions (excluding
commission, travel, relocation and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that (i) Hedging Obligations, (ii)
hedging agreements that such Person entered into in the ordinary course of
business in the oil and gas industry for the purpose of protecting against
fluctuations in oil or natural gas prices and otherwise in compliance with the
Indenture, (iii) endorsements of negotiable instruments and documents in the
ordinary course of business, (iv) Permitted Marketing Transactions and (v) an
acquisition of assets, Equity Interests or other securities by the Company for
consideration consisting of common equity securities of the Company shall not be
deemed to be an Investment. If the Company or any Restricted Subsidiary of the
Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, such entity is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of.
"Issue Date" means the closing date for the sale and original issuance of
the Notes under the Indenture.
"Legal Holiday" means a Saturday, a Sunday or a day on which federal
offices or banking institutions in the City of New York, in the city of the
Corporate Trust Office of the Trustee, or at a place of payment are authorized
by law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday, payment may be made on the next succeeding day that is not a
Legal Holiday, and no interest shall accrue for the intervening period.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Liquidated Damages" means all liquidated damages owing pursuant to the
Registration Rights Agreement.
"Material Change" means an increase or decrease of more than 20% during a
fiscal quarter in the discounted future net cash flows calculated in accordance
with Commission guidelines (excluding changes that result solely from changes in
prices) from proved oil and gas reserves of the Company and its Restricted
Subsidiaries (before any federal or state income tax); provided, however, that
the following will be excluded from the Material Change calculation: (i) any
acquisitions during the quarter of oil and gas reserves that have been estimated
by independent petroleum engineers and on which a report or reports exist, (ii)
any reserves added during the quarter attributable to the drilling or
recompletion of wells not included in previous reserve estimates, but which will
be included in future quarters, and (iii) any disposition of properties existing
at the beginning of such quarter that have been disposed of as provided in
"-- Repurchase at the Option of Holders -- Asset Sales".
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, and before reduction for
non-cash preferred stock dividends, excluding, however,
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(i) any gain or loss, together with any related provision for taxes on such gain
or loss, realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain or
loss, together with any related provision for taxes on such extraordinary or
nonrecurring gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP and net of any amounts
required to be applied to the repayment of Indebtedness (other than Indebtedness
under any Senior Debt) secured by a Lien on the asset or assets that were the
subject of such Asset Sale.
"Net Working Capital" means (i) all current assets of the Company and its
Restricted Subsidiaries excluding cash and Cash Equivalents, minus (ii) all
current liabilities of the Company and its Restricted Subsidiaries, except
current liabilities included in Indebtedness.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides any guarantee or credit
support of any kind (including any undertaking, guarantee, indemnity, agreement
or instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise), (ii) no default with respect to
which (including any rights that the Holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default under such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity and (iii) the explicit terms of which provide that
there is no recourse against any of the assets of the Company or its Restricted
Subsidiaries.
"Note Custodian" means the Trustee, as custodian with respect to the Global
Notes, or any successor entity thereto.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the
Secretary or any Vice President of such Person.
"Oil and Gas Business" means (i) the acquisition, exploration,
exploitation, development, operation or disposition of interests in oil, gas or
other hydrocarbon properties, (ii) the gathering, marketing, treating,
processing, storage, selling, transporting or refining of any production from
such interests or properties, (iii) any business relating to or arising from
exploration for or development, production, gathering, marketing, treatment,
processing, storage, sale, transportation or refining of oil, gas and other
minerals and products produced in association therewith or (iv) any activity
that is ancillary or necessary or desirable to facilitate the activities
described in clauses (i) through (iii) of this definition.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right
of payment to the Notes.
"Permitted Investments" means (a) any Investments in the Company or in a
Restricted Subsidiary of the Company that is engaged in the Oil and Gas
Business; (b) any Investments in Cash Equivalents; (c) Investments by the
Company or any Restricted Subsidiary of the Company in a Person if as a result
of such Investment (i) such Person becomes a Wholly Owned Subsidiary of the
Company and such Person is engaged in the Oil and Gas Business or (ii) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Wholly Owned
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Subsidiary of the Company that is engaged in the Oil and Gas Business; (d)
Investments made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described under "-- Repurchase at the Option of Holders -- Asset Sales"; (e)
Investments by the Company or any of its Restricted Subsidiaries in cash in an
aggregate amount not to exceed $10.0 million outstanding at any one time; (f)
loans and advances to employees in the ordinary course of business for bona fide
business purposes; (g) stock, obligations or securities received in settlement
of debts created in the ordinary course of business and owing to the Company or
any of its Subsidiaries or in satisfaction of judgments or pursuant to any plan
of reorganization or similar arrangement upon the bankruptcy or insolvency of
any debtor; (h) any operating agreements, joint ventures, partnership
agreements, working interests, royalty interests, mineral leases, processing
agreements, farm-in agreements, farm-out agreements, contracts for the sale,
transportation or exchange of oil and natural gas, unitization agreements,
pooling arrangements, area of mutual interest agreements, production sharing
agreements or other similar or customary agreements, transactions, properties,
interests, or arrangements, and Investments and expenditures in connection
therewith or pursuant thereto, in each case made or entered into in the ordinary
course of the Oil and Gas Business, excluding, however, Investments in
corporations; (i) accounts receivable created or acquired, and prepaid expenses
arising, in the ordinary course of business; (j) Investments existing on the
date of the Indenture; and (k) the incurrence, assumption or creation of Hedging
Obligations and hedging arrangements that the Company or a Restricted Subsidiary
of the Company enter into in the ordinary course of business in the oil and gas
industry for the purpose of protecting its production against fluctuations in
oil or natural gas prices and otherwise in compliance with the Indenture.
"Permitted Liens" means (i) Liens securing Indebtedness of a Subsidiary or
Liens securing Senior Debt that is outstanding on the date of issuance of the
Notes and Liens securing Senior Debt that is permitted by the terms of the
Indenture to be incurred; (ii) Liens in favor of the Company or any Restricted
Subsidiary; (iii) Liens on property existing at the time of acquisition thereof
by the Company or any Subsidiary of the Company and Liens on property or assets
of a Subsidiary existing at the time it became a Subsidiary, provided that such
Liens were in existence prior to the contemplation of the acquisition and do not
extend to any assets other than the acquired property or the property of the
acquired subsidiary; (iv) Liens incurred or deposits made in the ordinary course
of business in connection with workers' compensation, unemployment insurance or
other kinds of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the ordinary
course of business (including lessee or operator obligations under statutes,
governmental regulations or instruments related to the ownership, exploration
and production of oil, gas and minerals on state or federal lands or waters);
(v) Liens existing on the date of the Indenture; (vi) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (vii) statutory liens of landlords, mechanics, suppliers,
vendors, warehousemen, carriers or other like Liens arising in the ordinary
course of business; (viii) prejudgment liens and judgment Liens not giving rise
to an Event of Default so long as any appropriate legal proceeding that may have
been duly initiated for the review of such judgment shall not have been finally
terminated or the period within which such proceeding may be initiated shall not
have expired; (ix) Liens on, or related to, properties or assets to secure all
or part of the costs incurred in the ordinary course of the Oil and Gas Business
for the exploration, drilling, development, production, processing,
transportation, marketing, storage or operation thereof; (x) Liens on pipeline
or pipeline facilities that arise under operation of law; (xi) Liens arising
under operating agreements, joint venture agreements, partnership agreements,
oil and gas leases, farm-in agreements, farm-out agreements, division orders,
contracts for the sale, transportation or exchange of oil or natural gas,
unitization and pooling declarations and agreements, area of mutual interest
agreements and other agreements that are customary in the Oil and Gas Business;
(xii) Liens reserved in oil and gas mineral leases for bonus or rental payments
and for compliance with the terms of such leases, (xiii) Liens securing the
Notes; (xiv) Liens constituting survey exceptions, encumbrances, easements, and
reservations of, and rights to others for, rights-of-way, zoning and other
restrictions as to the use of real properties, and minor defects of title which,
in the case of any of the foregoing, do not secure the payment of borrowed
money, and in the aggregate do not materially adversely
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affect the value of the assets of the Company and its Restricted Subsidiaries,
taken as a whole, or materially impair the use of such properties for the
purposes of which such properties are held by the Company or such subsidiaries;
and (xv) Liens not otherwise permitted by clauses (i) through (xiv) that are
incurred in the ordinary course of business of the Company or any Subsidiary
with respect to obligations that do not exceed $5 million at any one time
outstanding.
"Permitted Marketing Transaction" means (i) a transaction in which the
Company or any Subsidiary of the Company either (a) establishes a position using
New York Mercantile Exchange Crude Oil or Natural Gas Futures contracts to
purchase hydrocarbons for future delivery to it or (b) purchases or commits to
purchase hydrocarbons for future delivery to it, and contemporaneous with such
purchase transaction either (1) establishes one or more positions using New York
Mercantile Exchange Crude Oil or Natural Gas Futures contracts to resell at a
date subsequent to such delivery date or (2) enters into a contract with a
Person to resell at a date subsequent to such delivery date, a similar aggregate
quantity and quality of hydrocarbons as so purchased by the Company or such
Subsidiary, as applicable, at an aggregate price greater than the Indebtedness
incurred for the hydrocarbons so purchased by the Company or such Subsidiary or
(ii) any other purchase by the Company or any Subsidiary of the Company of
hydrocarbons for which the Company or such Subsidiary has contracts to sell.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that (i) the principal amount (or accredited value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the original principal
amount (or then current accredited value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date at least as late as the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, or other business entity or government or agency or political
subdivision thereof (including any subdivision or ongoing business of any such
entity or substantially all of the assets of any such entity, subdivision or
business).
"Production Payments" means Dollar-Denominated Production Payments and
Volumetric Production Payments, collectively.
"Purchase Money Lien" means a Lien granted on an asset or property to
secure a Purchase Money Obligation permitted to be incurred under the Indenture
and incurred solely to finance the purchase, or the cost of construction or
improvement, of such asset or property; provided however, that such Lien
encumbers only such asset or property and is granted within 180 days of such
acquisition.
"Purchase Money Obligations" of any Person means any obligations of such
Person to any seller or any other Person incurred or assumed to finance the
purchase, or the cost of construction or improvement, of real or personal
property to be used in the business of such Person or any of its Restricted
Subsidiaries in an amount that is not more than 100% of the cost, or fair market
value, as appropriate, of such property, and incurred within 90 days after the
date of such acquisition (excluding accounts payable to trade creditors incurred
in the ordinary course of business).
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"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the date of the Indenture, by and among the Company and the Initial
Purchasers, as such agreement may be amended, modified or supplemented from time
to time.
"Representative" means the indenture trustee or other trustee, client or
representative for any senior Indebtedness.
"Responsible Officer," when used with respect to the Trustee, means any
officer of the Trustee with direct responsibility for the administration of the
Indenture and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Debt" means (i) indebtedness of the Company under or in respect of
the Credit Agreement, whether for principal, interest (including interest
accruing after the filing of a petition initiating any proceeding pursuant to
any bankruptcy law, whether or not the claim for such interest is allowed as a
claim in such proceeding), reimbursement obligations, fees, commissions,
expense, indemnities or other amounts, and (ii) any other Indebtedness permitted
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Notes. Notwithstanding anything to the
contrary in the foregoing sentence, Senior Debt will not include (v) Equity
Interests, (w) any liability for federal, state, local or other taxes owned or
owing by the Company, (x) any Indebtedness of the Company to any of its
Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness
that is incurred in violation of the Indenture. Senior Debt of a Subsidiary
Guarantor has a correlative meaning (including interest accruing after the
filing of a petition initiating any proceeding pursuant to any bankruptcy law,
whether or not the claim for such interest is allowed as a claim in such
proceeding).
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Exchange Act, as such Regulation is in effect on the date
hereof.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other equity interests (including partnership
interests) entitles (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person or (ii) one or
more Subsidiaries of such Person.
"Subsidiary Guarantee" means any guarantee of the obligations of the
Company under the Indenture and the Notes by a Restricted Subsidiary in
accordance with the provisions of the Indenture.
"Subsidiary Guarantors" means any Restricted Subsidiary that incurs a
Subsidiary Guarantee.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
sec.sec. 77aaa-77bbbb) as in effect on the date on which the Indenture is
qualified under the Trust Indenture Act.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any Subsidiary of the Company (including any newly acquired or
newly formed Subsidiary or a Person becoming a Subsidiary through merger or
consolidation or Investment therein) to be an Unrestricted Subsidiary only if
(a) such Subsidiary does not own any Capital Stock of, or own or hold any Lien
on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary; (b) all the Indebtedness of such Subsidiary and its
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Subsidiaries shall, at the date of designation, and will at all times
thereafter, consist of NonRecourse Debt; (c) the Company certifies that such
designation complies with the limitations of the "-- Restricted Payments"
covenant; (d) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly, all or
substantially all of the business of the Company and its Subsidiaries; (e) such
Subsidiary does not, directly or indirectly, own any Indebtedness of or Equity
Interest in, and has no investments in, the Company or any Restricted
Subsidiary; and (f) such Subsidiary is a Person with respect to which neither
the Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (1) to subscribe for additional Equity Interests of such Person or
(2) to maintain or preserve such Person's financial condition or to cause such
Person to achieve any specified levels of operating results. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing with the Trustee a resolution of the Board of Directors of the
Company giving effect to such designation and an Officers' certificate
certifying that such designation complied with the foregoing conditions. If, at
any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred as of such date. The Board of
Directors of the Company may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, that immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and the Company could incur
at least $1.00 of additional Indebtedness (excluding Permitted Indebtedness)
pursuant to the first paragraph of the "-- Incurrence of Indebtedness and
Issuance of Preferred Stock" covenant on a pro forma basis taking into account
such designation.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" of any entity means all classes of Capital Stock of such
entity then outstanding and normally entitled to vote in the election of
directors or all interests in such entity with the ability to control the
management or actions of such entity.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Restricted Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares or shares required by applicable
law to be held by third parties) shall at the time be owned by such Person or by
one or more Wholly Owned Subsidiaries of such Person. Unrestricted Subsidiaries
shall not be included in the definition of Wholly Owned Subsidiary for any
purposes of the Indenture.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences resulting from the acquisition, ownership and
disposition of Notes by an initial beneficial owner of Notes. The tax treatment
of the holders of the Notes may vary depending upon their particular situations.
The legal conclusions expressed in this summary are based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations, judicial authority and administrative rulings,
all as in effect as of the date of this Offering Memorandum, and all of which
are subject to change, either prospectively or retroactively. These authorities
are subject to various interpretations and it is therefore possible that the tax
treatment of the Notes may differ from the treatment described below.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders.
This discussion deals only with persons who will hold the Notes as capital
assets. In addition, certain other holders (including insurance companies, tax
exempt organizations, financial institutions and broker-dealers) may be subject
to special rules not discussed below. For purposes of this discussion, a "United
States person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in the United States or under
the laws of the United States or of any political subdivision thereof, an estate
whose income is includible in gross income for United States federal income tax
purposes regardless of its source or a trust, if a U.S. court is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE UNITED STATES FEDERAL TAX CONSEQUENCES OF ACQUIRING,
HOLDING AND DISPOSING OF NOTES, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE
UNDER THE LAWS OF ANY FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.
INTEREST
Interest on the Notes generally will be includable in the income of a
United States person as ordinary income at the time such interest is received or
accrued, in accordance with such United States person's method of accounting for
United States federal income tax purposes. The Company expects that the Notes
will not be issued with original issue discount within the meaning of the Code.
EFFECT OF OPTIONAL REDEMPTION
The Company, at its option, may redeem part or all of the Notes at the
times and for the amounts described in "Description of the Notes -- Optional
Redemption" herein. The Treasury regulations provide that for purposes of
calculating the yield to maturity of a debt instrument, an issuer will be
treated as exercising any option if its exercise would lower the yield of the
debt instrument. However, in this case, a redemption of the Notes at the
optional redemption prices would increase the effective yield of such Notes as
calculated from the date of issuance.
THE EXCHANGE OFFER
Pursuant to the Treasury regulations, the exchange of Old Notes for
Exchange Notes pursuant to the Exchange Offer should not constitute a
significant modification of the terms of the Old Notes, and accordingly, such
exchange should be treated as a "non-event" for federal income tax purposes.
Therefore, such exchange should have no federal income tax consequences to
United States persons. The holding period of an Exchange Note will include the
holding period of the Old Note for which it was exchanged; the basis of an
Exchange Note will be the same as the basis of the Old Note for which it was
exchanged; and each United States person holding the Exchange Notes would
continue to be required to include interest on the Old Notes in its gross income
in accordance with its method of accounting for United States federal income tax
purposes.
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SALES, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange, redemption or other disposition of a Note, other
than the exchange of an Old Note for an Exchange Note (see "-- The Exchange
Offer" above), a holder of a Note generally will recognize gain or loss in an
amount equal to the difference between the amount of cash and the fair market
value of any property received on the sale, exchange, redemption or other
disposition of the Note (other than in respect of accrued and unpaid interest on
the Note, which such amounts are treated as ordinary interest income) and such
holder's adjusted tax basis in the Note. Such gain or loss will be capital gain
or loss. An individual holder of the Note will generally recognize such gain as
long-term capital gain taxable at a rate of 20% if the Note is held for more
than 18 months, mid-term capital gain taxable at a rate of 28% if the Note is
held for 18 months or less but more than 12 months, and short-term capital gain
taxable at ordinary income tax rates if the Note is held for 12 months or less.
Subsequent to December 31, 2000, the capital gain rate would be reduced to 18%
if a Note has been held for more than five years. The deductibility of capital
losses is subject to limitation.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to interest
payments on the Notes made to United States persons, other than certain exempt
recipients (such as corporations), and to proceeds realized by such United
States persons on dispositions of Notes. A 31% backup withholding tax will apply
to such amounts only if the United States person: (i) fails to furnish its
social security or other taxpayer identification number ("TIN") within a
reasonable time after request therefor, (ii) furnishes an incorrect TIN, (iii)
fails to report properly interest or dividend income, or (iv) fails, under
certain circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that it is not subject
to backup withholding. Any amount withheld under the backup withholding rules
may be refunded or credited against the United States persons' United States
federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO NON-UNITED
STATES HOLDERS
For purposes of this discussion, a "Non-United States Holder" is an initial
beneficial owner of a Note that for United States federal income tax purposes is
not a United States person.
Interest
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and such Non-United States
Holder: (i) does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company; (ii) is not a
controlled foreign corporation with respect to which the Company is a "related
person" within the meaning of the Code; (iii) is not a bank whose receipt of
interest on a Note is described in section 881(c)(3)(A) of the Code; and (iv)
certifies, under penalties of perjury, that such holder is not a United States
person and provides such holder's name and address.
Sale, Exchange or Retirement of Notes
A non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, exchange, retirement (including
redemption) or other disposition of a Note unless: (i) the gain is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder; or (ii) in the case of a Non-United States Holder
who is a nonresident alien individual and holds the Note as a capital asset,
such holder is present in the United States for 183 or more days in the taxable
year and certain other requirements are met.
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Federal Estate Taxes
If interest on the Notes is exempt from withholding of United States
federal income tax under the rules described above, the Notes will not be
included in the estate of a deceased Non-United States Holder for United States
federal estate tax purposes.
Information Reporting and Backup Withholding
The Company will, where required, report to the holders of Notes and the
Internal Revenue Service the amount of any interest paid on the Notes in each
calendar year and the amounts of tax withheld, if any, with respect to such
payments.
In the case of payments of interest to Non-United States Holders, temporary
Treasury regulations provide that the 31% backup withholding tax and certain
information reporting will not apply to such payments with respect to which
either the requisite certification, as described above, has been received or an
exemption has otherwise been established; provided that neither the Company nor
its payment agent has actual knowledge that the holder is a United States person
or that the conditions of any other exemption are not in fact satisfied. Under
temporary Treasury regulations, these information reporting and backup
requirements will apply, however, to the gross proceeds paid to a Non-United
States Holder on the disposition of the Notes by or through a United States
office of a United States or foreign broker, unless the holder certifies to the
broker under penalties of perjury as to its name, address and status as a
foreign person or the holder otherwise establishes an exemption. Information
reporting requirements, but not backup withholding, will also apply to a payment
of the proceeds of a disposition of the Notes by or through a foreign office of
a United States broker or foreign brokers with certain types of relationships to
the United States unless such broker has documentary evidence in its file that
the holder of the Notes is not a United States person, and such broker has no
actual knowledge to the contrary, or the holder establishes an exception.
Neither information reporting or backup withholding generally will apply to a
payment of the proceeds of a disposition of the Notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.
United States Treasury regulations, which generally are effective for
payments made after December 31, 1999, subject to certain transition rules,
alter the foregoing rules in certain respects. Among other things, such
regulations provide presumptions under which a Non-United States Holder is
subject to information reporting and backup withholding at the rate of 31%
unless the Company receives certification from the holder of non-U.S. status.
Depending on the circumstances, this certification will need to be provided (i)
directly by the Non-United States Holder, (ii) in the case of a Non-United
States Holder that is treated as a partnership or other fiscally transparent
entity, by the partners, shareholders or other beneficiaries of such entity, or
(iii) certain qualified financial institutions or other qualified entities on
behalf of the Non-United States Holder.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
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<PAGE> 104
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commission or concessions received by any
such person may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer, other than commissions or concessions
of any broker-dealer, and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes will be passed
upon for the Company by Andrews & Kurth L.L.P., Houston, Texas.
INDEPENDENT PUBLIC ACCOUNTANTS
The combined audited financial statements of the Company as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, included and or incorporated by reference in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
RESERVE ENGINEERS
The reserve reports and estimates of the Company's net proved natural gas
and oil reserves included herein have been prepared by NSA, Miller and Lents,
Ryder Scott and Huddleston.
AVAILABLE INFORMATION
The Company has filed with the SEC a registration statement (the
"Registration Statement") under the Securities Act on Form S-4 with respect to
the Exchange Notes offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the SEC. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved. The Registration Statement and
any amendments thereto, including exhibits filed or incorporated by reference as
a part thereof, are available for inspection and copying at the SEC's offices as
described below.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy and information
statements and other information with the Commission. Copies of such materials
can be obtained by mail from the Public Reference Section of the Commission, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such reports, proxy and information statements and other
information can be inspected and copied at the public reference facility
referenced above and at the Commission's regional offices at Citicorp Center,
500 West Madison Street,
102
<PAGE> 105
Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300,
New York, New York 10048. The Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. In addition, for so long as any of the Notes
remains outstanding, the Company has agreed to make available to any prospective
purchaser of the Notes or beneficial owner of the Notes in connection with any
sale thereof the information required by Rule 144A(d)(4) under the Securities
Act. Any such request and requests for the agreements summarized herein should
be directed to James F. Westmoreland, Secretary, The Houston Exploration
Company, 1100 Louisiana, Suite 2000, Houston, Texas 77002, telephone number
(713) 830-6800.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission pursuant to the Exchange
Act is incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1997; and
2. The Company's Current Report on Form 8-K dated February 9, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference in this Prospectus and shall be deemed a part hereof from the date
of filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for all purposes to the extent that
a statement contained in this Prospectus, or in any other subsequently filed
document which is also, or is deemed to be, incorporated by reference, modifies
or replaces such statement. Any such statement so modified or superseded shall
not be deemed to constitute a part of this Prospectus, except as so modified or
superseded.
The Company will provide without charge to each person to whom this
Prospectus has been delivered, on written or oral request of such person, a copy
(without exhibits, unless such exhibits are specifically incorporated by
reference into such documents) of any or all documents incorporated by reference
in this Prospectus. Requests for such copies should be addressed to: Secretary,
The Houston Exploration Company, 1100 Louisiana, Suite 2000, Houston, Texas
77002, telephone number (713) 830-6800.
103
<PAGE> 106
GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus. All volumes of natural gas referred to herein are stated at
the legal pressure base of the state or area where the reserves exist and at 60
degrees Fahrenheit and in most instances are rounded to the nearest major
multiple.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bbl/d. One barrel per day.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production of
oil or gas, or in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
Developed acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Developed well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or gas reserves
not classified as proved, to find a new reservoir in a field previously found to
be productive of oil or gas in another reservoir or to extend a known reservoir.
Farm-in or farm-out. An agreement whereunder the owner of a working
interest in an natural gas and oil lease assigns the working interest or a
portion thereof to another party who desires to drill on the leased acreage.
Generally, the assignee is required to drill one or more wells in order to earn
its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a
"farm-in" while the interest transferred by the assignor is a "farm-out."
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Mcfe/d. One thousand cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids per day.
MMBbls. One million barrels of crude oil or other liquid hydrocarbons.
MMbtu. One million Btus.
G-1
<PAGE> 107
MMcf. One million cubic feet.
MMcf/d. One million cubic feet per day.
MMcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.
Oil. Crude oil and condensate.
Present value. When used with respect to natural gas and oil reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of the date indicated, without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
Proved developed nonproducing reserves. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required from recompletion.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest. An interest in a natural gas and oil property entitling
the owner to a share of oil or gas production free of costs of production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of natural gas and oil regardless of whether such acreage contains proved
reserves.
Working interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
Workover. Operations on a producing well to restore or increase production.
G-2
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Combined Balance Sheets as of December 31, 1996 and 1997.... F-3
Combined Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-4
Combined Statement of Stockholders' Equity for the Years
Ended December 31, 1995, 1996 and 1997.................... F-5
Combined Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Combined Financial Statements...................... F-7
</TABLE>
F-1
<PAGE> 109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying combined balance sheets of The Houston
Exploration Company (a Delaware corporation and an indirect 65%-owned subsidiary
of KeySpan Energy Corporation) as of December 31, 1996 and 1997, and the related
combined statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of The Houston
Exploration Company, as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
January 27, 1998
F-2
<PAGE> 110
THE HOUSTON EXPLORATION COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 2,851 $ 4,745
Accounts receivable......................................... 35,845 37,898
Accounts receivable -- Brooklyn Union....................... -- 1,303
Inventories................................................. 992 1,265
Prepayments and other....................................... 924 645
-------- --------
Total current assets.............................. 40,612 45,856
Natural gas and oil properties, full cost method
Unevaluated properties.................................... 60,258 104,075
Properties subject to amortization........................ 468,062 566,868
Other property and equipment................................ 7,308 9,341
-------- --------
535,628 680,284
Less: Accumulated depreciation, depletion and
amortization.............................................. (176,504) (236,546)
-------- --------
359,124 443,738
Other assets................................................ 1,549 1,797
-------- --------
TOTAL ASSETS...................................... $401,285 $491,391
======== ========
LIABILITIES:
Accounts payable and accrued expenses....................... $ 36,650 $ 42,432
Accounts payable -- Brooklyn Union.......................... 1,010 --
Deferred stock obligation................................... -- 8,825
-------- --------
Total current liabilities......................... 37,660 51,257
Long-term debt.............................................. 65,000 113,000
Deferred federal income taxes............................... 56,475 70,741
Other deferred liabilities.................................. 8,850 206
-------- --------
TOTAL LIABILITIES................................. 167,985 235,204
COMMITMENTS AND CONTINGENCIES (SEE NOTE 10)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000 shares authorized and
23,333
shares issued and outstanding at December 31, 1996 and
23,361
shares issued and outstanding at December 31, 1997..... 233 234
Additional paid-in capital................................ 222,271 221,907
Retained earnings......................................... 10,796 34,046
-------- --------
TOTAL STOCKHOLDERS' EQUITY........................ 233,300 256,187
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $401,285 $491,391
======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 111
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Natural gas and oil revenues.............................. $39,431 $64,864 $116,349
Other..................................................... 1,778 1,040 1,297
------- ------- --------
Total revenues.................................... 41,209 65,904 117,646
OPERATING COSTS AND EXPENSES:
Lease operating........................................... 5,005 10,800 14,146
Severance tax............................................. 463 1,401 4,233
Depreciation, depletion and amortization.................. 21,969 33,732 59,081
General and administrative, net........................... 3,486 6,249 5,825
Nonrecurring charge....................................... 12,000 -- --
------- ------- --------
Total operating expenses.......................... 42,923 52,182 83,285
INCOME (LOSS) FROM OPERATIONS............................... (1,714) 13,722 34,361
Interest expense, net....................................... 2,398 2,875 938
------- ------- --------
Net income (loss) before income taxes....................... (4,112) 10,847 33,423
Provision (benefit) for federal income taxes................ (3,809) 2,205 10,173
------- ------- --------
NET INCOME (LOSS)........................................... $ (303) $ 8,642 $ 23,250
======= ======= ========
Net income (loss) per share................................. $ (0.02) $ 0.49 $ 1.00
======= ======= ========
Net income (loss) per share -- assuming dilution............ $ (0.02) $ 0.49 $ 0.97
======= ======= ========
Weighted average shares outstanding......................... 15,295 17,532 23,337
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 112
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31, 1994....................... $153 $ 86,256 $ 2,457 $ 88,866
Capital contributions from Brooklyn Union(1)..... -- 14,673 -- 14,673
Net loss......................................... -- -- (303) (303)
---- -------- ------- --------
Balance at December 31, 1995....................... $153 $100,929 $ 2,154 $103,236
Capital contributions from Brooklyn Union........ -- 6,342 -- 6,342
8,037 shares of common stock at $15.50(2)........ 80 115,000 -- 115,080
Net income....................................... -- -- 8,642 8,642
---- -------- ------- --------
Balance at December 31, 1996....................... $233 $222,271 $10,796 $233,300
Other(3)......................................... -- (660) -- (660)
28 shares of common stock at $15.50(4)........... 1 296 -- 297
Net income....................................... -- -- 23,250 23,250
---- -------- ------- --------
Balance at December 31, 1997....................... $234 $221,907 $34,046 $256,187
==== ======== ======= ========
</TABLE>
- ---------------
(1) Includes $7.8 million related to the $12.0 million nonrecurring charge, net
of the tax benefit of $4.2 million.
(2) See Note 3 -- Stockholders' Equity.
(3) Non-cash charge relating to the February 1996 Reorganization.
(4) See Note 4 -- Incentive Stock Option Plan.
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 113
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................................... $ (303) $ 8,642 $ 23,250
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization.............. 21,969 33,732 59,081
Deferred income tax expense........................... 9,632 11,939 13,601
Nonrecurring charge................................... 12,000 -- --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......... 977 (10,348) (3,356)
Decrease (increase) in inventories................. 333 217 (273)
Decrease (increase) in prepayments and other....... 416 (29) 279
Decrease (increase) in other assets and
liabilities...................................... 864 909 (62)
Increase in accounts payable and accrued
expenses......................................... 9,890 9,003 4,772
--------- --------- ---------
Net cash provided by operating activities............... 55,778 54,065 97,292
INVESTING ACTIVITIES:
Investment in property and equipment.................... (70,249) (154,125) (145,055)
Dispositions and other.................................. 1,316 1,819 1,360
--------- --------- ---------
Net cash used in investing activities................... (68,933) (152,306) (143,695)
FINANCING ACTIVITIES:
Proceeds from long term borrowings...................... 6,212 76,838 79,000
Repayments of long term borrowings...................... -- (83,700) (31,000)
Proceeds from issuance of common stock, net of offering
costs................................................. -- 101,014 297
Capital contributions from Brooklyn Union............... 6,873 6,342 --
--------- --------- ---------
Net cash provided by financing activities............... 13,085 100,494 48,297
Increase (decrease) in cash and cash equivalents........ (70) 2,253 1,894
Cash and cash equivalents, beginning of period.......... 668 598 2,851
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 598 $ 2,851 $ 4,745
========= ========= =========
Cash paid for interest.................................. $ 4,658 $ 5,708 $ 6,001
========= ========= =========
Cash paid for taxes..................................... $ -- $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 114
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
The Houston Exploration Company ("Houston Exploration" or the "Company"), a
Delaware corporation, was incorporated in December 1985 and began operations in
January 1986 for the purpose of conducting certain natural gas and oil
exploration and development activities for The Brooklyn Union Gas Company
("Brooklyn Union"). Effective September 29, 1997, Brooklyn Union became a
wholly-owned subsidiary of KeySpan Energy Corporation, ("KeySpan"). Prior to the
Company's initial public offering in September 1996 (the "IPO"), the Company was
an indirect wholly-owned subsidiary of Brooklyn Union. Subsequent to the IPO,
Brooklyn Union holds 65% of the Company's outstanding common stock. The
Company's operations focus on the exploration, development and acquisition of
domestic natural gas and oil properties offshore in the Gulf of Mexico and
onshore in South Texas, the Arkoma Basin, East Texas and West Virginia.
Effective February 29, 1996 Brooklyn Union implemented a reorganization of
its exploration and production assets and liabilities by transferring to Houston
Exploration certain onshore producing properties and acreage formerly owned by
Fuel Resources Inc. ("FRI"), another subsidiary of Brooklyn Union. These
combined financial statements have been prepared giving effect to the transfer
of these assets and liabilities from the time of the acquisition of such assets
and liabilities by Brooklyn Union. The transfer of assets and liabilities has
been accounted for at historical cost as a reorganization of companies under
common control in a manner similar to a pooling-of-interests and the 1995
financial statements reflect the combined historical results of Houston
Exploration and the assets and liabilities transferred by Brooklyn Union.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." The statement specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") and is designed to
improve the EPS information provided in the financial statements by simplifying
the existing computation. Primary EPS has been replaced with Basic EPS which is
calculated by dividing net income by the weighted average number of shares of
common stock outstanding during the year. No dilution for any potentially
dilutive securities is included. Fully diluted EPS is now called Diluted EPS and
assumes the conversion of all potentially dilutive securities. The Company
adopted SFAS No. 128 in its December 31, 1997 financial statements and has
presented Diluted EPS for the years 1996 and 1995 which were previously not
required as the dilutive effect of options and contingent shares was less than
3%. As of December 31, 1997, the Company had 2,333,276 options authorized, of
which 1,640,098 were outstanding, and had an estimated 521,509 contingent shares
of common stock payable to Soxco pursuant to the accrued minimum purchase price
of $8.8 million (see Note 12 -- Acquisitions).
F-7
<PAGE> 115
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Under the requirements of SFAS No. 128, the Company's EPS are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)........................................... $ (303) $ 8,642 $23,250
Denominator:
Weighted average shares outstanding......................... 15,295 17,532 23,337
Add: dilutive securities
Options................................................... -- 27 153
Contingent shares......................................... -- 128 538
------- ------- -------
Total weighted average shares outstanding and dilutive
securities................................................ 15,295 17,687 24,028
======= ======= =======
Net income (loss) per share................................. $ (0.02) $ 0.49 $ 1.00
Net income (loss) per share -- assuming dilution............ $ (0.02) $ 0.49 $ 0.97
</TABLE>
Reclassifications and Use of Estimates
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company's most significant financial estimates are based
on remaining proved natural gas and oil reserves. See Note 13 -- Supplemental
Information on Natural Gas and Oil Exploration, Development and Production
Activities. Because there are numerous uncertainties inherent in the estimation
process, actual results could differ from the estimates. Certain
reclassifications for prior years have been made to conform with current year
presentation.
Natural Gas and Oil Properties
Natural gas and oil properties are accounted for using the full cost method
of accounting. Under this method of accounting, all costs identified with
acquisition, exploration and development of natural gas and oil properties,
including leasehold acquisition costs, geological and geophysical costs, dry
hole costs, tangible and intangible drilling costs, interest and the general and
administrative overhead directly associated with these activities are
capitalized as incurred. The Company computes the provision for depreciation,
depletion and amortization of natural gas and oil properties on a quarterly
basis using the unit-of-production method. The quarterly provision is calculated
by multiplying the natural gas and oil production each quarter by a depletion
rate determined by dividing the total unamortized cost of natural gas and oil
properties (including estimates of the costs of future development and property
abandonment and excluding the cost of significant investments in unproved and
unevaluated properties) by net equivalent proved reserves at the beginning of
the quarter. Natural gas and oil reserve quantities represent estimates only.
Actual future production may be materially different from estimated reserve
quantities and such differences could materially affect future amortization of
natural gas and oil properties. The Company believes that unevaluated properties
at December 31, 1997 will be fully evaluated within five years.
Proceeds from the dispositions of natural gas and oil properties are
recorded as reductions of capitalized costs, with no gain or loss recognized,
unless such adjustments significantly alter the relationship of unamortized
capitalized costs and total proved reserves.
The Company limits the capitalized costs of natural gas and oil properties,
net of accumulated depreciation, depletion and amortization and related deferred
taxes to the estimated future net cash flows from proved natural gas and oil
reserves discounted at ten percent, plus the lower of cost or fair value of
unproved properties, as adjusted for related income tax effects (the "full cost
ceiling"). A current period charge to operating income is required to the extent
that capitalized costs plus certain estimated costs for future property
F-8
<PAGE> 116
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
development, plugging, abandonment and site restorations, net of related
accumulated depreciation, depletion and amortization and related deferred income
taxes, exceed the full cost ceiling.
Other Property and Equipment
Other property and equipment include the costs of West Virginia gathering
facilities which are depreciated using the unit-of-production basis utilizing
estimated proved reserves accessible to the facilities. Also included in other
property and equipment are costs of office furniture, fixtures and equipment
which are recorded at cost and depreciated using the straight-line method over
estimated useful lives ranging between two to five years.
Income Taxes
Deferred taxes are determined based on the estimated future tax effect of
differences between the financial statement and tax basis of assets and
liabilities given the provisions of enacted tax laws. These differences relate
primarily to (i) intangible drilling and development costs associated with
natural gas and oil properties, which are capitalized and amortized for
financial reporting purposes and expensed as incurred for tax reporting purposes
and (ii) provisions for depreciation and amortization for financial reporting
purposes that differ from those used for income tax reporting purposes.
Prior to September 30, 1996, the Company was included in the consolidated
federal income tax return of Brooklyn Union. Under the Company's tax sharing
agreement with Brooklyn Union, the Company received or paid to Brooklyn Union an
amount equal to the reduction or increase in the currently payable federal
income taxes for Brooklyn Union resulting from the inclusion of the Company's
taxable income or loss in the consolidated Brooklyn Union return, whether or not
such amounts could be utilized on a separate return basis. For periods
subsequent to September 1996, the Company is no longer included in the
consolidated federal income tax return of Brooklyn Union and therefore
calculates taxes on a separate return basis.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories consist primarily of tubular goods used in the Company's
operations and are stated at the lower of cost or market value.
General and Administrative Costs and Expenses
The Company receives reimbursement for administrative and overhead expenses
incurred on behalf of other working interest owners of properties operated by
the Company. These reimbursements totaling $1.2 million, $1.0 million and $0.9
million for the years ended December 31, 1995, 1996 and 1997, respectively, were
allocated as reductions to general and administrative expenses. The capitalized
general and administrative costs directly related to the Company's acquisition,
exploration and development activities, during 1995, 1996 and 1997, aggregated
$4.1 million, $5.3 million and $7.2 million, respectively.
Capitalization of Interest
The Company capitalizes interest related to its unevaluated natural gas and
oil properties and certain properties under development which are not currently
being amortized. For the years ended December 31, 1995, 1996 and 1997 interest
costs of $2.9 million, $3.5 million and $5.9 million, respectively, were
capitalized.
F-9
<PAGE> 117
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Gas Imbalances
The Company utilizes the entitlements method to account for its gas
imbalances. Under this method, income is recorded based on the Company's net
revenue interest in production or nominated deliveries. Net deliveries in excess
of these amounts are recorded as liabilities, while net under deliveries are
reflected as assets. Production imbalances are valued using current market
prices. Production imbalances were not material as of December 31, 1996 and
1997.
Hedging
The Company utilizes derivative commodity instruments to hedge future sales
prices on a portion of its natural gas production in order to achieve a more
predictable cash flow and to reduce its exposure to adverse price fluctuations.
These instruments include swaps, costless collars and options, and are usually
placed with major financial institutions that the Company believes are minimal
credit risks. The Company's hedging strategies meet the criteria for hedge
accounting treatment under Statement of Financial Accounting Standards No. 80,
"Accounting for Futures Contracts" ("SFAS 80"). Accordingly, gains and losses
are recognized when the underlying transaction is completed, at which time these
gains and losses are included in earnings as a component of natural gas revenues
in accordance with a hedged transaction. Natural gas revenues were increased by
$5.6 million in 1995, and were reduced by $11.1 million and $9.9 million during
1996 and 1997, relative to these contracts. See Note 8 -- Financial Instruments.
The Company regularly assesses the relationship between natural gas
commodity prices in the "cash" and futures markets. The correlation between
prices in these markets has been well within a range generally deemed to be
acceptable. If correlation ceases to exist for more than a temporary period of
time, the Company accounts for its financial instrument positions as trading
activities and marks-to-market its open positions.
The Company also uses interest rate swaps to manage the interest rate
exposure arising from certain borrowings. Swaps used to hedge debt are
designated as hedges and are matched to the debt as to notional amount and
maturity. The periodic receipts or payments from each swap are recognized
ratably over the term of the swap as an adjustment to interest expense. Gains
and losses resulting from the termination of hedge contracts prior to their
stated maturity are recognized ratably over the remaining life of the instrument
being hedged.
Concentration of Credit Risk
Substantially all of the Company's accounts receivable result from natural
gas and oil sales or joint interest billings to third parties in the oil and gas
industry. This concentration of customers and joint interest owners may impact
the Company's overall credit risk in that these entities may be similarly
affected by changes in economic and other conditions. Historically the Company
has not experienced credit losses on such receivables.
New Accounting Pronouncements
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for years beginning after December 15, 1995.
This statement encourages, but does not require companies to record compensation
expense for stock-based compensation at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. Under
APB No. 25, compensation expense is measured as the excess, if any, of the fair
market value of the Company's stock at the date of grant over the price at which
the option was granted. Compensation expense for phantom stock rights is
recorded annually based on the quoted market price of the Company's stock at the
end of the period. See Note 4 -- Incentive Stock Option Plans.
F-10
<PAGE> 118
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure," which consolidates the existing requirements to
disclose certain information about an entity's capital structure, for both
public and nonpublic entities. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components. Also issued in June of 1997
was SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which specifies and revises guidelines for determining an entity's
operating and geographic segments and the type and level of financial
information about those segments to be disclosed. The Company has adopted the
provisions of SFAS Nos. 129, 130 and 131 in its 1997 financial statements. The
adoption of SFAS Nos. 129, 130 and 131 did not have an effect on results of
operations or the calculation of net income.
NOTE 2 -- LONG-TERM DEBT
Credit Facility. On July 2, 1996, the Company entered into a revolving
credit facility ("Credit Facility") with a syndicate of lenders led by Chase
Bank of Texas, National Association ("Chase"), which provides an aggregate
commitment of $150 million, subject to borrowing base limitations, of which $130
million was the available borrowing base at December 31, 1997. In addition, up
to $5 million of the Credit Facility is available for the issuance of letters of
credit to support performance guarantees. The Credit Facility matures on July 1,
2000 and is unsecured. At December 31, 1997, $113 million was outstanding under
the Credit Facility and $1.6 million was outstanding in letter of credit
obligations.
Interest is payable on borrowings under the Credit Facility, at the
Company's option, at an alternate base rate of the greater of the Federal Funds
rate plus 0.5% or Chase's prime rate or at a margin of 0.375% to 1.125% above a
quoted LIBOR rate. Interest is payable at calendar quarters on base rate loans
and at maturity on LIBOR loans. In addition, a commitment fee of: (i) between
0.20% and 0.375% per annum on the unused portion of the Designated Borrowing
Base, and (ii) 33% of the fee in (i) above on the difference between the lower
of the Facility Amount or the Borrowing Base and the Designated Borrowing Base.
The weighted average interest rate was 6.9%, 6.25% and 6.9%, respectively, for
the years ended December 31, 1995, 1996 and 1997.
The Credit Facility, as amended, contains covenants of the Company,
including certain restrictions on liens and financial covenants which require
the Company to, among other things, maintain (i) an interest coverage ratio of
2.5 to 1.0 of earnings before interest, taxes and depreciation ("EBITDA") to
cash interest and (ii) a total debt to capitalization ratio of less than 60%. In
addition to maintenance of certain financial ratios, cash dividends and/or
purchase or redemption of the Company's stock is restricted as well as the
encumbering of the Company's gas and oil assets or the pledging of the assets as
collateral. As of December 31, 1997, the Company was in compliance with all such
covenants.
NOTE 3 -- STOCKHOLDERS' EQUITY
On September 19, 1996, the Company entered into an underwriting agreement
with respect to the Company's IPO of its common stock at a price of $15.50 per
share. The initial closing of the IPO, in which the Company issued 6,200,000
shares of common stock, was completed on September 25, 1996. The underwriters
delivered notice of the exercise of their over-allotment option on September 30,
1996. The closing of the over-allotment, in which the Company issued an
additional 930,000 shares of common stock, was completed on October 3, 1996. The
Company received net proceeds of approximately $101.0 million from the total of
7,130,000 shares sold in the IPO.
Concurrently with the completion of the IPO, the Company's President
exchanged certain of his after program-payout working interests valued at $2.3
million for 145,161 shares of common stock. In addition, concurrently with the
completion of the IPO, the Company issued 762,387 shares of common stock valued
at $11.8 million to Soxco in connection with the Soxco Acquisition. See Note
12 -- Acquisitions.
F-11
<PAGE> 119
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- INCENTIVE STOCK OPTION PLANS
1994 Incentive Plan
On July 1, 1994, the Company adopted the Long-Term Stock Incentive Plan
(the "1994 Incentive Plan"), and granted options to purchase 247,000 shares of
common stock at $11.22 per share to certain officers and directors of Brooklyn
Union. Options under the 1994 Incentive Plan were nonqualified and had tandem
phantom option shares that gave the option holder the right to receive a cash
payment five years from the grant date provided the Company was a privately held
entity. At completion of the Company's IPO on September 20, 1996, all options
under the 1994 Incentive Plan were canceled in exchange for a cash payment by
the Company of $840,000. The Company recorded the $840,000 charge as
compensation expense.
1996 Incentive Plan
At the completion of the IPO, the Company adopted the 1996 Stock Option
Plan (the "1996 Incentive Plan"), which allows the Company to grant options not
to exceed 10% of the shares of the Company's common stock outstanding from time
to time. On September 20, 1996, the Company authorized 2,333,276 options and
subsequently granted 1,697,238 options. The options granted under the 1996
Incentive Plan expire 10 years from the grant date and vest in one-fifth
increments on each of the first five anniversaries of the grant date. During
1997, employees of the Company exercised 28,140 options at a weighted average
price of $15.50. As of December 31, 1997, 266,188 options were vested and
exercisable. No options were exercisable at December 31, 1996.
During 1997, the 1996 Incentive Plan was amended to allow option grants to
non-employee directors of the Company. Options granted to non-employee directors
vest on the date of grant. During 1997 the Company granted 49,000 options to
non-employee directors at a grant price of $20.813.
Under the 1996 Incentive Plan, 1,048,770 of the options granted are
incentive stock options ("ISOs") and the balance, 648,468 are nonqualified stock
options ("NQSOs"). Common stock issued through the exercise of nonqualified
options will result in a tax deduction for the Company equivalent to the taxable
gain recognized by the optionee. Generally, the Company will not receive an
income tax deduction for ISOs.
The following is a summary of option activity during the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997
----------------- ------------------- -------------------
SHARES PRICE* SHARES PRICE* SHARES PRICE*
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of
year....................... 247,000 $11.22 247,000 $11.22 1,239,638 $15.53
Granted.................... -- 1,239,638 15.53 457,600 19.68
Exercised.................. -- -- (28,140) 15.50
Forfeited.................. -- -- (29,000) 15.50
Canceled................... -- (247,000) 11.22 --
------- --------- ---------
Outstanding at end of year... 247,000 $11.22 1,239,638 $15.53 1,640,098 $16.69
------- --------- ---------
Exercisable at end of year... 247,000 $11.22 -- 266,188
Options available for
grant...................... -- 1,093,638 665,038
Weighted average fair value
of options granted......... $ 7.17 $ 7.60
</TABLE>
- ---------------
* Weighted average exercise price for the year.
F-12
<PAGE> 120
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Phantom Stock Rights
On December 16, 1996, the Company granted key employees of Houston
Exploration 176,470 phantom stock rights ("PSRs") that give the holder the right
to receive a cash payment determined by reference to the fair market value of
one share of the Company's common stock. Twenty percent (20%) of the PSRs are
payable on December 16th of each of the years 1997 through 2001. On each date on
which a PSR is payable, the holder will receive a cash payment equal to (i) the
average of the closing prices per share of the Company's common stock for the
five trading days immediately preceding such payment date multiplied by (ii) the
number of PSRs payable on such date. During 1997, the Company made payments of
$0.8 million for the vested portion of PSRs.
Effective October 1, 1997, the Company adopted an incentive compensation
plan for non-employee, non-affiliated directors under which they may defer
current compensation in the form of phantom stock rights that are tied to the
market price of the Common Stock on the date services are performed. Phantom
stock rights are exchanged for a cash distribution upon retirement.
Fair Value of Employee Stock-Based Compensation
The Company accounts for the Incentive Stock Plans using the intrinsic
value method prescribed under APB No. 25 and accordingly no compensation expense
has been recognized for stock options granted. Had stock options been accounted
for using the fair value method as recommended in SFAS No. 123, compensation
expense would have had the following pro forma effect on the Company's net
income and earnings per share for the years ended December 31, 1995, 1996 and
1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss) -- as reported.................... $ (303) $8,642 $23,250
Net income (loss) -- pro forma...................... (303) 8,268 21,499
Net income (loss) per share -- as reported.......... $(0.02) $ 0.49 $ 1.00
Net income (loss) per share -- pro forma............ (0.02) 0.47 0.92
Net income (loss) per share -- pro forma -- assuming
dilution.......................................... (0.02) 0.47 0.89
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1996 and 1997: (i) risk-free interest rate of 6.66% in 1996 and
6.30% in 1997; (ii) expected lives of 5 years; (iii) expected dividends of zero;
and (iv) expected volatility of 41%.
NOTE 5 -- INCOME TAXES
The components of the federal income tax provision (benefit) are:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current.............................................. $(13,441) $(9,734) $(3,428)
Deferred............................................. 9,632 11,939 13,601
-------- ------- -------
Total...................................... $ (3,809) $ 2,205 $10,173
======== ======= =======
</TABLE>
The credit in the current provision for 1997 includes (i) proceeds of $1.2
million received in connection with the sale of Section 29 tax credits to
Brooklyn Union during the first quarter of 1997 (see Note 6 --
F-13
<PAGE> 121
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Related Party Transactions) and (ii) an adjustment to the 1996 tax return.
Amounts received from Brooklyn Union pursuant to the previous tax-sharing
agreement were $14.6 million and $13.7 million in 1995 and 1996, respectively.
No amounts were received in 1997, as effective September 30, 1996, the Company
became a stand alone tax entity and is no longer consolidated with Brooklyn
Union.
The following is a reconciliation of statutory federal income tax expense
(benefit) to the Company's income tax provision:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes..................... $(4,112) $10,847 $33,423
Statutory rate........................................ 35% 35% 35%
Income tax expense (benefit) computed at statutory
rate................................................ (1,439) 3,796 11,698
Reconciling items:
Section 29 tax credits........................... (1,985) (1,401) (1,200)
Percentage depletion............................. (231) (33) (14)
Other............................................ (154) (157) (311)
------- ------- -------
Tax expense (benefit)................................. $(3,809) $ 2,205 $10,173
======= ======= =======
</TABLE>
Deferred Income Taxes
The components of deferred tax assets and liabilities pursuant to SFAS No.
109 for the years ended December 31, 1996 and 1997 primarily represent temporary
differences related to natural gas and oil properties.
NOTE 6 -- RELATED PARTY TRANSACTIONS
Sale of Section 29 Tax Credits
Effective January 1, 1997, the Company entered into an agreement to sell to
a subsidiary of Brooklyn Union certain interests in onshore producing wells of
the Company that produce from formations that qualify for tax credits under
Section 29 of the Internal Revenue Code ("Section 29"). Section 29 provides for
a tax credit from non-conventional fuel sources such as oil produced from shale
and tar sands and natural gas produced from geopressured brine, Devonian shale,
coal seams and tight sands formations. Brooklyn Union acquired an economic
interest in wells that are qualified for the tax credits and in exchange, the
Company (i) retained a volumetric production payment and a net profits interest
of 100% in the properties, (ii) received a cash down payment of $1.4 million and
(iii) will receive a quarterly payment of $0.75 for every dollar of tax credit
utilized. The Company will manage and administer the daily operations of the
properties in exchange for an annual management fee of $100,000. At December 31,
1997, the balance sheet effect of this transaction was a $1.4 million reduction
to the full cost pool for the down payment. The income statement effect for the
year ended December 31, 1997 was a reduction to income tax expense of $1.2
million, representing benefits received from the Section 29 tax credits.
General and Administrative Expense
The Company reimburses Brooklyn Union for certain general and
administrative costs. During the years ended December 31, 1995, 1996 and 1997,
the Company paid Brooklyn Union $0.7 million, $0.6 million and $0.1 million in
general and administrative reimbursements.
F-14
<PAGE> 122
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Gas Sales
In 1992, the Company entered into a term supply agreement with BRING Gas
Services Corp. ("BRING"), an affiliate of Brooklyn Union, at that time. As of
April 1, 1995, this contract was superseded when the Company entered into a term
supply agreement with PennUnion Energy Services, L.L.C. ("PennUnion"), successor
to BRING, and an affiliate of Brooklyn Union. This contract was terminated in
October 1996 with Brooklyn Union's sale of its interest in PennUnion. Under the
terms of the agreement, the Company agreed to sell and PennUnion agreed to buy a
substantial portion of the Company's production at index-related prices. The
agreement contained provisions for both the commitment of gas reserves
subsequently developed or acquired by the Company and the release of gas
reserves sold, traded or exchanged to third parties.
For the years ended December 31, 1995 and 1996 the Company had natural gas
sales of $18.9 million and $26.7 million, respectively, to PennUnion.
Employment Contracts
Prior to the IPO the Company maintained an employment agreement with its
President and Chief Executive Officer which provided him with the option to
participate in up to a 5% working interest in certain prospects of the Company.
During 1995 and 1996, affiliates of the Company's President obtained a 5%
working interest in 144 wells (which includes 142 Charco wells) operated by the
Company pursuant to such agreement. In addition, during 1995, 1996 and 1997,
affiliates of the Company's President paid $0.7 million, $1.4 million and $3.3
million, respectively, in expenses attributable to working interests owned in
properties operated by the Company, and received $0.9 million, $1.6 million and
$3.9 million, respectively, in distributions attributable to such working
interests. See Note 12 -- Acquisitions.
The employment agreement also provided for the assignment to the President
of a 2% net profits interest in all prospects of the Company and a 6.75% after
program-payout working interest. In addition, the employment agreement provided
for the assignment to certain key employees designated by the President of an
overriding royalty interest equivalent in the aggregate to a four percent net
revenue interest in certain properties acquired by the Company. Assignments were
made in two wells during 1995; no assignments were made in 1996 or 1997. Upon
completion of the IPO, the President's employment agreement was terminated and
replaced with a new employment agreement, which does not provide the President
with the option to participate in prospects of the Company or to receive or
grant assignments or after program-payout working interests. In addition to the
Company's President, certain other key employees of the Company entered into
employment agreements upon completion of the IPO.
NOTE 7 -- EMPLOYEE BENEFIT PLANS
401(k) Profit Sharing Plan
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan") for
its employees. Under the 401(k) Plan, eligible employees may elect to have the
Company contribute on their behalf up to 10% of their base compensation (subject
to certain limitations imposed under the Internal Revenue Code of 1986, as
amended) on a before tax basis. The Company makes a matching contribution of
$0.50 for each $1.00 of employee deferral, not to exceed 5% of an employee's
base compensation, subject to limitations imposed by the Internal Revenue
Service. The amounts contributed under the 401(k) Plan are held in a trust and
invested among various investment funds in accordance with the directions of
each participant. An employee's salary deferral contributions under the 401(k)
Plan are 100% vested. The Company's matching contributions vest at the rate of
20% per year of service. Participants are entitled to payment of their vested
account balances upon termination of employment. For the years ended December
31, 1995, 1996 and 1997, Company contributions to the 401(k) Plan were $157,000,
$158,000 and $210,000, respectively.
F-15
<PAGE> 123
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental Executive Plan
Effective immediately prior to the IPO, the Company adopted an unfunded,
nonqualified Supplemental Executive Retirement Plan (the "SERP") for the benefit
of James G. Floyd, the Company's President and Chief Executive Officer. The SERP
provides that, if the executive remains with the Company until age 65, upon his
retirement on or after age 65, the executive will be paid $100,000 per year for
life. If, after retirement, the executive predeceases his spouse, 50% of the
executive's SERP benefit will continue to be paid to the executive's surviving
spouse for her life. During 1997 the Company accrued $123,000 related to the
SERP and in 1996 no amounts were accrued as required accruals were de minimus.
NOTE 8 -- FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1996 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 2,851 $ 2,851 $ 4,745 4,745
Long-term debt................................... 65,000 65,000 113,000 113,000
Derivative transactions:
Interest rate swap agreements:
In a payable position....................... -- (171) -- (169)
Commodity price and basis swaps:
In a payable position.......................... -- (30,286) -- (516)
</TABLE>
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short maturity of
these instruments.
Long-Term Debt
The carrying amount of borrowings outstanding under the Credit Facility
approximates fair value as the interest rate is tied to current market rates.
DERIVATIVE TRANSACTIONS
Interest Rate Swap Agreements
The fair values are obtained from the financial institutions that are
counterparties to the transactions. These values represent the estimated amount
the Company would pay or receive to terminate the agreements, taking into
consideration current interest rates and the current creditworthiness of the
counterparties. The Company's interest rate swap agreements are off balance
sheet transactions and, accordingly, no respective carrying amounts for these
transactions are included in the accompanying combined balance sheets at
December 31, 1997. At December 31, 1997, the Company had two interest rate swap
agreements to exchange an aggregate notional principal of $80.0 million over
various periods from November 1996 through November 1999 at rates between 5.805%
and 6.025%.
Commodity Related Transactions
The Company uses derivative financial instruments for non-trading purposes
as a hedging strategy to reduce the impact of market volatility and to ensure
cash flows. Gains and losses on these hedging transactions are recorded when the
related natural gas has been produced or delivered. While derivative financial
F-16
<PAGE> 124
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
instruments are intended to reduce the Company's exposure to declines in the
market price of natural gas, the derivative financial instruments may limit the
Company's gain from increases in the market price.
The derivative instruments used to hedge commodity transactions have
historically had high correlation with commodity prices and are expected to
continue to do so. The correlation of indices and prices is regularly evaluated
to ensure that the instruments continue to be effective hedges. In the event
that correlation falls below allowable levels, the gains or losses associated
with the hedging instruments are immediately recognized to the extent that
correlation was lost. In December of 1995, the Company recognized a pretax loss
of $0.7 million due to the loss of correlation of the New York Mercantile
Exchange ("NYMEX") futures market for natural gas with the market price for
natural gas in certain parts of the country. The Company's hedges in place at
December 31, 1996 or 1997 did not experience loss of market correlation.
Commodity Price Swaps
Price swap agreements call for one party to make monthly payments to (or
receive from) another party based upon the differential between a fixed and a
variable price (fixed-price swap) or two variable prices (basis swap) for a
notional volume specified by the contract. The fair value is the estimated
amount the Company would receive or pay to terminate swap agreements at
year-end, taking into account the difference between NYMEX natural gas prices or
index prices at year-end and fixed swap prices. NYMEX natural gas price closed
at $3.61 per MMbtu and $2.68 per MMbtu at December 31, 1996 and 1997,
respectively. At December 31, 1996 and 1997, the Company had fixed-price swap
agreements and basis swap agreements to exchange a total notional volume of
23,278 MMbtu and 5,410 MMbtu, respectively, of natural gas over the period
January 1996 through March 1998. The Company has no hedges in place past March
1998.
The Company is exposed to credit risk in the event of nonperformance by
counterparties to futures and swaps contracts. The Company believes that the
credit risk related to the futures and swap contracts is no greater than that
associated with the primary contracts which they hedge, as these contracts are
with major investment grade financial institutions, and that elimination of the
price risk lowers the Company's overall business risk.
NOTE 9 -- SALES TO MAJOR CUSTOMERS
As is the nature of the exploration, development and production business,
production is normally sold to relatively few customers. However, alternate
buyers are available to replace the loss of any of the Company's major
customers. For year ended December 31, 1995, PennUnion was the only customer for
which natural gas sales exceeded 10% of total revenues and during 1995 sales to
PennUnion comprised 46% of total revenues. For the year ended December 31, 1996,
the Company sold natural gas production representing more than 10% of its total
revenues to PennUnion (40%) and H&N Gas Ltd. (27%). For the year ended December
31, 1997, the Company's only customer to whom sales of natural gas production
represented more than 10% of its total revenues was H&N Gas Ltd. (38%). The
Company believes that prices at which it sold gas to PennUnion were similar to
those it would be able to obtain in the open market. The Company also believes
that the loss of H&N Gas Ltd. as a purchaser would not have a material adverse
effect on the Company's operations. See Note 6 -- Related Party Transactions.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved from time to time in various claims and lawsuits
incidental to its business. In the opinion of management, the ultimate liability
thereunder, if any, will not have a material adverse effect on the financial
position or results of operations of the Company.
F-17
<PAGE> 125
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Leases
The Company has entered into certain noncancelable operating lease
agreements relative to office space and equipment with various expiration dates
through 2002. Minimum rental commitments under the terms of the leases are as
follows:
<TABLE>
<CAPTION>
MINIMUM NET MINIMUM
RENTAL SUBLEASE RENTAL
COMMITMENTS RENTALS COMMITMENTS
----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1998............................................ $743 $(246) $497
1999............................................ 750 (250) 500
2000............................................ 753 (252) 501
2001............................................ 513 (84) 429
2002............................................ 460 -- 460
Thereafter...................................... $877 $ -- $877
</TABLE>
Net rental expense related to these leases was $0.3 million for each of the
years ended December 31, 1997, 1996 and 1995.
NOTE 11 -- NONRECURRING CHARGE
In connection with the February 1996 reorganization in which Brooklyn Union
transferred certain onshore producing properties and acreage to the Company,
certain former employees of FRI, the subsidiary of Brooklyn Union that
previously owned the onshore properties, were entitled to remuneration for the
increase in the value of the transferred properties prior to the reorganization.
The Company incurred a $12 million non-cash charge in the quarter ended December
31, 1995 with respect to the remuneration to which such employees of FRI were
entitled.
NOTE 12 -- ACQUISITIONS
TransTexas
On July 2, 1996, the Company acquired certain natural gas and oil
properties and associated gathering pipelines and equipment located in Zapata
County, Texas (the "TransTexas Acquisition") from TransTexas Gas Corporation and
TransTexas Transmission Corporation (together, "TransTexas"). The Company
acquired a 100% working interest (95% after the exercise by James G. Floyd, the
Company's President and Chief Executive Officer, of his right to purchase a 5%
working interest) in the approximately 142 wells on such properties. The
purchase price of $62.2 million ($59.1 million after giving effect to the
exercise of Mr. Floyd's purchase option) for the TransTexas Acquisition was
reduced by $3.1 million for production revenue and expenses related to the
assets between the May 1, 1996 effective date of the TransTexas Acquisition and
July 2, 1996. The purchase price of the TransTexas Acquisition was paid in cash,
financed with borrowings under the Company's Credit Facility.
The Company loaned Mr. Floyd the $3.1 million purchase price for his
purchase of a 5% working interest in the properties purchased by the Company in
the TransTexas Acquisition. In addition, the Company has agreed to loan Mr.
Floyd, on a revolving basis, the amounts required to fund the expenses
attributable to Mr. Floyd's working interest. Mr. Floyd is required to repay
amounts owed under the loan in the amount of 65% of all distributions received
by Mr. Floyd in respect of such working interest, as distributions are received.
Amounts outstanding under such loan bear interest at an interest rate equal to
the Company's cost of borrowing under the Credit Facility. Mr. Floyd's
obligations under the agreement are secured by a pledge of his working interest
in, and the production from, such properties. As of December 31, 1997, the
outstanding balance owed by Mr. Floyd under the agreement was $3.7 million and
the loan will mature on July 2, 2006.
F-18
<PAGE> 126
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Soxco
On September 25, 1996, the Company acquired substantially all of the
natural gas and oil properties and related assets (the "Soxco Acquisition") of
Smith Offshore Exploration Company ("Soxco"). The natural gas and oil properties
acquired in the Soxco Acquisition consisted solely of working interests in
properties located in the Gulf of Mexico that are operated by the Company or in
which the Company also has a working interest. Pursuant to the Soxco
Acquisition, the Company paid Soxco cash in the aggregate amount of $20.3
million (net of $3.4 million for certain purchase price adjustments), and issued
to Soxco 762,387 shares of common stock with an aggregate value (determined by
reference to the IPO price) of $11.8 million. The cash portion of the purchase
price was funded with the proceeds of the IPO. In addition to the foregoing, the
Company will pay Soxco a deferred purchase price of up to $17.6 million
effective January 31, 1998. The amount of the deferred purchase price will be
determined by the probable reserves of Soxco as of December 31, 1995
(approximately 17.6 Bcfe) that are produced prior to or classified as proved as
of December 31, 1996 and December 31, 1997, respectively, provided that Soxco is
entitled to receive a minimum deferred purchase price of approximately $8.8
million. The amounts so determined will be paid in shares of common stock based
on the fair market value of such stock at the time of issuance. At December 31,
1997, the Company believes it is probable that only the minimum payment will be
required and as a result, $8.8 million has been accrued and reflected in current
liabilities.
Pending Acquisition
On January 12, 1998, the Company entered into a non-binding letter of
intent with respect to the acquisition of natural gas and oil properties located
onshore in South Louisiana, representing 45 Bcfe of net proved reserves (the
"South Louisiana Acquisition"). The average net production in December 1997
attributable to such properties was approximately 14 Mmcfe per day, net to the
Company's interest. The non-binding letter of intent provides for the Company to
pay $60 million for the properties to be acquired. The estimated purchase price
of $60 million is less than 10% of the Company's total assets and income
generated from these properties for the year ended December 31, 1997 was
estimated to be less than 20% of the Company's income from operations.
NOTE 13 -- SUPPLEMENTAL INFORMATION ON NATURAL GAS AND OIL EXPLORATION,
DEVELOPMENT AND PRODUCTION ACTIVITIES
The following information concerning the Company's natural gas and oil
operations has been provided pursuant to Statement of Financial Accounting
Standards No. 69, "Disclosures about Oil and Gas Producing Activities." The
Company's natural gas and oil producing activities are conducted onshore within
the continental United States and offshore in federal and state waters of the
Gulf of Mexico. The Company's natural gas and oil reserves were estimated by
independent reserve engineers.
Capitalized Costs of Natural Gas and Oil Properties
As of December 31, 1995, 1996 and 1997, the Company's capitalized costs of
natural gas and oil properties are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Unevaluated properties, not amortized.............. $ 42,286 $ 60,258 $ 104,075
Properties subject to amortization................. 309,378 468,062 566,868
--------- --------- ---------
Capitalized costs.................................. 351,664 528,320 670,943
Accumulated depreciation, depletion and
amortization..................................... (137,769) (171,258) (229,776)
--------- --------- ---------
Net capitalized costs.................... $ 213,895 $ 357,062 $ 441,167
========= ========= =========
</TABLE>
F-19
<PAGE> 127
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the costs (in thousands) which are excluded
from the amortization calculation as of December 31, 1997, by year of
acquisition. The Company is not able to accurately predict when these costs will
be included in the amortization base; however, the Company believes that
unevaluated properties at December 31, 1997 will be fully evaluated within five
years.
<TABLE>
<CAPTION>
<S> <C>
1997...................................................... $ 46,546
1996...................................................... 33,168
1995...................................................... 13,097
Prior..................................................... 11,264
--------
$104,075
========
</TABLE>
Costs incurred for natural gas and oil exploration, development and
acquisition are summarized below. Costs incurred during the years ended December
31, 1995, 1996 and 1997 include interest expense, general and administrative
costs related to acquisition, exploration and development of natural gas and oil
properties, of $7.0 million, $8.8 million and $13.1 million, respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Leasehold and acquisition:
Unevaluated(1)....................................... $ 9,902 $ 23,317 $ 16,613
Proved............................................... 11,137 94,774 24,007
Exploration costs...................................... 7,224 27,398 44,119
Development costs...................................... 41,163 31,243 59,244
------- -------- --------
Total costs incurred......................... $69,426 $176,732 $143,983
======= ======== ========
</TABLE>
- ---------------
(1) These amounts represent costs incurred by the Company and excluded from the
amortization base until proved reserves are established or impairment is
determined.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas and Oil Reserves (unaudited)
The following summarizes the policies used by the Company in the
preparation of the accompanying natural gas and oil reserve disclosures,
standardized measures of discounted future net cash flows from proved natural
gas and oil reserves and the reconciliations of such standardized measures from
year to year. The information disclosed, as prescribed by the Statement of
Financial Accounting Standards No. 69 is an attempt to present such information
in a manner comparable with industry peers.
The information is based on estimates of proved reserves attributable to
the Company's interest in natural gas and oil properties as of December 31 of
the years presented. These estimates were principally prepared by independent
petroleum consultants. Proved reserves are estimated quantities of natural gas
and crude oil which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
The standardized measure of discounted future net cash flows from
production of proved reserves was developed as follows:
1. Estimates are made of quantities of proved reserves and future
periods during which they are expected to be produced based on year-end
economic conditions.
F-20
<PAGE> 128
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. The estimated future cash flows are compiled by applying year-end
prices of natural gas and oil relating to the Company's proved reserves to
the year-end quantities of those reserves except for those reserves devoted
to future production that is hedged. The estimated future cash flows
associated with such reserves are compiled by applying the reference prices
of such hedges to the future production that is hedged. Future price
changes are considered only to the extent provided by contractual
arrangements in existence at year-end.
3. The future cash flows are reduced by estimated production costs,
costs to develop and produce the proved reserves and certain abandonment
costs, all based on year-end economic conditions.
4. Future income tax expenses are based on year-end statutory tax
rates giving effect to the remaining tax basis in the natural gas and oil
properties, other deductions, credits and allowances relating to the
Company's proved natural gas and oil reserves.
5. Future net cash flows are discounted to present value by applying a
discount rate of 10 percent.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of the
Company's natural gas and oil reserves. An estimate of fair value would also
take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
The standardized measure of discounted future net cash flows relating to
proved natural gas and oil reserves is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------
1995 1996 1997
-------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows.............................. $418,822 $1,117,058 $ 781,336
Future production costs.......................... (66,458) (153,452) (135,437)
Future development costs......................... (24,803) (67,966) (84,658)
Future income taxes.............................. (74,933) (230,316) (124,510)
-------- ---------- ---------
Future net cash flows............................ 252,628 665,324 436,731
10% annual discount for estimated timing of cash
flows.......................................... (81,169) (212,742) (121,351)
-------- ---------- ---------
Standardized measure of discounted future net
cash flows..................................... $171,459 $ 452,582 $ 315,380
======== ========== =========
</TABLE>
Future cash inflows include the effect of hedges in place at year end
December 31, 1995, 1996 and 1997. At December 31, 1995, 1996, and 1997 the
effect of the hedges in place is a reduction to future cash inflows of $4.4
million, $28.7 million and $0.5 million, respectively.
F-21
<PAGE> 129
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1995 1996 1997
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of the year............................. $118,434 $171,459 $ 452,582
Revisions to previous estimates:
Changes in prices and costs..................... 35,497 145,385 (223,169)
Changes in quantities........................... 11,306 (19,132) (23,156)
Changes in future development costs............. 531 (14,068) (20,499)
Development costs incurred during the period...... 8,074 19,594 16,154
Extensions and discoveries, net of related
costs........................................... 51,061 46,616 114,893
Sales of natural gas and oil, net of production
costs........................................... (34,843) (52,663) (97,968)
Accretion of discount............................. 12,815 20,652 57,700
Net change in income taxes........................ (24,720) (89,353) 62,733
Purchase of reserves in place..................... 11,189 251,713 2,463
Sale of reserves in place......................... (19) (723) (608)
Production timing and other....................... (17,866) (26,898) (25,745)
-------- -------- ---------
End of year....................................... $171,459 $452,582 $ 315,380
======== ======== =========
</TABLE>
ESTIMATED NET QUANTITIES OF NATURAL GAS AND OIL RESERVES (UNAUDITED)
The following table sets forth the Company's net proved reserves, including
changes therein, and proved developed reserves (all within the United States) at
the end of each of the three years in the period ended December 31, 1995, 1996
and 1997.
<TABLE>
<CAPTION>
NATURAL GAS CRUDE OIL AND CONDENSATE
(MMCF) (MBBLS)
----------------------------- -------------------------
1995 1996 1997 1995 1996 1997
------- ------- ------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:.... 145,945 195,946 320,474 636 889 1,131
Revisions of previous
estimates............. 15,702 (8,665) (18,743) 51 (157) (62)
Extensions and
discoveries........... 45,014 21,445 75,651 254 198 184
Production............... (21,077) (31,215) (50,310) (100) (118) (171)
Purchase of reserves
in place.............. 10,367 143,688 3,778 48 361 1
Sales of reserves in
place................. (5) (725) (249) -- (42) (6)
------- ------- ------- ---- ----- -----
End of year................ 195,946 320,474 330,601 889 1,131 1,077
======= ======= ======= ==== ===== =====
Proved developed reserves:
Beginning of year........ 104,678 162,784 236,544 328 774 1,013
End of year.............. 162,784 236,544 256,632 774 1,013 914
</TABLE>
F-22
<PAGE> 130
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected unaudited quarterly data is shown below:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Total revenues.......................... $10,213 $11,574 $19,171 $24,946
Income from operations.................. 1,219 2,661 2,740 7,102
Net income (loss)....................... 976 1,813 1,267 4,586
Net income per share(1)................. $ 0.06 $ 0.12 $ 0.08 $ 0.20
Net income per share -- assuming
dilution............................. $ 0.06 $ 0.12 $ 0.08 $ 0.19
1997
Total revenues.......................... $25,328 $22,220 $29,312 $40,786
Income from operations.................. 8,287 4,337 8,065 13,672
Net income.............................. 5,693 3,442 5,525 8,590
Net income per share.................... $ 0.24 $ 0.15 $ 0.24 $ 0.37
Net income per share -- assuming
dilution............................. $ 0.24 $ 0.14 $ 0.23 $ 0.35
</TABLE>
- ---------------
(1) Quarterly earnings per share are based on the weighted average number of
shares outstanding during the quarter. Because of the increase in the number
of shares outstanding during the third quarter of 1996, the sum of quarterly
earnings per share do not equal earnings per share for the year.
F-23
<PAGE> 131
======================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
By Mail:
THE BANK OF NEW YORK
Tender and Exchange Department
P. O. Box 11248
Church Street Station
New York, NY 10286-1248
By Overnight Courier or Hand Delivery:
THE BANK OF NEW YORK
Tender and Exchange Department
101 Barclay Street
Receive & Deliver Window
New York, NY 10286
By Facsimile Transmission:
(for Eligible Institutions only)
(212) 815-5915
Attention: Remo J. Reale
Confirm by Telephone:
(212) 815-3703
(Originals of all documents submitted by facsimile should be sent promptly by
hand, overnight delivery, or registered or certified mail.)
---------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE INITIAL PURCHASERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO
BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
======================================================
======================================================
$100,000,000
(HOUSTON EXPLORATION LOGO)
8 5/8% SENIOR SUBORDINATED
NOTES DUE 2008
-----------------
PROSPECTUS
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Disclosure Regarding Forward-Looking
Statements.......................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 16
The Company........................... 23
The Exchange Offer.................... 24
Use of Proceeds....................... 32
Capitalization........................ 32
Selected Combined Financial Data...... 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Business.............................. 42
Management............................ 60
Certain Transactions.................. 63
Description of the Notes.............. 66
Certain United States Federal Income
Tax Considerations.................. 99
Plan of Distribution.................. 101
Legal Matters......................... 102
Independent Public Accountants........ 102
Reserve Engineers..................... 102
Available Information................. 102
Incorporation of Certain Information
by Reference........................ 103
Glossary of Oil and Gas Terms......... G-1
Index to Financial Statements......... F-1
</TABLE>
, 1998
======================================================
<PAGE> 132
PART II
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason for the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless sand only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expense which the Court of Chancery or such other
court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defenses of
any action, suit or proceeding referred to in subsections (a) and (b) of Section
145 in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; that indemnification provided for by Section
145 shall, unless otherwise provided when authorized or ratified, continue as to
a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of such person's heirs, executors and administrators; and
empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
Section 5.07 of the Company's Certificate of Incorporation states that:
(a) No person who is or was a director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the Corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law,
II-1
<PAGE> 133
(iii) under Section 174 of the DGCL or (iv) for any transaction from which
the director derived an improper personal benefit.
(b) If the DGCL is hereafter amended to authorize corporate action
further limiting or eliminating the personal liability of directors, then
the personal liability of the directors to the Corporation or its
stockholders shall be limited or eliminated to the full extent permitted by
the DGCL, as so amended from time to time.
In addition, Article VI of the Company's Certificate of Incorporation and
Article VIII of the Company's Bylaws further provide that the Company shall
indemnify its officers, directors and employees to the fullest extent permitted
by law.
The Company has entered into indemnification agreements with each of its
directors and executive officers.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.1 -- Indenture, dated as of March 2, 1998 between The Houston
Exploration Company and The Bank of New York, as Trustee,
with respect to the 8 5/8% Senior Subordinated Notes Due
2008 (including form of 8 5/8% Senior Subordinated Note
Due 2008).
4.2 -- Registration Rights Agreement, dated as of March 2, 1998,
among The Houston Exploration Company, as issuer, and
Donaldson, Lufkin & Jenrette Securities Corporation,
Salomon Brothers Inc, PaineWebber Incorporated, Chase
Securities Inc., and Howard, Weil, Labouisse, Friedrichs
Incorporated.
5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of
the securities being registered.
12.1 -- Computation of ratio of earnings to fixed charges.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit
5.1).
23.3 -- Consent of Netherland, Sewell & Associates.
23.4 -- Consent of Miller and Lents.
23.5 -- Consent of Ryder Scott Company.
23.6 -- Consent of Huddleston & Co., Inc.
24.1 -- Power of Attorney (set forth on the signature pages
contained in Part II of this Registration Statement).
25.1 -- Statement of Eligibility and Qualification of Form T-1 of
The Bank of New York.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
FINANCIAL STATEMENT SCHEDULES
None.
II-2
<PAGE> 134
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however, that paragraphs (1)(i) and (I)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 135
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 136
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Houston, State of Texas, on the 15th
day of April, 1998.
THE HOUSTON EXPLORATION COMPANY
By: /s/ JAMES G. FLOYD
----------------------------------
James G. Floyd
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below does hereby appoint James G.
Floyd and James F. Westmoreland, and each of them severally, his or her true and
lawful attorneys or attorney-in-fact and agents or agent with power to act with
or without the others and with full power of substitution and resubstitution, to
execute for him and in his name, place and stead, in his capacity as a director
or officer or both, as the case may be, of The Houston Exploration Company, any
and all amendments to this Registration Statement, including post-effective
amendments, as said attorneys or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to me, the same or cause the same to be filed with the Securities
and Exchange Commission. Each of said attorneys shall have full power and
authority to do and perform in the name and on behalf of the undersigned, in any
and all capacities, every act whatsoever necessary or desirable to be done in
the premises, as fully and to all intents and purposes as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES G. FLOYD President, Chief Executive April 15, 1998
- ----------------------------------------------------- Officer and Director
James G. Floyd (Principal Executive Officer)
/s/ JAMES F. WESTMORELAND Vice President, Chief April 15, 1998
- ----------------------------------------------------- Accounting Officer,
James F. Westmoreland Comptroller and Secretary
(Principal Financial Officer)
/s/ ROBERT B. CATELL Chairman of the Board of April 15, 1998
- ----------------------------------------------------- Directors
Robert B. Catell
/s/ CRAIG G. MATTHEWS Director April 15, 1998
- -----------------------------------------------------
Craig G. Matthews
/s/ RUSSELL D. GORDY Director April 15, 1998
- -----------------------------------------------------
Russell D. Gordy
/s/ GORDON F. AHALT Director April 15, 1998
- -----------------------------------------------------
Gordon F. Ahalt
</TABLE>
II-5
<PAGE> 137
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES Q. RIORDAN Director April 15, 1998
- -----------------------------------------------------
James Q. Riordan
/s/ LESTER H. SMITH Director April 15, 1998
- -----------------------------------------------------
Lester H. Smith
/s/ DONALD C. VAUGHN Director April 15, 1998
- -----------------------------------------------------
Donald C. Vaughn
</TABLE>
II-6
<PAGE> 138
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.1 -- Indenture, dated as of March 2, 1998 between The Houston
Exploration Company and The Bank of New York, as Trustee,
with respect to the 8 5/8% Senior Subordinated Notes Due
2008 (including form of 8 5/8% Senior Subordinated Note
Due 2008).
4.2 -- Registration Rights Agreement, dated as of March 2, 1998,
among The Houston Exploration Company, as issuer, and
Donaldson, Lufkin & Jenrette Securities Corporation,
Salomon Brothers Inc, PaineWebber Incorporated, Chase
Securities Inc., and Howard, Weil, Labouisse, Friedrichs
Incorporated.
5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of
the securities being registered.
12.1 -- Computation of ratio of earnings to fixed charges.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit
5.1).
23.3 -- Consent of Netherland, Sewell & Associates.
23.4 -- Consent of Miller and Lents.
23.5 -- Consent of Ryder Scott Company.
23.6 -- Consent of Huddleston & Co., Inc.
24.1 -- Power of Attorney (set forth on the signature pages
contained in Part II of this Registration Statement).
25.1 -- Statement of Eligibility and Qualification of Form T-1 of
The Bank of New York.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
<PAGE> 1
EXHIBIT 4.1
EXECUTION COPY
THE HOUSTON EXPLORATION COMPANY
8-5/8% SENIOR SUBORDINATED NOTES DUE 2008
-------------------------
INDENTURE
Dated as of March 2, 1998
-------------------------
-------------------------
The Bank of New York
-------------------------
Trustee
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE............................... 1
Section 1.1. Definitions................................................................ 1
Section 1.2. Other Definitions.......................................................... 24
Section 1.3. Incorporation by Reference of Trust
Indenture Act............................................................ 24
Section 1.4. Rules of Construction...................................................... 24
Section 1.5. Compliance Certificates and Opinions....................................... 25
Section 1.6. Form of Documents Delivered To Trustee..................................... 26
Section 1.7. Acts of Holders............................................................ 26
ARTICLE 2
THE NOTES................................................ 28
Section 2.1. Form and Dating............................................................ 28
Section 2.2. Execution and Authentication............................................... 29
Section 2.3. Registrar and Paying Agent................................................. 29
Section 2.4. Paying Agent to Hold Money in Trust........................................ 30
Section 2.5. Holder Lists............................................................... 30
Section 2.6. Transfer and Exchange...................................................... 30
Section 2.7. Replacement Notes.......................................................... 45
Section 2.8. Outstanding Notes.......................................................... 45
Section 2.9. Treasury Notes............................................................. 46
Section 2.10. Temporary Notes............................................................ 46
Section 2.11. Cancellation............................................................... 46
Section 2.12. Defaulted Interest......................................................... 46
Section 2.13. CUSIP Numbers.............................................................. 47
ARTICLE 3
REDEMPTION AND PREPAYMENT....................................... 48
Section 3.1. Applicability of Article................................................... 48
Section 3.2. Election to Redeem; Notice to Trustee...................................... 48
Section 3.3. Selection by Trustee of Notes to Be
Redeemed................................................................. 48
Section 3.4. Notice of Redemption....................................................... 48
Section 3.5. Deposit of Redemption Price................................................ 49
Section 3.6. Notes Payable on Redemption Date........................................... 50
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
Section 3.7. Notes Redeemed in Part..................................................... 50
Section 3.8. Optional Redemption........................................................ 50
Section 3.9. Mandatory Redemption....................................................... 51
Section 3.10. Offer to Purchase by Application of
Excess Proceeds.......................................................... 51
ARTICLE 4
COVENANTS................................................ 54
Section 4.1. Payment of Principal, Premium and
Interest................................................................. 54
Section 4.2. Maintenance of Office or Agency............................................ 54
Section 4.3. Money for Security Payments to be Held
in Trust................................................................. 55
Section 4.4. Reports.................................................................... 56
Section 4.5. Statement as to Compliance; Notice of
Default.................................................................. 57
Section 4.6. Payment of Taxes and Other Claims.......................................... 58
Section 4.7. Limitation on Liens........................................................ 58
Section 4.8. Corporate Existence........................................................ 58
Section 4.9. Offer to Repurchase Upon Change of
Control.................................................................. 59
Section 4.10. Asset Sales................................................................ 61
Section 4.11. Limitation on Restricted Payments.......................................... 63
Section 4.12. Limitation on Incurrence of Indebtedness
and Issuance of Preferred Stock.......................................... 66
Section 4.13. Transactions with Affiliates............................................... 69
Section 4.14. Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries........................................ 70
Section 4.15. Limitations on Guarantees of
Indebtedness by Restricted Subsidiaries
....................................................................... 70
Section 4.16. Limitation on Other Senior Subordinated
Indebtedness............................................................. 72
Section 4.17. Limitation as to Unrestricted
Subsidiaries............................................................. 72
Section 4.18. Line of Business........................................................... 72
Section 4.19. Effectiveness of Covenants................................................. 72
ARTICLE 5
SUCCESSORS................................................ 73
Section 5.1. Merger, Consolidation, or Sale of All or
Substantially All Assets................................................. 73
Section 5.2. Successor Corporation Substituted.......................................... 74
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE 6
DEFAULTS AND REMEDIES......................................... 74
Section 6.1. Events of Default and Notice Thereof....................................... 74
Section 6.2. Acceleration of Maturity; Rescission....................................... 76
Section 6.3. Other Remedies............................................................. 77
Section 6.4. Waiver of Past Defaults.................................................... 77
Section 6.5. Control by Majority........................................................ 77
Section 6.6. Limitation on Suits........................................................ 78
Section 6.7. Rights of Holders of Notes to Receive
Payment.................................................................. 78
Section 6.8. Collection Suit by Trustee................................................. 78
Section 6.9. Trustee May File Proofs of Claim........................................... 78
Section 6.10. Priorities................................................................. 79
Section 6.11. Undertaking for Costs...................................................... 80
Section 6.12. Waiver of Stay, Extension of Usury Laws.................................... 80
ARTICLE 7
TRUSTEE................................................. 80
Section 7.1. Duties of Trustee.......................................................... 80
Section 7.2. Rights of Trustee.......................................................... 81
Section 7.3. Individual Rights of Trustee............................................... 82
Section 7.4. Trustee's Disclaimer....................................................... 82
Section 7.5. Notice of Defaults......................................................... 83
Section 7.6. Reports by Trustee to Holders of the
Notes.................................................................... 83
Section 7.7. Compensation and Indemnity................................................. 83
Section 7.8. Replacement of Trustee..................................................... 84
Section 7.9. Successor Trustee by Merger, Etc........................................... 85
Section 7.10. Eligibility; Disqualification.............................................. 86
Section 7.11. Preferential Collection of Claims
Against the Company...................................................... 86
Section 7.12. Rights of Holders with Respect to Time,
Method and Place......................................................... 86
Section 7.13. Trustee's Application for Instructions
from the Company......................................................... 86
ARTICLE 8
DEFEASANCE AND COVENANT DEFEASANCE..................................... 87
Section 8.1. Option to Effect Defeasance or Covenant
Defeasance............................................................... 87
Section 8.2. Defeasance and Discharge................................................... 87
</TABLE>
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<TABLE>
<S> <C> <C>
Section 8.3. Covenant Defeasance........................................................ 87
Section 8.4. Conditions to Defeasance or Covenant
Defeasance............................................................... 88
Section 8.5. Deposited Money and U.S. Government
Obligations to be Held in Trust; Other
Miscellaneous Provisions................................................. 89
Section 8.6. Reinstatement.............................................................. 90
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER.................................... 91
Section 9.1. Without Consent of Holders of Notes........................................ 91
Section 9.2. With Consent of Holders of Notes........................................... 91
Section 9.3. Compliance with TIA........................................................ 93
Section 9.4. Revocation and Effect of Consents.......................................... 93
Section 9.5. Notation on or Exchange of Notes........................................... 94
Section 9.6. Trustee to Sign Amendments, Etc............................................ 94
ARTICLE 10
SUBORDINATION............................................... 94
Section 10.1. Agreement to Subordinate................................................... 94
Section 10.2. Liquidation; Dissolution; Bankruptcy....................................... 94
Section 10.3. Default on Designated Senior Debt.......................................... 95
Section 10.4. Acceleration of Securities................................................. 95
Section 10.5. When Distribution Must Be Paid Over........................................ 96
Section 10.6. Notice by Company.......................................................... 96
Section 10.7. Subrogation................................................................ 97
Section 10.8. Relative Rights............................................................ 97
Section 10.9. Subordination May Not Be Impaired by
Company.................................................................. 97
Section 10.10. Distribution or Notice to Representative
........................................................................ 98
Section 10.11. Rights of Trustee and Paying Agent......................................... 98
Section 10.12. Authorization to Effect Subordination...................................... 98
ARTICLE 11
SATISFACTION AND DISCHARGE...................................... 99
Section 11.1. Satisfaction and Discharge of Indenture.................................... 99
Section 11.2. Application of Trust Money.................................................100
ARTICLE 12
MISCELLANEOUS..............................................100
</TABLE>
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<PAGE> 6
<TABLE>
<S> <C> <C>
Section 12.1. Conflict of Any Provision of Indenture
with TIA.................................................................100
Section 12.2. Notices....................................................................100
Section 12.3. Communication by Holders of Notes with
Other Holders of Notes...................................................102
Section 12.4. Certificate and Opinion as to Conditions
Precedent................................................................102
Section 12.5. Legal Holidays.............................................................102
Section 12.6. No Personal Liability of Directors,
Officers, Employees and Stockholders.....................................102
Section 12.7. Governing Law..............................................................103
Section 12.9. No Adverse Interpretation of Other
Agreements...............................................................104
Section 12.10. Successors and Assigns.....................................................104
Section 12.11. Severability...............................................................104
Section 12.12. Counterpart Originals......................................................104
Section 12.13. Table of Contents, Headings, Etc...........................................104
</TABLE>
ANNEXES
Annex A Specified Property
EXHIBITS
Exhibit A-1 Form of Restricted Definitive Note, IAI Global
Note, Regulation S Global Note and Rule 144 A
Global Note
Exhibit A-2 Form of Unrestricted Note
Exhibit B Form of Certificate of Transfer
Exhibit C Form of Certificate of Exchange
Exhibit D Form of Certificate from Acquiring Institutional
Accredited Investor
Exhibit E Form of Supplemental Indenture to be Delivered by
Subsidiary Guarantors
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<PAGE> 7
CROSS-REFERENCE TABLE(*)
<TABLE>
<CAPTION>
Trust Indenture
Act Section Indenture Section
<S> <C>
310(a)(1)................................................................................... 7.10
(a)(2)................................................................................... 7.10
(a)(3)................................................................................... N.A.
(a)(4)................................................................................... N.A.
(a)(5)................................................................................... 7.10
(b)...................................................................................... 7.10
(c)...................................................................................... N.A.
311(a)...................................................................................... 7.11
(b)...................................................................................... 7.11
(c)...................................................................................... N.A.
312(a)...................................................................................... 11.3
(b)...................................................................................... 11.3
(c)...................................................................................... 11.3
313(a)...................................................................................... 7.6
(b)(1)................................................................................... N.A.
(b)(2)................................................................................... 7.6; 7.7
(c)...................................................................................... 7.6; 10.2
(d)...................................................................................... 7.6
314(a)...................................................................................... 4.4; 11.2
(b)...................................................................................... N.A.
(c)(1)................................................................................... 11.4
(c)(2)................................................................................... 11.4
(c)(3)................................................................................... N.A.
(d)...................................................................................... N.A.
(f)...................................................................................... N.A.
315(a)...................................................................................... 7.1
(b)...................................................................................... 7.5; 11.2
(c)...................................................................................... 7.1
(d)...................................................................................... 7.1
(e)...................................................................................... 6.11
316(a)(last sentence)....................................................................... 2.9
(a)(1)(A)................................................................................ 6.5
(a)(1)(B)................................................................................ 6.4
(a)(2)................................................................................... N.A.
(b)...................................................................................... 6.7
</TABLE>
- --------------------
*/ This Cross-Reference Table is not part of the Indenture.
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<PAGE> 8
<TABLE>
<S> <C>
317(a)(1)................................................................................... 6.8
(a)(2)................................................................................... 6.9
(b)...................................................................................... 2.4
318(a)...................................................................................... 11.1
(b)...................................................................................... N.A.
(c)...................................................................................... 11.1
N.A. means not applicable.
</TABLE>
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<PAGE> 9
INDENTURE dated as of March 2, 1998 between The Houston
Exploration Company, a Delaware corporation, and The Bank of New York, a New
York banking corporation, as trustee (the "Trustee"). The Company and the
Trustee agree as follows for the benefit of each other and for the equal and
ratable benefit of the Holders of the 8-5/8% Senior Subordinated Notes due 2008
(the "Notes").
ARTICLE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. DEFINITIONS.
Set forth below are certain defined terms used in this
Indenture.
"Acquired Indebtedness" means, with respect to any specified
Person, (i) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Restricted Subsidiary or is designated
a Restricted Subsidiary of such specified Person, including, without limitation,
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Restricted Subsidiary of such
specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
"Adjusted Consolidated Net Tangible Assets" means (without
duplication), as of the date of determination, (A) the sum of (i) discounted
future net cash flows from proved oil and gas reserves of the Company and its
Restricted Subsidiaries, calculated in accordance with Commission guidelines
(before any federal or state income tax), as estimated by independent petroleum
engineers as of a date no earlier than the date of the Company's latest annual
consolidated financial statements (or, in the case that the date of
determination is after the end of the first fiscal quarter of the Company's
fiscal year, as estimated by the Company's engineers as of a date no earlier
than the end of the most recent fiscal quarter, which estimates shall be
confirmed in writing by a report by independent petroleum engineers in
accordance with Commission guidelines in the event of a Material Change if the
amount of Adjusted Consolidated Net Tangible Assets is required to be computed
under this Indenture), (ii) the Net Working Capital on a date no earlier than
the date of the Company's latest consolidated annual or quarterly financial
statements, and (iii)
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<PAGE> 10
with respect to each other tangible asset of the Company or its Restricted
Subsidiaries, the greater of (a) the net book value of such other tangible asset
on a date no earlier than the date of the Company's latest consolidated annual
or quarterly financial statements, and (b) (A) the appraised value, as estimated
by a qualified independent appraiser, of such other tangible asset, as of a date
no earlier than the date that is three years prior to the date of determination
(or such later date on which the Company shall have a reasonable basis to
believe that there has occurred a material decrease in value since the
determination of such appraised value), minus (B) minority interests.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of a
Person shall be deemed to be control.
"Agent" means any Registrar, Paying Agent or
co-registrar.
"Agent Members" means members of, or participants in, the
Depository.
"Applicable Procedures" means applicable procedures of the
Depository, Euroclear or Cedel Bank, as the case may be.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets (including, without limitation, by way of a sale and
leaseback, including any disposition by means of a merger, consolidation or
similar transaction and including the issuance, sale or other transfer of any of
the capital stock of any Restricted Subsidiary of such person) other than to the
Company or to any of its Wholly Owned Subsidiaries (including the receipt of
proceeds of insurance paid on account of the loss of or damage to any asset and
awards of compensation for any asset taken by condemnation, eminent domain or
similar proceeding, but excluding
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<PAGE> 11
the receipt of proceeds of business interruption insurance or environmental
damage insurance or similar types of policies) that have a fair market value (as
determined in good faith by the Board of Directors) in excess of $1.0 million or
for net cash proceeds in excess of $1.0 million; and (ii) the issuance of Equity
Interests in any Restricted Subsidiary or Unrestricted Subsidiary or the sale of
any Equity Interests in any Restricted Subsidiary or Unrestricted Subsidiary, in
each case, in one or a series of related transactions, provided, that
notwithstanding the foregoing, the term "Asset Sale" shall not include: (a) the
sale, lease, conveyance, disposition or other transfer of all or substantially
all of the assets of the Company, as permitted pursuant to Section 5.1 hereof,
(b) the abandonment, farmout, lease or sublease of developed or undeveloped oil
and gas properties in the ordinary course of business, (c) a transfer of assets
by the Company to a Wholly Owned Subsidiary of the Company or by a Wholly Owned
Subsidiary of the Company to the Company or to another Wholly Owned Subsidiary
of the Company, (d) an issuance of Equity Interests by a Wholly Owned Subsidiary
of the Company to the Company or to another Wholly Owned Subsidiary of the
Company, (e) the making of Permitted Investments, (f) any cash dividend,
distribution, Investment or payment made pursuant to the first or second
paragraph of Section 4.11 hereof, (g) the trade or exchange by the Company or
any Restricted Subsidiary of the Company of any oil and gas property or interest
therein owned or held by the Company or such Restricted Subsidiary for any oil
and gas property or interest therein owned or held by another Person, including
any cash or Cash Equivalents necessary in order to achieve an exchange of
equivalent value; provided that any such cash or Cash Equivalents received by
the Company or such Restricted Subsidiary will be subject to the provisions
described in the second paragraph of Section 4.10 hereof, which the Board of
Directors of the Company determine in good faith to be of approximately
equivalent value, (h) the sale or transfer of hydrocarbons or other mineral
products or surplus or obsolete equipment in the ordinary course of business,
(i) the sale of oil and gas properties in connection with tax credit
transactions complying with ss. 29 of the Code or (j) the sale or transfer
(whether or not in the ordinary course of business) of any oil and gas property
or interest therein to which no proved reserves are attributable at the time of
such sale or transfer.
"Attributable Debt" in respect of a sale and leaseback
transaction means, at the time of determination, the present value (discounted
at the rate of interest implicit in such transaction,
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<PAGE> 12
determined in accordance with GAAP) of the obligation of the lessee for net
rental payments during the remaining term of the lease included in such sale and
leaseback transaction (including any period for which such lease has been
extended or may, at the option of the lessor, be extended, to the extent the
lease payments during such extension period are required to be capitalized on a
balance sheet as a liability in accordance with GAAP).
"Bankruptcy Law" means Title 11, U.S. Code or any similar
foreign, federal or state law for the relief of debtors.
"Board of Directors" means the board of directors of the
Company or any authorized committee of the board of directors.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee.
"Broker-Dealer" has the meaning set forth in the
Registration Rights Agreement.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease that would at such time be required to be capitalized on a balance
sheet in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of a limited liability company or similar
entity, any membership or similar interests therein, (iii) in the case of an
association or business entity, any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate stock, (iv) in the
case of a partnership, partnership interests (whether general or limited) and
(v) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof having
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<PAGE> 13
maturities of not more than one year from the date of acquisition, (ii)
certificates of deposit and eurodollar time deposits with maturities of one year
or less from the date of acquisition, bankers' acceptances with maturities not
exceeding one year and overnight bank deposits, in each case with any domestic
commercial bank having capital and surplus in excess of $500 million, (iii)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (i) and (ii) above entered into
with any financial institution meeting the qualifications specified in clause
(ii) above, (iv) commercial paper having a rating of at least P1 from Moody's
(or its successor) or a rating of at least A1 from S&P (or its successor) and
(v) investments in money market or other mutual funds all of whose assets
comprise securities of types described in clauses (i) through (iv) above.
"Change of Control" means the occurrence of any of the
following: (i) any "Person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than the Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have a "beneficial ownership" of all
shares that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of 35% or more of the total voting power of the Voting Stock of the
Company, provided however that the Permitted Holders beneficially own (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, in the aggregate a lesser percentage of the total voting power of
the Voting Stock of the Company than such other person (for purposes of this
definition, such other person shall be deemed to beneficially own any Voting
Stock of a specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined above), directly or indirectly, or
more than 35% of the voting power of the Voting Stock of such parent corporation
and the Permitted Holders beneficially own (as defined in this proviso),
directly or indirectly, in the aggregate a lesser percentage of the Voting Stock
of such parent corporation); (ii) the sale, lease, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a series
of related transactions, of all or substantially all of the assets of the
Company and its Restricted Subsidiaries taken as a whole to any "Person" or
group of related Persons (a "Group") (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) other than
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<PAGE> 14
the Permitted Holders; (iii) the adoption of a plan relating to the liquidation
or dissolution of the Company; or (iv) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the Company
was approved by a vote of a majority of the directors of the Company then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors then in office.
"Code" means the Internal Revenue Code of 1986, as
amended, or any successor thereto.
"Company" means The Houston Exploration Company, a Delaware
corporation, and any successor thereto pursuant to Section 5.1 hereof.
"Commission" means the Securities and Exchange
Commission.
"Company Request" or "Company Order" means a written request
or order signed in the name of the Company (i) by its Chairman, a Vice Chairman,
its President or a Vice President and (ii) by its Treasurer, an Assistant
Treasurer, its Secretary or an Assistant Secretary and delivered to the Trustee;
provided, however, that such written request or order may be signed by any two
of the officers listed in clause (i) above in lieu of being signed by one of
such officers listed in such clause (i) and one of the officers listed in clause
(ii) above.
"Consolidated Cashflow" means, with respect to the Company and
its Restricted Subsidiaries for any period, the sum of, without duplication, (i)
the Consolidated Net Income for such period, plus (ii) to the extent deducted
from Consolidated Net Income for such period, the Fixed Charges for such period,
plus (iii) Consolidated Income Taxes for such period, plus (iv) consolidated
depreciation, amortization, depletion and other non-cash charges of the Company
and its Restricted Subsidiaries required to be reflected as expenses on the
books and records of the Company, and (v) excluding the impact of foreign
currency translations. Notwithstanding the foregoing, Consolidated Income Taxes
of, and the depreciation, depletion and amortization and
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<PAGE> 15
other non-cash charges of, a Restricted Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated Cashflow only to the extent that
the Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount would
be permitted at the date of determination to be dividended to the Company by
such Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Income Taxes" means, with respect to any Person
for any period, taxes imposed upon such Person or other payments required to be
made by such Person by any governmental authority which taxes or other payments
are calculated by reference to the income or profits of such Person or such
Person and its Subsidiaries (to the extent such income or profits were included
in computing Consolidated Net Income for such period), regardless of whether
such taxes or payments are required to be remitted to any governmental
authority.
"Consolidated Net Income" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income (but not loss) of any
Person that is not a Restricted Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid in cash to the referent Person or a
Restricted Subsidiary thereof, (ii) the Net Income of, or any dividends or other
distributions from, any Unrestricted Subsidiary, to the extent otherwise
included, shall be excluded, whether or not distributed to the Company or one or
its Restricted Subsidiaries, (iii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(which has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders, (iv) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date
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<PAGE> 16
of such acquisition shall be excluded, and (v) the cumulative effect of a change
in accounting principles shall be excluded.
"Corporate Trust Office of the Trustee" shall be at the
address of the Trustee specified in Section 12.2 hereof or such other address as
to which the Trustee may give notice to the Company.
"Credit Agreement" means, collectively, (i) that certain
Credit Agreement, as in effect on the date hereof, by and among the Company, the
lenders that may be from time to time parties thereto and Chase Bank of Texas,
National Association (formerly known as Texas Commerce Bank National
Association), as agent, as the foregoing may from time to time be amended,
renewed, supplemented or otherwise modified at the option of the parties
thereto, including increases in the principal amount thereof; and (ii) any
successors to or replacements of (as designated by the Board of Directors of the
Company in its sole judgment, and evidenced by a resolution) such Credit
Agreement, as such successors or replacements may from time to time be amended,
renewed, supplemented, modified or replaced, including increases in the
principal amount thereof.
"Custodian" means any receiver, trustee, assignee, liquidator
or similar official under any Bankruptcy Law.
"Default" means any event that is, or with the passage of time
or the giving of notice or both would be, an Event of Default.
"Definitive Notes" means Restricted Definitive Notes and
Unrestricted Definitive Notes.
"Depository" means, with respect to any Notes issuable or
issued in whole or in part in global form, the Person specified in Section 2.3
hereof as the Depository with respect to such Notes, until a successor shall
have been appointed and become such Depository pursuant to the applicable
provision of this Indenture, and, thereafter, "Depository" shall mean or include
such successor.
"Designated Senior Debt" means (i) the Credit Agreement and
(ii) any Senior Debt permitted under this Indenture which, at the date of
determination, has an aggregate principal amount outstanding of, or under which,
at the date of determination, the holders thereof are committed to lend up to,
at least $25 million
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<PAGE> 17
and is specifically designated by the Company in the instrument evidencing or
governing such Senior Debt as "Designated Senior Debt" for purposes of this
Indenture.
"Disqualified Stock" means any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable) or upon the happening of any event, matures or is
mandatorily redeemable (other than in connection with a Change of Control or
Asset Sale) for any consideration other than Capital Stock, pursuant to a
sinking fund obligation or otherwise, is convertible or is exchangeable for
Indebtedness or Disqualified Stock or redeemable (other than in connection with
a Change of Control or Asset Sale) for any consideration other than Capital
Stock at the option of the holder thereof, in whole or in part, in each case on
or prior to the date that is 91 days after (x) the date on which the Notes
mature or (y) on which there are no Notes outstanding.
"Dollar-Denominated Production Payments" means production
payment obligations recorded as liabilities in accordance with GAAP, together
with all undertakings and obligations in connection therewith.
"Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private offering (other
than on Form S-8 or any other form relating to securities issuable under any
benefit plan of the Company) of Equity Interests other than Disqualified Stock
of the Company or any successor by merger to the Company.
"Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"Exchange Offer" means the offer that may be made by the
Company pursuant to the Registration Rights Agreement to exchange new Notes for
Notes.
"Existing Indebtedness" means the Indebtedness of the Company
and its Restricted Subsidiaries (other than Indebtedness
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<PAGE> 18
under the Credit Agreement) in existence on the date hereof, until such amounts
are repaid.
"Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of letters of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), and (ii) the consolidated interest
expense of such Person and its Restricted Subsidiaries that was capitalized
during such period, and (iii) any interest expense on Indebtedness of another
Person that is guaranteed by such Person or one of its Restricted Subsidiaries
or secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries (whether or not such guarantee or Lien is called upon), and (iv)
the product of (a) all dividend payments, whether or not in cash (other than any
such non-cash dividend in the form of Equity Interests which do not provide for
the payment of cash dividends prior to any stated maturity of the principal of
the Notes), on any series of preferred stock of any such Person or one of its
Restricted Subsidiaries payable to a party other than the Company or a Wholly
Owned Subsidiary, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state,
provincial and local statutory tax rate of such Person, expressed as a decimal,
in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person
for any period, the ratio of the Consolidated Cashflow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, guarantees, redeems or
repays any Indebtedness (other than the incurrence or repayment of revolving
credit borrowings used for working capital, except to the extent that a
repayment is accompanied by a permanent reduction in revolving credit
commitments) or issues preferred stock subsequent to the commencement of the
four-quarter reference period for which the Fixed Charge Coverage Ratio is being
calculated but prior to
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<PAGE> 19
the date on which the event for which the calculation of the
Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, guarantee, redemption or repayment of Indebtedness, or
such issuance or redemption of preferred stock, as if the same had occurred at
the beginning of the applicable four-quarter reference period. For purposes of
making the computation referred to above, (i) acquisitions that have been made
by the Company or any of its Restricted Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and shall give pro forma effect to the
Consolidated Cashflow and Indebtedness and preferred stock of the Person which
is the subject of any such acquisition and any cost savings or expense
reductions attributable at the time of such computation or to be attributable in
the future to such acquisition, shall be included in such computation, to the
extent that such adjustments would be permitted under Article 11 of Regulation
S-X and Consolidated Cashflow for such reference period shall be calculated
without giving effect to clause (iv) of the proviso set forth in the definition
of Consolidated Net Income, (ii) the net proceeds of Indebtedness incurred or
Disqualified Stock issued by the referent Person pursuant to the first paragraph
of Section 4.12 hereof during the four-quarter reference period or subsequent to
such reference period and on or prior to the Calculation Date shall be deemed to
have been received by the referent Persons or any of its Restricted Subsidiaries
on the first day of the four-quarter reference period and applied to its
intended use on such date, (iii) the Consolidated Cashflow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iv) the Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public
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<PAGE> 20
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as have been
approved by a significant segment of the accounting profession, which are in
effect on the date hereof.
"Global Note" means, individually and collectively, the
Regulation S Global Note, the Rule 144A Global Note, the IAI Global Note and the
Unrestricted Global Note.
"Government Securities" means direct obligations of, or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States is
pledged.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate or currency exchange swap
agreements, interest rate or currency exchange cap agreements and interest rate
or currency exchange collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"Holder" means a Person in whose name a Note is
registered on the Registrar's books.
"IAI Global Note" means a permanent Global Note in the form of
Exhibit A-1 hereto bearing the Global Note Legend and the Private Placement
Legend and deposited with or on behalf of and registered in the name of the
Depository or its nominee, representing Restricted Notes offered and sold to
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act) in the United States of America.
"Indebtedness" means, with respect to any Person, without
duplication, any indebtedness of such Person, whether or not contingent, in
respect of borrowed money or evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in respect
thereof) or banker's acceptances or representing Capital Lease Obligations or in
respect of any Production Payment or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than in the case of letters
of credit and Hedging Obligations) would appear as a liability upon a balance
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<PAGE> 21
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person), the maximum fixed repurchase
price of Disqualified Stock issued by such Person in each case, if held by any
Person other than the Company or a Wholly Owned Subsidiary of the Company,
obligations of such Person in respect of production imbalances, Attributable
Debt of such Person, and, to the extent not otherwise included, the guarantee by
such Person of any indebtedness of any other Person; provided, however that
indebtedness shall not include gas balancing liabilities incurred in the
ordinary course of business and consistent with past practice.
"Indenture" means this Indenture, as amended or
supplemented from time to time.
"Initial Purchasers" mean Donaldson, Lufkin & Jenrette
Securities Corporation, Chase Securities Inc., Howard, Weil,
Labouisse, Friedrichs Incorporated, PaineWebber Incorporated and
Salomon Brothers Inc.
"Institutional Accredited Investor" means an institutional and
"accredited investor" as defined in Rule 501(a) (1), (2), (3) or (7) of the
Securities Act.
"Interest Payment Date" means each January 1 and July 1,
whether or not such day is a Business Day.
"interest" means all interest payable with respect to the
Notes, including, without limitation, Liquidated Damages, if any.
"Investment Grade Status," with respect to the Company, shall
occur when the Notes receive a rating of "BBB-" or higher from S&P or a rating
of "Baa3" or higher from Moody's.
"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates) in the forms
of direct or indirect loans (including guarantees of Indebtedness or other
obligations, but excluding trade credit), advances or capital contributions
(excluding commission, travel, relocation and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities and all other items that are or would be classified as
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<PAGE> 22
investments on a balance sheet prepared in accordance with GAAP; provided that
(i) Hedging Obligations, (ii) hedging agreements that such Person entered into
in the ordinary course of business in the oil and gas industry for the purpose
of protecting against fluctuations in oil or natural gas prices and otherwise in
compliance with this Indenture, (iii) endorsements of negotiable instruments and
documents in the ordinary course of business, (iv) Permitted Marketing
Transactions and (v) an acquisition of assets, Equity Interests or other
securities by the Company for consideration consisting of common equity
securities of the Company shall not be deemed to be an Investment. If the
Company or any Restricted Subsidiary of the Company sells or otherwise disposes
of any Equity Interests of any direct or indirect Restricted Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
entity is no longer a Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to the
fair market value of the Equity Interests of such Subsidiary not sold or
disposed of.
"Issue Date" means the closing date for the sale and original
issuance of the Notes under this Indenture.
"Legal Holiday" means a Saturday, a Sunday or a day on which
federal offices or banking institutions in the City of New York, in the city of
the Corporate Trust Office of the Trustee, or at a place of payment are
authorized by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday, payment may be made on the next succeeding day that is
not a Legal Holiday, and no interest shall accrue for the intervening period.
"Letter of Transmittal" means the letter of transmittal to be
prepared by the Company and sent to all Holders of the Notes for use by such
Holders in connection with the Exchange Offer.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
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<PAGE> 23
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquidated Damages" means all interest payable pursuant to
Paragraph 2 of the Restricted Definitive Notes, the Regulation S Global Notes,
the Rule 144A Global Notes and the IAI Global Notes.
"Material Change" means an increase or decrease of more than
20% during a fiscal quarter in the discounted future net cash flows (excluding
changes that result solely from changes in prices) from proved oil and gas
reserves of the Company and its Restricted Subsidiaries calculated in accordance
with Commission guidelines (before any federal or state income tax); provided,
however, that the following will be excluded from the Material Change
calculation: (i) any acquisitions during the quarter of oil and gas reserves
that have been estimated by independent petroleum engineers and on which a
report or reports exist, (ii) any reserves added during the quarter attributable
to the drilling or recompletion of wells not included in previous reserve
estimates, but which will be included in future quarters, and (iii) any
disposition of properties existing at the beginning of such quarter that have
been disposed of as provided in Section 4.10 hereof.
"Maturity" when used in respect to any Note means the date on
which the principal of (and premium, if any) and interest on such Note becomes
due and payable as therein or herein provided, whether at Stated Maturity or the
applicable Redemption Date and whether by declaration of acceleration, call for
redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc.
"Net Income" means, with respect to any Person, the net income
(loss) of such Person, determined in accordance with GAAP, and before reduction
for non-cash preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (b) the disposition
of any securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (ii) any extraordinary or nonrecurring gain or loss, together
with any
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<PAGE> 24
related provision for taxes on such extraordinary or nonrecurring gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by
the Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), and any reserve for adjustment in
respect of the sale price of such asset or assets established in accordance with
GAAP and net of any amounts required to be applied to the repayment of
Indebtedness (other than Indebtedness under any Senior Debt) secured by a Lien
on the asset or assets that were the subject of such Asset Sale.
"Net Working Capital" means (i) all current assets of the
Company and its Restricted Subsidiaries excluding cash and Cash Equivalents,
minus (ii) all current liabilities of the Company and its Restricted
Subsidiaries, except current liabilities included in Indebtedness.
"Non-Recourse Debt" means Indebtedness (i) as to which neither
the Company nor any of its Restricted Subsidiaries (a) provides any guarantee or
credit support of any kind (including any undertaking, guarantee, indemnity,
agreement or instrument that would constitute Indebtedness) or (b) is directly
or indirectly liable (as a guarantor or otherwise), (ii) no default with respect
to which (including any rights that the Holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default under such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity and (iii) the explicit terms of which provide that
there is no recourse against any of the assets of the Company or its Restricted
Subsidiaries.
"Non-U.S. Person" shall mean a Person who is not a U.S.
Person, as such term is defined in Regulation S.
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<PAGE> 25
"Notes" means the Company's 8-5/8% Senior Subordinated Notes
due 2008 issued in compliance with this Indenture.
"Note Custodian" means the Trustee, as custodian with respect
to the Global Notes, or any successor entity thereto.
"Obligations" means any principal, interest, penalties, fees,
Liquidated Damages, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Offering Memorandum" means that certain offering memorandum
with respect to the Notes, dated February 25, 1998.
"Officer" means, with respect to any Person, the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer,
the Controller, the Secretary or any Vice President of such Person.
"Officers' Certificate" means a certificate signed on behalf
of the Company by two officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company that meets the requirements set
forth in Section 1.5.
"Oil and Gas Business" means (i) the acquisition, exploration,
exploitation, development, operation or disposition of interests in oil, gas or
other hydrocarbon properties, (ii) the gathering, marketing, treating,
processing, storage, selling, transporting or refining of any production from
such interests or properties, (iii) any business relating to or arising from
exploration for or development, production, gathering, marketing, treatment,
processing, storage, sale, transportation or refining of oil, gas and other
minerals and products produced in association therewith or (iv) any activity
that is ancillary or necessary or desirable to facilitate the activities
described in clauses (i) through (iii) of this definition.
"Opinion of Counsel" means a written opinion of counsel, who
may be an employee of or counsel for the Company, and who shall be acceptable to
the Trustee. Each such opinion shall include the statements provided for in TIA
Section 314(e) to the extent applicable.
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<PAGE> 26
"Pari Passu Indebtedness" means Indebtedness that ranks pari
passu in right of payment to the Notes.
"Permitted Holders" means THEC Holding Corp., The Brooklyn
Union Gas Company, KeySpan Energy Corporation and (to the extent it has
consummated a merger, consolidation or other business combination transaction
with KeySpan Energy Corporation) Long Island Lighting Company, and any successor
or Affiliate of any such
Person.
"Permitted Investments" means (a) any Investments in the
Company or in a Restricted Subsidiary of the Company that is engaged in the Oil
and Gas Business; (b) any Investments in Cash Equivalents; (c) Investments by
the Company or any Restricted Subsidiary of the Company in a Person if as a
result of such Investment (i) such Person becomes a Wholly Owned Subsidiary of
the Company and such Person is engaged in the Oil and Gas Business or (ii) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Wholly Owned Subsidiary of the Company that is engaged in the Oil and Gas
Business; (d) Investments made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with Section 4.10 hereof; (e) Investments by the Company or any of its
Restricted Subsidiaries in cash in an aggregate amount not to exceed $10.0
million outstanding at any one time; (f) loans and advances to employees in the
ordinary course of business for bona fide business purposes; (g) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any of its Subsidiaries
or in satisfaction of judgments or pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of any debtor; (h) any
operating agreements, joint ventures, partnership agreements, working interests,
royalty interests, mineral leases, processing agreements, farm-in agreements,
farm-out agreements, contracts for the sale, transportation or exchange of oil
and natural gas, unitization agreements, pooling arrangements, area of mutual
interest agreements, production sharing agreements or other similar or customary
agreements, transactions, properties, interests, or arrangements, and
Investments and expenditures in connection therewith or pursuant thereto, in
each case made or entered into in the ordinary course of the Oil and Gas
Business, excluding, however, Investments in corporations; (i) accounts
receivable
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<PAGE> 27
created or acquired, and prepaid expenses arising, in the ordinary course of
business; (j) Investments existing on the date hereof; and (k) the incurrence,
assumption or creation of Hedging Obligations and hedging arrangements that the
Company or a Restricted Subsidiary of the Company enter into in the ordinary
course of business in the oil and gas industry for the purpose of protecting its
production against fluctuations in oil or natural gas prices and otherwise in
compliance with this Indenture.
"Permitted Liens" means (i) Liens securing Indebtedness of a
Subsidiary or Liens securing Senior Debt that is outstanding on the date of
issuance of the Notes and Liens securing Senior Debt that is permitted by the
terms of this Indenture to be incurred; (ii) Liens in favor of the Company or
any Restricted Subsidiary; (iii) Liens on property existing at the time of
acquisition thereof by the Company or any Subsidiary of the Company and Liens on
property or assets of a Subsidiary existing at the time it became a Subsidiary,
provided that such Liens were in existence prior to the contemplation of the
acquisition and do not extend to any assets other than the acquired property or
the property of the acquired Subsidiary; (iv) Liens incurred or deposits made in
the ordinary course of business in connection with workers' compensation,
unemployment insurance or other kinds of social security, or to secure the
payment or performance of tenders, statutory or regulatory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business (including lessee or operator
obligations under statutes, governmental regulations or instruments related to
the ownership, exploration and production of oil, gas and minerals on state or
federal lands or waters); (v) Liens existing on the date hereof; (vi) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (vii) statutory liens of landlords, mechanics, suppliers,
vendors, warehousemen, carriers or other like Liens arising in the ordinary
course of business; (viii) pre-judgment liens and judgment Liens not giving rise
to an Event of Default so long as any appropriate legal proceeding that may have
been duly initiated for the review of such judgment shall not have been finally
terminated or the period within which such proceeding may be initiated shall not
have expired; (ix) Liens on, or related to, properties or assets to
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<PAGE> 28
secure all or part of the costs incurred in the ordinary course of the Oil and
Gas Business for the exploration, drilling, development, production, processing,
transportation, marketing, storage or operation thereof; (x) Liens on pipeline
or pipeline facilities that arise under operation of law; (xi) Liens arising
under operating agreements, joint venture agreements, partnership agreements,
oil and gas leases, farm-in agreements, farm-out agreements, division orders,
contracts for the sale, transportation or exchange of oil or natural gas,
unitization and pooling declarations and agreements, area of mutual interest
agreements and other agreements that are customary in the Oil and Gas Business;
(xii) Liens reserved in oil and gas mineral leases for bonus or rental payments
and for compliance with the terms of such leases; (xiii) Liens securing the
Notes; (xiv) Liens constituting survey exceptions, encumbrances, easements, and
reservations of, and rights to others for, rights-of-way, zoning and other
restrictions as to the use of real properties, and minor defects of title which,
in the case of any of the foregoing, do not secure the payment of borrowed
money, and in the aggregate do not materially adversely affect the value of the
assets of the Company and its Restricted Subsidiaries, taken as a whole, or
materially impair the use of such properties for the purposes of which such
properties are held by the Company or such subsidiaries; and (xv) Liens not
otherwise permitted by clauses (i) through (xiv) that are incurred in the
ordinary course of business of the Company or any Subsidiary with respect to
obligations that do not exceed $5 million at any one time outstanding.
"Permitted Marketing Transaction" means (i) a transaction in
which the Company or any Subsidiary of the Company either (a) establishes a
position using New York Mercantile Exchange Crude Oil or Natural Gas Futures
contracts to purchase hydrocarbons for future delivery to it or (b) purchases or
commits to purchase hydrocarbons for future delivery to it, and contemporaneous
with such purchase transaction either (1) establishes one or more positions
using New York Mercantile Exchange Crude Oil or Natural Gas Futures contracts to
resell at a date subsequent to such delivery date or (2) enters into a contract
with a Person to resell at a date subsequent to such delivery date, a similar
aggregate quantity and quality of hydrocarbons as so purchased by the Company or
such Subsidiary, as applicable, at an aggregate price greater than the
Indebtedness incurred for the hydrocarbons so purchased by the Company or such
Subsidiary or (ii) any other purchase by the
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Company or any Subsidiary of the Company of hydrocarbons for which the Company
or such Subsidiary has contracts to sell.
"Permitted Refinancing Indebtedness" means any Indebtedness of
the Company or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the original principal
amount (or then current accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date at least as late as the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
limited liability company, or other business entity or government or agency or
political subdivision thereof (including any subdivision or ongoing business of
any such entity or substantially all of the assets of any such entity,
subdivision or business).
"Private Placement Legend" means the legend set forth in
Section 2.6(g)(i)(A) to be placed on all Notes issued under this Indenture
except as permitted pursuant to Section 2.6(g)(i)(B).
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"Production Payments" means Dollar-Denominated Production
Payments and Volumetric Production Payments, collectively.
"Purchase Money Lien" means a Lien granted on an asset or
property to secure a Purchase Money Obligation permitted to be incurred under
this Indenture and incurred solely to finance the purchase, or the cost of
construction or improvement, of such asset or property; provided however, that
such Lien encumbers only such asset or property and is granted within 180 days
of such acquisition.
"Purchase Money Obligations" of any Person means any
obligations of such Person to any seller or any other Person incurred or assumed
to finance the purchase, or the cost of construction or improvement, of real or
personal property to be used in the business of such Person or any of its
Restricted Subsidiaries in an amount that is not more than 100% of the cost, or
fair market value, as appropriate, of such property, and incurred within 90 days
after the date of such acquisition (excluding accounts payable to trade
creditors incurred in the ordinary course of business).
"QIB" means a "Qualified Institutional Buyer" under Rule
144A.
"Redemption Date," when used with respect to any Note to be
redeemed, means the date fixed for such redemption pursuant to this Indenture.
"Redemption Price," when used with respect to any Note to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of March 2, 1998, by and among the Company and the Initial
Purchasers, as such agreement may be amended, modified or supplemented from time
to time.
"Regular Record Date" for the interest payable on any Interest
Payment Date means the December 15 or June 15 (whether or not a Business Day),
as the case may be, next preceding such Interest Payment Date.
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"Regulation S" means Regulation S promulgated under the
Securities Act.
"Regulation S Global Note" means a permanent global Note in
the form of Exhibit A-1 hereto bearing the Global Note Legend and the Private
Placement Legend and deposited with or on behalf of and registered in the name
of the Depository or its nominee, representing Notes sold in reliance on
Regulation S.
"Representative" means the indenture trustee or other trustee,
client or representative for any senior Indebtedness.
"Repurchase Offer" means an offer made by the Company to
purchase all or any portion of a Holder's Notes pursuant to the provisions
described under Sections 4.9 or 4.10.
"Responsible Officer," when used with respect to the Trustee,
means any officer of the Trustee with direct responsibility for the
administration of this Indenture and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"Restricted Definitive Notes" means Notes that are in the form
of the Notes attached hereto as Exhibit A-1, that do not include the information
called for by footnotes 1 and 2 thereof.
"Restricted Global Notes" means the Regulation S Global
Notes, the Rule 144A Global Notes and the IAI Global Notes.
"Restricted Investment" means an Investment other than a
Permitted Investment.
"Restricted Notes" means Restricted Global Notes or
Restricted Definitive Notes.
"Restricted Period" means the 40-day restricted period as
defined in Regulation S.
"Restricted Subsidiary" of a Person means any Subsidiary of
the referent Person that is not an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A promulgated under the
Securities Act.
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"Rule 144A Global Note" means a permanent global note in the
form of Exhibit A-1 hereto bearing the Global Note Legend and the Private
Placement Legend and deposited with or on behalf of and registered in the name
of the Depository or its nominee, representing Notes sold in reliance on Rule
144A.
"Rule 903" means Rule 903 promulgated under the
Securities Act.
"Rule 904" means Rule 904 promulgated under the
Securities Act.
"S&P" means Standard and Poor's Ratings Group.
"Securities Act" means the Securities Act of 1933, as
amended.
"Senior Debt" means (i) indebtedness of the Company under or
in respect of the Credit Agreement, whether for principal, interest (including
interest accruing after the filing of a petition initiating any proceeding
pursuant to any bankruptcy law, whether or not the claim for such interest is
allowed as a claim in such proceeding), reimbursement obligations, fees,
commissions, expenses, indemnities or other amounts, and (ii) any other
Indebtedness permitted under the terms of this Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is on a
parity with or subordinated in right of payment to the Notes. Notwithstanding
anything to the contrary in the foregoing sentence, Senior Debt will not include
(v) Equity Interests, (w) any liability for federal, state, local or other taxes
owned or owing by the Company, (x) any Indebtedness of the Company to any of its
Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness
that is incurred in violation of this Indenture. Senior Debt of a Subsidiary
Guarantor has a correlative meaning (including interest accruing after the
filing of a petition initiating any proceeding pursuant to any bankruptcy law,
whether or not the claim for such interest is allowed as a claim in such
proceeding).
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Exchange Act, as such Regulation is in effect on the
date hereof.
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"Special Record Date" means a date fixed by the Trustee for
the payment of any Defaulted Interest pursuant to Section 2.12.
"Specified Property" means the items set forth on Annex
A hereto.
"Stated Maturity," when used with respect to any Note or any
installment of principal thereof or interest thereon, means the date specified
in such Note as the fixed date on which the principal of such Note or such
installment of principal or interest is due and payable.
"Subordinated Note Obligations" means any principal of,
premium, if any, and interest and Liquidated Damages on, the Notes and any other
payment obligations of the Company in respect of the Notes (including any
obligation to repurchase the Notes).
"Subsidiary" of any Person means any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other equity interests (including
partnership interests) entitles (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person
or (ii) one or more Subsidiaries of such Person.
"Subsidiary Guarantee" means any guarantee of the obligations
of the Company under this Indenture and the Notes by a Restricted Subsidiary in
accordance with the provisions of this Indenture pursuant to a supplemental
indenture substantially in the form attached hereto as Exhibit E.
"Subsidiary Guarantor" means any Restricted Subsidiary
that incurs a Subsidiary Guarantee.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA, except as provided in Section 9.3 hereof.
"Trustee" means the party named as such above unless and until
a successor replaces it in accordance with the applicable provisions of this
Indenture and thereafter means such successor.
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"Unrestricted Definitive Note" means Notes that are in the
form of the Notes attached hereto as Exhibit A-2 that do not include the
information called for by footnotes 1 and 2 thereof.
"Unrestricted Global Note" means a permanent global Note that
contains the paragraph referred to in footnote 1 and the additional schedule
referred to in footnote 2 to the form of the Note attached hereto as Exhibit
A-2, and that is deposited with or on behalf of and registered in the name of
the Depository.
"Unrestricted Notes" means the Unrestricted Global Notes
and Unrestricted Definitive Notes.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company which at the time of determination shall be an Unrestricted Subsidiary
(as designated by the Board of Directors of the Company, as provided below) and
(ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary or a Person becoming a Subsidiary through
merger or consolidation or Investment therein) to be an Unrestricted Subsidiary
only if (a) such Subsidiary does not own any Capital Stock of, or own or hold
any Lien on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary; (b) all the Indebtedness of such Subsidiary and its Subsidiaries
shall, at the date of designation, and will at all times thereafter, consist of
Non-Recourse Debt; (c) the Company certifies that such designation complies with
the limitations of the covenant contained in Section 4.11 hereof; (d) such
Subsidiary, either alone or in the aggregate with all other Unrestricted
Subsidiaries, does not operate, directly or indirectly, all or substantially all
of the business of the Company and its Subsidiaries; (e) such Subsidiary does
not, directly or indirectly, own any Indebtedness of or Equity Interest in, and
has no investments in, the Company or any Restricted Subsidiary; and (f) such
Subsidiary is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (1) to subscribe
for additional Equity Interests of such Person or (2) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing with the
Trustee a resolution of the Board of Directors
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of the Company giving effect to such designation and an Officers' certificate
certifying that such designation complied with the foregoing conditions. If, at
any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred as of such date. The Board of
Directors of the Company may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, that immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and the Company could incur
at least $1.00 of additional Indebtedness (excluding Permitted Indebtedness)
pursuant to the first paragraph of Section 4.12 hereof on a pro forma basis
taking into account such designation.
"Volumetric Production Payments" means production payment
obligations recorded as deferred revenue in accordance with GAAP, together with
all undertakings and obligations in connection therewith.
"Voting Stock" of any entity means all classes of Capital
Stock of such entity then outstanding and normally entitled to vote in the
election of directors or all interests in such entity with the ability to
control the management or actions of such entity.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares or shares
required by applicable law to be held by third parties) shall at the time be
owned by such Person or by one or more Wholly Owned Subsidiaries of such Person.
Unrestricted Subsidiaries shall not be included in the definition of Wholly
Owned Subsidiary for any purposes of this Indenture.
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SECTION 1.2. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Term Defined in
Section
<S> <C>
"Act" ......................................................................... 1.7
"Affiliate Transaction"........................................................ 4.13
"Asset Sale Offer"............................................................. 4.10
"Cedel Bank"................................................................... 2.1
"Covenant Defeasance".......................................................... 8.3
"Defaulted Interest"........................................................... 2.12
"Defeasance"................................................................... 8.2
"DTC".......................................................................... 2.3
"Euroclear".................................................................... 2.1
"Event of Default"............................................................. 6.1
"Paying Agent"................................................................. 2.3
"QIB".......................................................................... 2.1
"Registrar".................................................................... 2.3
"Restricted Payments".......................................................... 4.11
"Successor Company"............................................................ 5.1
</TABLE>
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE
ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following meanings:
"INDENTURE SECURITIES" means the Notes;
"INDENTURE SECURITY HOLDER" means a Holder of a Note;
"INDENTURE TO BE QUALIFIED" means this Indenture;
"INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the
Trustee;
"OBLIGOR" on the Notes means the Company and any successor
obligors upon the Notes.
All other terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined
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by Commission rule under the TIA have the meanings so assigned to them.
SECTION 1.4. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in
the plural include the singular;
(5) provisions apply to successive events and
transactions; and
(6) references to sections of or rules under the
Securities Act shall be deemed to include substitute,
replacement or successor sections or rules adopted by
the Commission from time to time.
SECTION 1.5. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the Trustee
to take any action under any provision of this Indenture, the Company shall
furnish to the Trustee an Officers' Certificate stating that all conditions
precedent, if any, provided for in this Indenture (including any covenant
compliance with which constitutes a condition precedent) relating to the
proposed action have been complied with and an Opinion of Counsel stating that
in the opinion of such counsel all such conditions precedent, if any, have been
complied with, except that, in the case of any such application or request as to
which the furnishing of such documents is specifically required by any provision
of this Indenture relating to such particular application or request, no
additional certificate or opinion need be furnished.
Every certificate or opinion (other than the certificates
required by Section 4.5(a)) with respect to compliance with a
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<PAGE> 38
condition or covenant provided for in this Indenture shall comply with the
provisions of TIA 314(e) and shall include:
(a) a statement that each individual signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of each such
individual, he or she has made such examination or investigation as is necessary
to enable him or her to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each
such individual, such condition or covenant has been complied with.
SECTION 1.6. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representation
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
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<PAGE> 39
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.
SECTION 1.7. ACTS OF HOLDERS.
(a) Any request, demand, authorization, direction,
notice, consent, waiver or other action provided by this Indenture to be given
or taken by Holders may be embodied in and evidenced by one or more instruments
of substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to TIA Section 315) conclusive in favor of the Trustee
and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of
any such instrument or writing may be proved in any reasonable manner that the
Trustee deems sufficient.
(c) The ownership of Notes shall be proved by a register
kept by the Registrar.
(d) If the Company shall solicit from the Holders any
request, demand, authorization, direction, notice, consent, waiver or other Act,
the Company may, at its option, by or pursuant to a Board Resolution, fix in
advance a record date for the determination of such Holders entitled to give
such request, demand, authorization, direction, notice, consent, waiver or other
Act, but the Company shall have no obligation to do so. Notwithstanding TIA
Section 316(c), any such record date shall be the record date specified in or
pursuant to such Board Resolution, which shall be a date not more than 30 days
prior to the first
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solicitation of Holders generally in connection therewith and no later than the
date such solicitation is completed.
If such a record date is fixed, such request, demand,
authorization, direction, notice, consent, waiver or other Act may be given
before or after such record date, but only the Holders of record at the close of
business on such record date shall be deemed to be Holders for the purposes of
determining whether Holders of the requisite proportion of Notes then
outstanding have authorized or agreed or consented to such request, demand,
authorization, direction, notice, consent, waiver or other Act, and for this
purpose the Notes then outstanding shall be computed as of such record date;
provided that no such request, demand, authorization, direction, notice,
consent, waiver or other Act by the Holders on such record date shall be deemed
effective unless it shall become effective pursuant to the provisions of this
Indenture not later than six months after the record date.
(e) Any request, demand, authorization, direction,
notice, consent, waiver or other Act by the Holder of any Note shall bind every
future Holder of the same Note or the Holder of every Note issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof, in
respect of anything done, suffered or omitted to be done by the Trustee, any
Paying Agent or the Company in reliance thereon, whether or not notation of such
action is made upon such Note.
ARTICLE 2
THE NOTES
SECTION 2.1. FORM AND DATING.
The Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibits A-1 and A-2 attached hereto. The
Notes may have notations, legends or endorsements
required by law, stock exchange rule or usage, as designated by the Company or
its counsel. Each Note shall be dated the date of its authentication. The Notes
shall be in denominations of $1,000 and integral multiples thereof.
The Notes initially offered and sold in reliance on Rule 144A
shall be issued initially in the form of a Rule 144A Global Note. Notes
initially offered and sold in reliance on Regulation
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<PAGE> 41
S shall be issued initially in the form of the Regulation S Global Note. Notes
offered and sold to Institutional Accredited Investors in the United States of
America shall be issued in the form of an IAI Global Note. Each of the
Restricted Global Notes shall be deposited on behalf of the purchasers of the
Notes represented thereby with the Trustee, at its New York office, as custodian
for the Depository, and registered in the name of the Depository or the nominee
of the Depository. The Regulation S Global Notes shall be registered in the name
of the Depository or the nominee of the Depository for the accounts of
designated agents holding on behalf of Euroclear or Cedel Bank, duly executed by
the Company and authenticated by the Trustee as hereinafter provided. The
Restricted Period shall be terminated upon the receipt by the Trustee of (i) a
written certificate from the Depository or the Note Custodian, together with
copies of certificates from Euroclear and Cedel Bank certifying that they have
received certification of non-United States beneficial ownership of 100% of the
aggregate principal amount of the Regulation S Global Note, and (ii) an
Officers' Certificate from the Company to the effect set forth in Section
12.4(a) hereof.
Notes issued in global form shall be substantially in the form
of Exhibits A-1 or A-2 attached hereto (including the Global Note Legend and the
"Schedule of Exchanges in the Global Note" attached thereto). Notes issued in
definitive form shall be substantially in the form of Exhibit A-1 or A-2
attached hereto (but without the Global Note Legend and without the "Schedule of
Exchanges of Interests in the Global Note" attached thereto). Each Global Note
shall represent such of the outstanding Notes as shall be specified therein and
each shall provide that it shall represent the aggregate principal amount of
outstanding Notes from time to time endorsed thereon and that the aggregate
principal amount of outstanding Notes represented thereby may from time to time
be reduced or increased, as appropriate, to reflect exchanges and redemptions.
Any endorsement of a Global Note to reflect the amount of any increase or
decrease in the aggregate principal amount of outstanding Notes represented
thereby shall be made by the Trustee or the Note Custodian, at the direction of
the Trustee, in accordance with instructions given by the Holder thereof as
required by Section 2.6 hereof.
The provisions of the "Operating Procedures of the Euroclear
System" and "Terms and Conditions Governing Use of Euroclear" and the "General
Terms and Conditions of Cedel Bank" and
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"Customer Handbook" of Cedel Bank shall be applicable to transfers of beneficial
interests in the Regulation S Global Notes that are held by the Agent Members
through Euroclear or Cedel Bank.
SECTION 2.2. EXECUTION AND AUTHENTICATION.
Two Officers shall sign the Notes for the Company by manual or
facsimile signature.
If an Officer whose signature is on a Note no longer holds
that office at the time a Note is authenticated, the Note shall nevertheless be
valid.
A Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed
by two Officers, authenticate Notes for original issue up to the aggregate
principal amount stated in the Notes. The aggregate principal amount of Notes
outstanding at any time may not exceed such amount except as provided in Section
2.7 hereof.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate Notes. An authenticating agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with Holders or an
Affiliate of the Company.
SECTION 2.3. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Notes may
be presented for registration of transfer or for exchange ("Registrar") and an
office or agency where Notes may be presented for payment ("Paying Agent"). The
Registrar shall keep a register of the Notes and of their transfer and exchange.
The Company may appoint one or more co-registrars and one or more additional
paying agents. The term "Registrar" includes any co-registrar and the term
"Paying Agent" includes any additional paying agent. The Company may change any
Paying Agent or Registrar without notice to any Holder. The Company shall
promptly notify the Trustee in writing of the name and address of any Agent not
a party to this
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Indenture. If the Company fails to appoint or maintain another entity as
Registrar or Paying Agent, the Trustee shall act as such. The Company or any of
its Subsidiaries may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company
("DTC") to act as Depository with respect to the Global Notes.
The Company initially appoints the Trustee to act as the
Registrar and Paying Agent and to act as Note Custodian with respect to the
Global Notes.
SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of Holders or the Trustee all money held by the Paying Agent for the
payment of principal, premium, if any, or interest on the Notes, and will
promptly notify the Trustee of any default by the Company in making any such
payment. While any such default continues, the Trustee may require a Paying
Agent to pay all money held by it to the Trustee. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee. Upon payment
over to the Trustee, the Paying Agent (if other than the Company or a
Subsidiary) shall have no further liability for the money. If the Company or a
Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust
fund for the benefit of the Holders all money held by it as Paying Agent. Upon
any bankruptcy or reorganization proceedings relating to the Company, the
Trustee shall serve as Paying Agent for the Notes.
SECTION 2.5. HOLDER LISTS.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of all Holders and shall otherwise comply with TIA ss. 312(a). If the
Trustee is not the Registrar, the Company shall furnish to the Trustee at least
seven Business Days before each interest payment date and at such other times as
the Trustee may request in writing, a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of the Holders of
Notes and the Company shall otherwise comply with TIA ss. 312(a).
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SECTION 2.6. TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Global Notes. A Global Note may
not be transferred as a whole except by the Depository to a nominee of the
Depository, by a nominee of the Depository to the Depository or to another
nominee of the Depository, or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository. All Global Notes
will be exchanged by the Company for Definitive Notes if (i) DTC (x) notifies
the Company that it is unwilling or unable to continue as Depository for the
Global Notes and the Company thereupon fails to appoint a successor depositary
within 90 days or (y) has ceased to be a clearing agency registered under the
Exchange Act, (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of Definitive Notes in exchange for the
Global Notes or (iii) there shall have occurred and be continuing a Default or
an Event of Default with respect to the Notes. Upon the occurrence of either of
the preceding events in (i), (ii) or (iii) above, Definitive Notes shall be
issued in such names as the Depository shall instruct the Trustee. Global Notes
also may be exchanged or replaced, in whole or in part, as provided in Sections
2.7 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or
in lieu of, a Global Note or any portion thereof, pursuant to Section 2.7 or
2.10 hereof, shall be authenticated and delivered in the form of, and shall be,
a Global Note. A Global Note may not be exchanged for another Note other than as
provided in this Section 2.6(a), however, beneficial interests in a Global Note
may be transferred and exchanged as provided in Section 2.6(b), (c) or (f)
hereof.
(b) Transfer and Exchange of Beneficial Interests in
Global Notes. The transfer and exchange of beneficial interests in the Global
Notes shall be effected through the Depository, in accordance with the
provisions of this Indenture and the Applicable Procedures. Beneficial interests
in the Restricted Global Notes shall be subject to restrictions on transfer
described in the Private Placement Legend to the extent required by the
Securities Act. Transfers of beneficial interests in the Global Notes also shall
require compliance with subparagraph (i) below as well as one or more of the
other following subparagraphs as applicable:
(i) Transfers and Exchanges of Beneficial Interests in
Global Notes. In connection with all transfers and exchanges of
beneficial interests, the transferor of such beneficial
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interest must deliver to the Registrar either (A) (1) a written order
from an Agent Member to the Depository in accordance with the
Applicable Procedures directing the Depository to credit or cause to be
credited a beneficial interest in another Global Note in an amount
equal to the beneficial interest to be transferred or exchanged and (2)
instructions given in accordance with the Applicable Procedures
containing information regarding the Agent Member account to be
credited with such increase or (B) (1) a written order from an Agent
Member given to the Depository in accordance with the Applicable
Procedures directing the Depository to cause to be issued a Definitive
Note in an amount equal to the beneficial interest to be transferred or
exchanged and (2) instructions given by the Depository to the Registrar
containing information regarding the Person in whose name such
Definitive Note shall be registered to effect the transfer or exchange
referred to in (1) above. Upon an Exchange Offer by the Company in
accordance with Section 2.6(f) hereof, the requirements of this Section
2.6(b)(i) shall be deemed to have been satisfied upon receipt by the
Registrar of the instructions contained in the Letter of Transmittal
delivered by the Holder of such beneficial interests in the Restricted
Global Notes. Upon satisfaction of all of the requirements for transfer
or exchange of beneficial interests in Global Notes contained in this
Indenture, the Notes and otherwise applicable under the Securities Act,
the Trustee shall adjust the principal amount of the relevant Global
Note(s) pursuant to Section 2.6(h) hereof.
(ii) Transfer of Beneficial Interests Among Restricted
Global Notes. (a) The following provisions shall apply with respect to
any proposed transfer of the 144A Global Note or the IAI Global Note to
a Restricted Global Note prior to the two-year anniversary of the Issue
Date:
(1) a transfer of the 144A Global Note
or the IAI Global Note or a beneficial interest
therein to a QIB shall be made upon the delivery of a
certificate in the form of Exhibit B hereto,
including the certifications in item (1) thereof;
(2) a transfer of the 144A Global Note
or the IAI Global Note or a beneficial interest
therein to
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an Institutional Accredited Investor shall be made
upon delivery of a certificate in the form of Exhibit
B hereto, including the certifications in item (3)
thereof; and
(3) a transfer of the 144A Global Note or
the IAI Global Note or a beneficial interest therein
to a Non-U.S. Person shall be made upon delivery of a
certificate in the form of Exhibit B hereto,
including the certifications in item (2) thereof.
The following provisions shall apply with respect to
any proposed transfer of a Regulation S Global Note prior to the
expiration of the Restricted Period:
(i) a transfer of a Regulation S Global Note
or a beneficial interest therein to a QIB shall be
made upon the delivery of a certificate in the form
of Exhibit B hereto, including the certifications in
item (1) thereof;
(ii) a transfer of a Regulation S Global
Note or a beneficial interest therein to an
Institutional Accredited Investor shall be made upon
delivery of a certificate in the form of Exhibit B
hereto, including the certifications in item (3)
thereof; and
(iii) a transfer of a Regulation S Global
Note or a beneficial interest therein to a Non-U.S.
Person shall be made upon the delivery of a
certificate in the form of Exhibit B hereto,
including the certifications in item (2) thereof.
After the expiration of the Restricted Period, interests in a
Regulation S Global Note may be transferred without requiring certification.
(iii) Transfer and Exchange of Beneficial Interests in a
Restricted Global Note for Beneficial Interests in an Unrestricted
Global Note. A beneficial interest in any Restricted Global Note may be
exchanged by any holder thereof for a beneficial interest in an
Unrestricted Global Note or transferred to a Person who takes delivery
thereof in the form
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of a beneficial interest in an Unrestricted Global Note if the exchange
or transfer complies with the requirements of clause (i) above and:
(A) such exchange or transfer is effected pursuant
to the Exchange Offer in accordance with the Registration
Rights Agreement and the holder of the beneficial interest to
be transferred, in the case of an exchange, or the
transferee, in the case of a transfer, is not (1) a
Broker-Dealer, (2) a Person participating in the distribution
of the Notes issued in the Exchange Offer or (3) a Person who
is an affiliate (as defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the
Shelf Registration Statement in accordance with the
Registration Rights Agreement;
(C) any such transfer is effected by a Broker-Dealer
pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial
interest in a Restricted Global Note proposes to
exchange such beneficial interest for a beneficial
interest in an Unrestricted Global Note, a
certificate from such holder in the form of Exhibit C
hereto, including the certifications in item (1)(a)
thereof;
(2) if the holder of such beneficial
interest in a Restricted Global Note proposes to
transfer such beneficial interest to a Person who
shall take delivery thereof in the form of a
beneficial interest in an Unrestricted Global Note, a
certificate from such holder in the form of Exhibit B
hereto, including the certifications in item (4)
thereof; and
(3) in each such case set forth in this
subparagraph (D), an Opinion of Counsel in form
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reasonably acceptable to the Registrar to the effect
that such exchange or transfer is in compliance with
the Securities Act and that the restrictions on
transfer contained herein and in the Private
Placement Legend are not required in order to
maintain compliance with the Securities Act.
If any such transfer is effected pursuant to subparagraph (B)
or (D) above at a time when an Unrestricted Global Note has not yet been issued,
the Company shall issue and, upon receipt of an authentication order in
accordance with Section 2.2 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
principal amount of beneficial interests transferred pursuant to subparagraph
(B) or (D) above.
Beneficial interests in an Unrestricted Global Note cannot be
exchanged for, or transferred to, Persons who take delivery thereof in the form
of a beneficial interest in a Restricted Global Note.
(c) Transfer or Exchange of Beneficial Interests in
Global Notes for Definitive Notes.
(i) If any holder of a beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest
for a Restricted Definitive Note or to transfer such beneficial
interest to a Person who takes delivery thereof in the form of a
Restricted Definitive Note, then, upon receipt by the Registrar of the
following documentation:
(A) if the holder of such beneficial interest
proposes to exchange such beneficial interest for a Restricted
Definitive Note, a certificate from such holder in the form of
Exhibit C hereto, including the certifications in item (2)(a)
thereof;
(B) if such beneficial interest is being transferred
to a QIB in accordance with Rule 144A under the Securities
Act, a certificate to the effect set forth in Exhibit B
hereto, including the certifications in item (1) thereof;
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(C) if such beneficial interest is being transferred
to a Non-U.S. Person in an offshore transaction in accordance
with Rule 903 or Rule 904 under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (2) thereof;
(D) if such beneficial interest is being transferred
pursuant to an exemption from the registration requirements of
the Securities Act in accordance with Rule 144 under the
Securities Act, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(a)
thereof;
(E) if such beneficial interest is being transferred
to an Institutional Accredited Investor in reliance on an
exemption from the registration requirements of the Securities
Act other than those listed in subparagraphs (B) through (D)
above, a certificate to the effect set forth in Exhibit B
hereto, including the certifications, certificates and Opinion
of Counsel required by item (3)(d) thereof, if applicable, and
Exhibit D;
(F) if such beneficial interest is being transferred
to the Company or any of its Subsidiaries, a certificate to
the effect set forth in Exhibit B hereto, including the
certifications in item (3)(b) thereof; or
(G) if such beneficial interest is being transferred
pursuant to an effective registration statement under the
Securities Act, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(c)
thereof,
the Trustee shall cause the aggregate principal amount of the applicable
Restricted Global Note to be reduced accordingly pursuant to Section 2.6(h)
hereof, and the Company shall execute and the Trustee shall authenticate and
deliver or cause to be delivered to the Person designated in the instructions a
Restricted Definitive Note in the appropriate principal amount. Any Restricted
Definitive Note issued in exchange for a beneficial interest in a Restricted
Global Note pursuant to this Section 2.6(c) shall be registered in such name or
names and in such
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authorized denomination or denominations as the holder of such beneficial
interest shall instruct the Registrar through instructions from the Depository
and the Agent Member. The Trustee shall deliver such Restricted Definitive Notes
to the Persons in whose names such Notes are so registered. Any Restricted
Definitive Note issued in exchange for a beneficial interest in a Restricted
Global Note pursuant to this Section 2.6(c)(i) shall bear the Private Placement
Legend and shall be subject to all restrictions on transfer contained therein.
(ii) Notwithstanding 2.6(c)(i) hereof, a holder of a
beneficial interest in a Restricted Global Note may exchange such
beneficial interest for an Unrestricted Definitive Note or may transfer
such beneficial interest to a Person who takes delivery thereof in the
form of an Unrestricted Definitive Note if:
(A) such exchange or transfer is effected pursuant to
the Exchange Offer in accordance with the Registration Rights
Agreement and the holder of such beneficial interest, in the
case of an exchange, or the transferee, in the case of a
transfer, is not (1) a Broker-Dealer, (2) a Person
participating in the distribution of the Notes issued in the
Exchange Offer or (3) a Person who is an affiliate (as defined
in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the
Shelf Registration Statement in accordance with the
Registration Rights Agreement;
(C) any such transfer is effected by a Broker-Dealer
pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial
interest in a Restricted Global Note proposes to
exchange such beneficial interest for an Unrestricted
Definitive Note, a certificate from such holder in
the form of Exhibit C hereto, including the
certifications in item (1)(b) thereof;
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(2) if the holder of such beneficial
interest in a Restricted Global Note proposes to
transfer such beneficial interest to a Person who
shall take delivery thereof in the form of an
Unrestricted Definitive Note, a certificate from such
holder in the form of Exhibit B hereto, including the
certifications in item (4) thereof; and
(3) in each such case set forth in this
subparagraph (D), an Opinion of Counsel in form
reasonably acceptable to the Company, to the effect
that such exchange or transfer is in compliance with
the Securities Act and that the restrictions on
transfer contained herein and in the Private
Placement Legend are not required in order to
maintain compliance with the Securities Act.
(iii) If any holder of a beneficial interest in an
Unrestricted Global Note proposes to exchange such beneficial interest
for an Unrestricted Definitive Note or to transfer such beneficial
interest to a Person who takes delivery thereof in the form of an
Unrestricted Definitive Note, then, upon satisfaction of the conditions
set forth in Section 2.6(b)(i) hereof, the Trustee shall cause the
aggregate principal amount of the applicable Unrestricted Global Note
to be reduced accordingly pursuant to Section 2.6(h) hereof, and
the Company shall execute and the Trustee shall authenticate and
deliver or cause to be delivered to the Person designated in the
instructions an Unrestricted Definitive Note in the appropriate
principal amount. Any Unrestricted Definitive Note issued in exchange
for a beneficial interest pursuant to this Section 2.6(c)(iii) shall be
registered in such name or names and in such authorized denomination or
denominations as the holder of such beneficial interest shall instruct
the Registrar through instructions from the Depository and the Agent
Member. The Trustee shall deliver or cause to be delivered such
Unrestricted Definitive Notes to the Persons in whose names such Notes
are so registered. Any Unrestricted Definitive Note issued in exchange
for a beneficial interest pursuant to this section 2.6(c)(iii) shall
not bear the Private Placement Legend. A beneficial interest in an
Unrestricted Global Note cannot be exchanged for a Restricted
Definitive Note or transferred to a Person who takes delivery thereof
in the form of a Restricted Definitive Note.
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(d) Transfer and Exchange of Definitive Notes for
Beneficial Interests in Global Note.
(i) If any Holder of a Restricted Definitive Note
proposes to exchange such Note for a beneficial interest in a
Restricted Global Note or to transfer such Restricted Definitive Notes
to a Person who takes delivery thereof in the form of a beneficial
interest in a Restricted Global Note, then, upon receipt by the
Registrar of the following documentation:
(A) if the Holder of such Restricted Definitive Note
proposes to exchange such Note for a beneficial interest in a
Restricted Global Note, a certificate from such Holder in the
form of Exhibit C hereto, including the certifications in item
(2)(b) thereof;
(B) if such Restricted Definitive Note is being
transferred to a QIB in accordance with Rule 144A under the
Securities Act, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (1)
thereof;
(C) if such Restricted Definitive Note is being
transferred to a Non-U.S. Person in an offshore transaction in
accordance with Rule 903 or Rule 904 under the Securities Act,
a certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (2) thereof; or
(D) if such Restricted Definitive Note is being
transferred to an Institutional Accredited Investor pursuant
to an exemption from the registration requirements of the
Securities Act, certificates to the effect set forth in
Exhibit B hereto, including the certifications in item (3)
thereof and Exhibit D;
the Trustee shall cancel the Restricted Definitive Note, increase or cause to be
increased the aggregate principal amount of, in the case of clause (A) above,
the appropriate Restricted Global Note, in the case of clause (B) above, the
144A Global Note, in the case of clause (C) above, the Regulation S Global Note
and in the case of clause (D) above, the IAI Global Note.
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(ii) A Holder of a Restricted Definitive Note may
exchange such Note for a beneficial interest in an Unrestricted Global
Note or transfer such Restricted Definitive Note to a Person who takes
delivery thereof in the form of a beneficial interest in an
Unrestricted Global Note
if:
(A) such exchange or transfer is effected pursuant to
the Exchange Offer in accordance with the Registration Rights
Agreement and the Holder, in the case of an exchange, or the
transferee, in the case of a transfer, is not (1) a
Broker-Dealer, (2) a Person participating in the distribution
of the Notes issued in the Exchange Offer or (3) a Person who
is an affiliate (as defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the
Shelf Registration Statement in accordance with the
Registration Rights Agreement;
(C) any such transfer is effected by a Broker-Dealer
pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Restricted
Definitive Notes proposes to exchange such Notes for
a beneficial interest in the Unrestricted Global
Note, a certificate from such Holder in the form of
Exhibit C hereto, including the certifications in
item (1)(c) thereof;
(2) if the Holder of such Restricted
Definitive Notes proposes to transfer such Notes to a
Person who shall take delivery thereof in the form of
a beneficial interest in the Unrestricted Global
Note, a certificate from such Holder in the form of
Exhibit B hereto, including the certifications in
item (4) thereof; and
(3) in each such case set forth in this
subparagraph (D), an Opinion of Counsel in form
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reasonably acceptable to the Company to the effect
that such exchange or transfer is in compliance with
the Securities Act, that the restrictions on transfer
contained herein and in the Private Placement Legend
are not required in order to maintain compliance with
the Securities Act, and such Restricted Definitive
Notes are being exchanged or transferred in
compliance with any applicable blue sky securities
laws of any State of the United States.
Upon satisfaction of the conditions of any of the subparagraphs in this
Section 2.6(d)(ii), the Trustee shall cancel the Restricted Definitive
Notes and increase or cause to be increased the aggregate principal
amount of the Unrestricted Global Note.
(iii) A Holder of an Unrestricted Definitive Note may
exchange such Note for a beneficial interest in an Unrestricted Global
Note or transfer such Unrestricted Definitive Notes to a Person who
takes delivery thereof in the form of a beneficial interest in an
Unrestricted Global Note at any time. Upon receipt of a request for
such an exchange or transfer, the Trustee shall cancel the applicable
Unrestricted Definitive Note and increase or cause to be increased the
aggregate principal amount of the Unrestricted Global Note.
If any such exchange or transfer from a Definitive Note to a
beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or
(iii) above at a time when an Unrestricted Global Note has not yet been issued,
the Company shall issue and, upon receipt of an authentication order in
accordance with Section 2.2 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
principal amount of beneficial interests transferred pursuant to subparagraphs
(ii)(B), (ii)(D) or (iii) above.
(e) Transfer and Exchange of Definitive Notes for Definitive
Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance
with the provisions of this Section 2.6(e), the Registrar shall register the
transfer or exchange of Definitive Notes. Prior to such registration of transfer
or exchange, the requesting Holder shall present or surrender to the
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Registrar the Definitive Notes duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Registrar duly executed by
such Holder or by his attorney, duly authorized in writing. In addition, the
requesting Holder shall provide any additional certifications, documents and
information, as applicable, pursuant to the provisions of this Section 2.6(e).
(i) Restricted Definitive Notes may be transferred to
and registered in the name of Persons who take delivery thereof if the
Registrar receives the following:
(A) if the transfer will be made pursuant to Rule
144A under the Securities Act, then the transferor must
deliver a certificate in the form of Exhibit B hereto,
including the certifications in item (1) thereof;
(B) if the transfer will be made pursuant to Rule 903
or Rule 904, then the transferor must deliver a certificate in
the form of Exhibit B hereto, including the certifications in
item (2) thereof; and
(C) if the transfer will be made pursuant to any
other exemption from the registration requirements of the
Securities Act, then the transferor must deliver a certificate
in the form of Exhibit B hereto, including the certifications,
certificates and Opinion of Counsel required by item (3)
thereof, if applicable.
(ii) Any Restricted Definitive Note may be exchanged by
the Holder thereof for an Unrestricted Definitive Note or transferred
to a Person or Persons who take delivery thereof in the form of an
Unrestricted Definitive Note if:
(A) such exchange or transfer is effected pursuant to
the Exchange Offer in accordance with the Registration Rights
Agreement and the Holder, in the case of an exchange, or the
transferee, in the case of a transfer, is not (1) a
Broker-Dealer, (2) a Person participating in the distribution
of the Notes issued in the Exchange Offer or (3) a Person who
is an affiliate (as defined in Rule 144) of the Company;
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(B) any such transfer is effected pursuant to the
Shelf Registration Statement in accordance with the
Registration Rights Agreement;
(C) any such transfer is effected by a Broker-Dealer
pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Restricted
Definitive Notes proposes to exchange such Notes for
an Unrestricted Definitive Note, a certificate from
such Holder in the form of Exhibit C hereto,
including the certifications in item (l)(d) thereof;
(2) if the Holder of such Restricted
Definitive Notes proposes to transfer such Notes to a
Person who shall take delivery thereof in the form of
an Unrestricted Definitive Note, a certificate from
such Holder in the form of Exhibit B hereto,
including the certifications in item (4) thereof; and
(3) in each such case set forth in this
subparagraph (D), an Opinion of Counsel in form
reasonably acceptable to the Company to the effect
that such exchange or transfer is in compliance with
the Securities Act, that the restrictions on transfer
contained herein and in the Private Placement Legend
are not required in order to maintain compliance with
the Securities Act, and such Restricted Definitive
Note is being exchanged or transferred in compliance
with any applicable blue sky securities laws of any
State of the United States.
(iii) A Holder of Unrestricted Definitive Notes may
transfer such Notes to a Person who takes delivery thereof in the form
of an Unrestricted Definitive Note. Upon receipt of a request for such
a transfer, the Registrar shall register the Unrestricted Definitive
Notes pursuant to the instructions
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from the Holder thereof. Unrestricted Definitive Notes cannot be
exchanged for or transferred to Persons who take delivery thereof in
the form of a Restricted Definitive Note.
(f) Exchange Offer. Upon the occurrence of the Exchange Offer
in accordance with the Registration Rights Agreement, the Company shall issue
and, upon receipt of an authentication order in accordance with Section 2.2, the
Trustee shall authenticate (i) one or more Unrestricted Global Notes in an
aggregate principal amount equal to the principal amount of the beneficial
interests in the Restricted Global Notes tendered for acceptance by persons that
are not (x) Broker-Dealers, (y) Persons participating in the distribution of the
Notes issued in the Exchange Offer or (z) Persons who are Affiliates (as defined
in Rule 144) of the Company and accepted for exchange in the Exchange Offer and
(ii) Unrestricted Definitive Notes in an aggregate principal amount equal to the
principal amount of the Restricted Definitive Notes accepted for exchange in the
Exchange Offer. Concurrent with the issuance of such Notes, the Trustee shall
cause the aggregate principal amount of the applicable Restricted Global Notes
to be reduced accordingly, and the Company shall execute and the Trustee shall
authenticate and deliver or cause to be delivered to the Persons designated by
the Holders of Definitive Notes so accepted Unrestricted Definitive Notes in the
appropriate principal amount.
(g) Legends. The following legends shall appear on the face of
all Global Notes and Definitive Notes issued under this Indenture unless
specifically stated otherwise in the applicable provisions of this Indenture.
(i) Private Placement Legend.
(A) Except as permitted by subparagraph (B)
below, each Global Note and each Definitive Note (and
all Notes issued in exchange therefor or substitution
thereof) shall bear the legend in substantially the
following form:
"THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND,
ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN
THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT
AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF OR OF A
BENEFICIAL
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INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A
"QIB"), (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE
WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1),(2),(3) OR (7) OF REGULATION
D UNDER THE SECURITIES ACT) (AN "IAI"), (2) AGREES THAT IT WILL NOT RESELL OR
OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF ITS
SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB
PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION
MEETING THE REQUIREMENT OF RULE 144A UNDER THE SECURITIES ACT, (C) IN AN
OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULES 903 AND 904 OF THE
SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER
THE SECURITIES ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE
TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS
RELATING TO THE TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM
THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL
AMOUNT OF NOTES LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN
ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY)
OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND, IN EACH CASE, IN ACCORDANCE WITH APPLICABLE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION, AND (3) AGREES THAT IT
WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN,
THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO
THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE
CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF
THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS."
(B) Notwithstanding the foregoing, any
Unrestricted Global Note or Unrestricted Definitive
Note issued pursuant to subparagraphs (b)(iii),
(c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii),
(e)(iii) or (f) to this Section 2.6 (and all Notes
issued in exchange therefor or substitution thereof)
shall not bear the Private Placement Legend.
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(ii) Global Note Legend. Each Global Note shall bear a
legend in substantially the following form:
"THIS GLOBAL NOTE IS HELD BY THE DEPOSITORY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE
BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY
PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE
SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.7 OF THE
INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN
PART PURSUANT TO SECTION 2.6(a) OF THE INDENTURE, (III) THIS GLOBAL
NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO
SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE
TRANSFERRED TO A SUCCESSOR DEPOSITORY WITH THE PRIOR WRITTEN CONSENT OF
THE COMPANY."
(h) Cancellation and/or Adjustment of Global Notes. At such
time as all beneficial interests in a particular Global Note have been exchanged
for Definitive Notes or a particular Global Note has been redeemed, repurchased
or cancelled in whole and not in part, each such Global Note shall be returned
to or retained and cancelled by the Trustee in accordance with Section 2.11
hereof. At any time prior to such cancellation, if any beneficial interest in a
Global Note is exchanged for or transferred to a Person who will take delivery
thereof in the form of a beneficial interest in another Global Note or for
Definitive Notes, the principal amount of Notes represented by such Global Note
shall be reduced accordingly and an endorsement shall be made on such Global
Note, by the Trustee or by the Depository at the direction of the Trustee, to
reflect such reduction; and if the beneficial interest is being exchanged for or
transferred to a Person who will take delivery thereof in the form of a
beneficial interest in another Global Note, such other Global Note shall be
increased accordingly and an endorsement shall be made on such Global Note, by
the Trustee or by the Depository at the direction of the Trustee, to reflect
such increase.
(i) General Provisions Relating to Transfers and
Exchanges.
(i) To permit registrations of transfers and exchanges,
the Company shall execute and the Trustee shall authenticate Global
Notes and Definitive Notes upon receipt of a Company Order or at the
Registrar's request.
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(ii) No service charge shall be made to a holder of a
beneficial interest in a Global Note or to a Holder of a Definitive
Note for any registration of transfer or exchange, but the Company may
require payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable in connection therewith (other than
any such transfer taxes or similar governmental charge payable upon
exchange or transfer pursuant to Sections 2.10, 3.7, 4.9, 4.10 and 9.5
hereof).
(iii) The Registrar shall not be required to register
the transfer of or exchange any Note selected for redemption in whole
or in part, except the unredeemed portion of any Note being redeemed in
part.
(iv) All Global Notes and Definitive Notes issued upon
any registration of transfer or exchange of Global Notes or Definitive
Notes shall be the valid obligations of the Company, evidencing the
same debt, and entitled to the same benefits under this Indenture, as
the Global Notes or Definitive Notes surrendered upon such registration
of transfer or exchange.
(v) The Company shall not be required (A) to issue, to
register the transfer of or to exchange Notes during a period beginning
at the opening of business 15 days before the day of any selection of
Notes for redemption under Section 3.3 hereof and ending at the close
of business on the day of selection, (B) to register the transfer of or
to exchange any Note so selected for redemption in whole or in part,
except the unredeemed portion of any Note being redeemed in part or (C)
to register the transfer of or to exchange a Note between a record date
and the next succeeding Interest Payment Date.
(vi) Prior to due presentment for the registration of a
transfer of any Note, the Trustee, any Agent and the Company may deem
and treat the Person in whose name any Note is registered as the
absolute owner of such Note for the purpose of receiving payment of
principal of and interest on such Notes and for all other purposes, and
none of the Trustee, any Agent or the Company shall be affected by
notice to the contrary.
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(vii) The Trustee shall authenticate Global Notes and
Definitive Notes in accordance with the provisions of Section 2.2
hereof.
(viii) All certifications, certificates and Opinions of
Counsel required to be submitted to the Registrar pursuant to this
Section 2.6 to effect a transfer or exchange may be submitted by
facsimile.
SECTION 2.7. REPLACEMENT NOTES.
If any mutilated Note is surrendered to the Trustee, or the
Company and the Trustee and the Company receive evidence to their satisfaction
of the destruction, loss or theft of any Note, the Company shall issue and the
Trustee, upon the written order of the Company signed by two Officers of the
Company, shall authenticate a replacement Note if the Trustee's and the
Company's requirements are met. If required by the Trustee or the Company, an
indemnity bond must be supplied by the Holder that is sufficient in the judgment
of the Trustee and the Company to protect the Company, the Trustee, any Agent
and any authenticating agent from any loss that any of them may suffer if a Note
is replaced. The Company may charge for its expenses in replacing a Note.
Every replacement Note is an additional obligation of the
Company and shall be entitled to all of the benefits of this Indenture equally
and proportionately with all other Notes duly issued hereunder.
SECTION 2.8. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Note
effected by the Trustee in accordance with the provisions hereof, and those
described in this Section as not outstanding. Except as set forth in Section 2.9
hereof, a Note does not cease to be outstanding because the Company or an
Affiliate of the Company holds the Note.
If a Note is replaced pursuant to Section 2.7 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Note is held by a bona fide purchaser.
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If the principal amount of any Note is considered paid under
Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If the Paying Agent (other than the Company, a Subsidiary or
an Affiliate of any thereof) holds, on a redemption date or maturity date, money
sufficient to pay Notes payable on that date, then on and after that date such
Notes shall be deemed to be no longer outstanding and shall cease to accrue
interest.
SECTION 2.9. TREASURY NOTES.
In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, waiver or consent, Notes owned
by the Company, or by an Affiliate of the Company, shall be considered as though
not outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Notes that a Responsible Officer of the Trustee has been informed of by the
Company as being so owned shall be so disregarded.
SECTION 2.10. TEMPORARY NOTES.
Until permanent Notes are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Notes upon a written order
of the Company signed by two Officers of the Company. Temporary Notes shall be
substantially in the form of permanent Notes but may have variations that the
Company considers appropriate for temporary Notes and as shall be reasonably
acceptable to the Trustee. Without unreasonable delay, the Company shall prepare
and the Trustee shall authenticate permanent Notes in exchange for temporary
Notes.
Holders of temporary Notes shall be entitled to all of the
benefits of this Indenture.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation and shall return
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cancelled Notes to the Company. The Company may not issue new Notes to replace
Notes that it has paid or that have been delivered to the Trustee for
cancellation.
SECTION 2.12. DEFAULTED INTEREST.
Interest on any Note which is payable, and is punctually paid
or duly provided for, on any Interest Payment Date shall be paid to the Person
in whose name that Note is registered at the close of business on the Regular
Record Date for such interest.
Any interest on any Note which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date and interest
on such defaulted interest at the applicable interest rate borne by the Notes,
to the extent lawful (such defaulted interest (and interest thereon) herein
collectively called "Defaulted Interest") shall forthwith cease to be payable to
the Holder on the relevant Regular Record Date by virtue of having been such
Holder; and such Defaulted Interest shall be paid by the Company to the Persons
in whose names the Notes are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be fixed in
the following manner. The Company shall give the Trustee at least 15 days'
written notice (unless a shorter period is acceptable to the Trustee for its
convenience) of the amount of Defaulted Interest proposed to be paid on each
Note and the date of the proposed payment, and at the same time the Company
shall deposit with the Trustee an amount of money equal to the aggregate amount
proposed to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to the date of
the proposed payment, such money when deposited to be held by the Trustee in
trust for the benefit of the Persons entitled to such Defaulted Interest as in
this subsection provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall not be more than 15 days
and not less than 10 days prior to the date of the proposed payment and not less
than 10 days after the receipt by the Trustee of the notice of the proposed
payment. The Trustee shall promptly notify the Company of such Special Record
Date. In the name and at the expense of the Company, the Trustee shall cause
notice of the proposed payment of such Defaulted Interest and the Special Record
Date therefor to be mailed, first-class postage prepaid, to each Holder at his
address as it appears in the Registrar, not less than 10 days prior to such
Special Record Date. Notice of the proposed
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payment of such Defaulted Interest and the Special Record Date therefor having
been so mailed, such Default Interest shall be paid to the Persons in whose
names the Notes are registered at the close of business on such Special Record
Date.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
SECTION 2.13. CUSIP NUMBERS.
The Company in issuing the Notes may use "CUSIP" numbers (if
then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in
notices of redemption as a convenience to Holders; provided that any such notice
may state that no representation is made as to the correctness of such numbers
either as printed on the Notes or as contained in any notice of a redemption and
that reliance may be placed only on the other identification numbers printed on
the Notes, and any such redemption shall not be affected by any defect in or
omission of such numbers. The Company will promptly notify the Trustee of any
change in the "CUSIP" numbers.
ARTICLE 3
REDEMPTION AND PREPAYMENT
SECTION 3.1. APPLICABILITY OF ARTICLE.
Redemption of Notes at the election of the Company shall be
made in accordance with this Article 3.
SECTION 3.2. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Company to redeem any Notes pursuant to
Section 3.8 shall be evidenced by a Board Resolution. In case of any redemption
at the election of the Company, the Company shall, at least 45 but not more than
60 days prior to the Redemption Date fixed by it (unless a shorter notice period
shall be satisfactory to the Trustee for its convenience), notify the Trustee of
such Redemption Date and of the principal amount of Notes to be redeemed.
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SECTION 3.3. SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption or purchase, as the case may be, shall be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which such Notes are listed, or, if
such Notes are not so listed, on a pro rata basis, by lot or by such other
method as the Trustee shall deem fair and appropriate (and in such manner as
complies with applicable legal requirements); provided that no Notes of $1,000
or less shall be redeemed in part.
The Trustee shall promptly notify the Company and the
Registrar in writing of the Notes selected for redemption and, in the case of
any Notes selected for partial redemption, the principal amount thereof to be
redeemed.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to redemption of Notes shall relate,
in the case of any Note redeemed or to be redeemed only in part, to the portion
of the principal amount of such Note which has been or is to be redeemed.
SECTION 3.4. NOTICE OF REDEMPTION.
Notices of redemption shall be mailed by first class mail,
postage prepaid, at least 30 but not more than 60 days before the Redemption
Date to each Holder of Notes to be redeemed at such Holder's registered address.
If any Note is to be redeemed in part only, any notice of redemption that
relates to such Note shall state the portion of the principal amount thereof
that has been or is to be redeemed.
All notices of redemption shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) if less than all Notes then outstanding are to be
redeemed, the identification (and, in the case of a Note to be redeemed in part,
the principal amount) of the particular Notes to be redeemed;
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(d) that on the Redemption Date, the Redemption Price will
become due and payable upon each such Note or portion thereof, and that (unless
the Company shall default in payment of the Redemption Price) interest thereon
shall cease to accrue on or after said date;
(e) the places or places where such Notes are to be
surrendered for payment of the Redemption Price;
(f) that Notes called for redemption must be surrendered to
the Paying Agent to collect the Redemption Price;
(g) the CUSIP number, if any, relating to such Notes; and
(h) in the case of a Note to be redeemed in part, the
principal amount of such Note to be redeemed and that after the Redemption Date
upon surrender of such Note, a new Note or Notes in the aggregate principal
amount equal to the unredeemed portion thereof will be issued.
Notice of redemption of Notes to be redeemed at the election
of the Company shall be given by the Company or, at its request, by the Trustee
in the name and at the expense of the Company.
SECTION 3.5. DEPOSIT OF REDEMPTION PRICE.
On or prior to any Redemption Date, the Company shall deposit
with the Trustee or with a Paying Agent (or, if the Company is acting as its
owning Paying Agent, segregate and hold in trust as provided in Section 4.3) an
amount of money in same day funds (or New York Clearing House funds if such
deposit is made prior to the applicable Redemption Date) sufficient to pay the
Redemption Price of, and accrued interest on, all the Notes or portions thereof
which are to be redeemed on that date.
SECTION 3.6. NOTES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Notes
so to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Notes shall cease
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to bear interest. Upon surrender of any such Note for redemption in accordance
with said notice, such Note shall be paid by the Company at the Redemption Price
together with accrued interest to the Redemption Date; provided, however, that
installments of interest whose Stated Maturity is on or prior to the Redemption
Date shall be payable to the Holders of such Notes, registered as such on the
relevant Regular Record Dates according to the terms and the provisions of
Section 2.12.
If any Note called for redemption shall not be so paid upon
surrender thereof for redemption, the principal thereof (and premium, if any,
thereon) shall, until paid, bear interest from the Redemption Date at the rate
borne by such Note.
SECTION 3.7. NOTES REDEEMED IN PART.
Any Note which is to be redeemed only in part shall be
surrendered at the office or agency of the Company maintained for such purpose
pursuant to Section 4.2 (with, if the Company, the Registrar or the Trustee so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company, the Registrar or the Trustee duly executed by, the
Holder thereof or his attorney duly authorized in writing), and a new Note in
principal amount equal to the unpurchased or unredeemed portion will be issued
in the name of the Holder thereof upon cancellation of the original Note. On and
after the purchase or redemption date, unless the Company defaults in payment of
the purchase or redemption price, interest shall cease to accrue on Notes or
portions thereof purchased or called for redemption.
SECTION 3.8. OPTIONAL REDEMPTION.
(a) Except as described in this Section 3.8, the Notes will
not be redeemable at the Company's option prior to January 1, 2003. On and after
January 1, 2003, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
written notice, at the Redemption Prices (expressed as a percentage of principal
amount) set forth below, plus accrued and unpaid interest, and Liquidated
Damages thereon, if any, to the applicable Redemption Date, if redeemed during
the twelve-month period beginning on January 1 of each of the years indicated
below:
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<TABLE>
<CAPTION>
YEAR REDEMPTION
- ---- PRICE
-----
<S> <C>
2003............................................. 104.313%
2004............................................. 102.875%
2005............................................. 101.438%
2006 and thereafter.............................. 100.000%
</TABLE>
In addition, at any time on or prior to January 1, 2001, the
Company may (but will not have the obligation to) redeem for cash up to 35% of
the aggregate principal amount of Notes originally issued under this Indenture
on the Issue Date at a Redemption Price equal to 108.625% of the aggregate
principal amount thereof, plus accrued and unpaid interest, and Liquidated
Damages thereon, if any, to the Redemption Date, with the net cash proceeds of
an Equity Offering; provided that at least 65% of the aggregate principal amount
of Notes originally issued under this Indenture on the Issue Date remains
outstanding immediately after the occurrence of such redemption; provided,
further that such redemption occurs within 90 days of the date of closing of
such Equity Offering.
(b) Any redemption pursuant to this Section 3.8 shall be made
pursuant to the provisions of Sections 3.1 through 3.7 hereof.
SECTION 3.9. MANDATORY REDEMPTION.
Except as set forth under Sections 3.10, 4.9 and 4.10 hereof,
the Company shall not be required to make mandatory redemption or sinking fund
payments with respect to the Notes.
SECTION 3.10. OFFER TO PURCHASE BY APPLICATION OF EXCESS
PROCEEDS.
In the event that, pursuant to Section 4.10 hereof, the
Company shall be required to commence an offer to all Holders to purchase Notes
(an "Asset Sale Offer"), it shall follow the procedures specified below.
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The Asset Sale Offer will remain open for a period of 20
Business Days following its commencement and no longer, except to the extent
that a longer period is required by applicable law (the "Asset Sale Offer
Period"). No later than five Business Days after the termination of the Asset
Sale Offer Period (the "Asset Sale Purchase Date"), the Company will purchase
the principal amount of Notes and Pari Passu Indebtedness required to be
purchased pursuant to Section 4.10 hereof (the "Asset Sale Offer Amount") or, if
less than the Asset Sale Offer Amount has been so validly tendered, all Notes
and Pari Passu Indebtedness validly tendered in response to the Asset Sale
Offer. Payment for any Notes so purchased will be made in the same manner as
interest payments are made on the Notes.
If the Asset Sale Purchase Date is on or after a Regular
Record Date and on or before the related Interest Payment Date, any accrued and
unpaid interest and Liquidated Damages will be paid to the Person in whose name
a Note is registered at the close of business on such Regular Record Date, and
no additional interest will be payable to Holders who tender Notes pursuant to
the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company
shall send, by first class mail, a notice to the Trustee and each of the Holders
of Notes, with a copy to the Trustee. The notice shall contain all instructions
and materials necessary to enable such holders or lenders, as the case may be,
to tender Notes pursuant to the Asset Sale Offer. The notice, which shall govern
the terms of the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to
this Section 3.10 and Section 4.10 hereof and the
length of time the Asset Sale Offer shall remain
open;
(b) the Asset Sale Offer Amount, the purchase price and
the Asset Sale Purchase Date;
(c) that any Note not tendered or accepted for payment
shall continue to accrete or accrue interest;
(d) that, unless the Company defaults in making such
payment, any Note accepted for payment pursuant to
the Asset Sale Offer shall cease to accrue interest
after the Asset Sale Purchase Date;
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(e) that Holders of Notes electing to have a Note
purchased pursuant to any Asset Sale Offer shall be
required to surrender the Note with the form
entitled "Option of Holder to Elect Purchase" on
the reverse of the Note completed, or transfer by
book entry transfer, to the Company, a depositary,
if appointed by the Company, or a Paying Agent at
the address specified in the notice not later than
the third Business Day preceding the end of the
Asset Sale Offer Period;
(f) that Holders of Notes shall be entitled to withdraw
their election if the Company, the depositary or
the Paying Agent, as the case may be, receives, not
later than the Business Day preceding the end of
the Asset Sale Offer Period, a telegram, facsimile
transmission or letter setting forth the name of
such holder, the principal amount of the Note that
the Holder of Notes delivered for purchase and a
statement that such holder is withdrawing his
election to have such Note purchased;
(g) that, if the aggregate principal amount of Notes
surrendered by Holders of Notes or holders or
lenders of Pari Passu Indebtedness, as the case may
be, exceeds the Asset Sale Offer Amount, the
Company shall select the Notes and Pari Passu
Indebtedness, if any, to be purchased on a pro rata
basis (with such adjustments as may be deemed
appropriate by the Company so that only Notes and
Pari Passu Indebtedness in denominations of $1,000,
or integral multiples thereof, shall be purchased);
and
(h) that Holders of Notes whose notes were purchased only
in part shall be issued new notes equal in principal
amount to the unpurchased portion of the notes
surrendered (or transferred by book-entry transfer).
On or before the Asset Sale Purchase Date, the Company will,
to the extent lawful, accept for payment, on a pro rata basis by principal
amount tendered to the extent necessary, the Asset Sale Offer Amount of Notes
and Pari Passu Indebtedness or portions
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thereof so validly tendered and not properly withdrawn pursuant to the Asset
Sale Offer, or if less than the Asset Sale Offer Amount has been validly
tendered and not properly withdrawn, all Notes and Pari Passu Indebtedness so
validly tendered and not properly withdrawn. The Company shall deliver to the
Trustee an Officers' Certificate stating that such Notes or portions thereof
were accepted for payment by the Company in accordance with the terms of this
section and, in addition, the Company shall deliver all certificates and notices
required, if any, by the agreements governing the Pari Passu Indebtedness. The
Company, the Depository or the Paying Agent, as the case may be, shall promptly
(but in any case not later than five days after the Asset Sale Purchase Date)
mail or deliver to each tendering Holder of Notes or holder or lender of Pari
Passu Indebtedness, as the case may be, an amount equal to the purchase price of
the Notes or Pari Passu Indebtedness so validly tendered and not properly
withdrawn by such Holder or lender, as the case may be, and accepted by the
Company for purchase, and the Company shall promptly issue a new Note, and the
Trustee, upon delivery of an Officers' Certificate from the Company will
authenticate and mail or deliver such new Note to such Holder, in a principal
amount equal to any unpurchased portion of the Note surrendered. In addition,
the Company shall take any and all other actions required by the agreements
governing the Pari Passu Indebtedness. Any Note not so accepted shall be
promptly mailed or delivered by the Company to the Holder thereof. The Company
shall publicly announce the results of the Asset Sale Offer on the Asset Sale
Purchase Date.
Other than as specifically provided in this Section 3.10, any
purchase pursuant to this Section 3.10 shall be made pursuant to the provisions
of Sections 3.1 through 3.7 hereof.
ARTICLE 4
COVENANTS
SECTION 4.1. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company shall pay or cause to be paid the principal of,
premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes. Principal, premium, if any, Liquidated Damages, if any,
and interest shall be considered paid on the date due if the Paying Agent, if
other than the Company or a Subsidiary thereof, holds as of 10:00 a.m. Eastern
Time on the
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due date money deposited by the Company in immediately available funds and
designated for and sufficient to pay all principal, premium, if any, Liquidated
Damages, if any, and interest then due.
SECTION 4.2. MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain, in The City of New York, an office
or agency where Notes may be presented or surrendered for payment, where Notes
may be surrendered for registration of transfer or exchange and where notices
and demands to or upon the Company in respect of the Notes and this Indenture
may be served. The Company will give prompt written notice to the Trustee of any
change in the location of any such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, and the Company hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
The Company may from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Notes may
be presented or surrendered for any or all such purposes, and may from time to
time rescind such designation; provided, however, that no such designation or
recession shall in any manner relieve the Company of its obligation to maintain
an office or agency in The City of New York for such purposes. The Company will
give prompt written notice to the Trustee of any such designation or recession
and any change in the location of any such office or agency.
SECTION 4.3. MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent,
it will, on or before each due date of the principal of, premium, if any, or
interest on any of the Notes, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum sufficient to pay the principal, premium, if any,
or interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided, and will promptly notify the Trustee
of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for
the Notes, it will, on or before each due date of the principal
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of, premium, if any, or interest on any Notes, deposit with a Paying Agent a sum
in same day funds (or New York Clearing House funds if such deposit is made
prior to the date on which such deposit is required to be made) sufficient to
pay the principal, premium, if any, or interest so becoming due (or at the
option of the Company, payment of interest may be mailed by check to the Holders
of the Notes at their respective addresses set forth in the register of Holders
of Notes; provided that all payments with respect to Global Notes and Definitive
Notes, the holders of which have given wire transfer instructions to the Company
shall receive such payments of interest by wire transfer in same day funds) such
sum to be held in trust for the benefit of the Persons entitled to such
principal, premium or interest and (unless such Paying Agent is the Trustee) the
Company will promptly notify the Trustee of such action or any failure so to
act.
The Company will cause each Paying Agent other than the
Trustee to execute and deliver to the Trustee an instrument in which such Paying
Agent shall agree with the Trustee, subject to the provisions of this Section,
that such Paying Agent will:
(a) hold all sums held by it for the payment of the
principal of, premium, if any, or interest on Notes
in trust for the benefit of the Persons entitled
thereto until such sums shall be paid to such Persons
or otherwise disposed of as herein provided;
(b) give the Trustee notice of any default by the Company
(or any other obligor upon the Notes) in the making
of any payment of principal, premium, if any, or
interest;
(c) at any time during the continuance of any such
default, upon the written request of the Trustee,
forthwith pay to the Trustee all sums so held in
trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all
respects with the provisions of this Indenture
relating to the duties, rights and obligations of
such Paying Agent.
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The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of, premium,
if any, or interest on any Note and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company on Company Request or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Note shall thereafter, as an
unsecured general creditor, look only to the Company for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, shall at the expense of the Company cause
notice to be promptly sent to each Holder that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such notification any unclaimed balance of such money then remaining
will be repaid to the Company.
SECTION 4.4. REPORTS.
Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act or otherwise
report on an annual and quarterly basis on forms provided for such annual and
quarterly reporting pursuant to rules and regulations promulgated by the
Commission, the Company shall, so long as any Notes are outstanding, furnish to
the Holders of Notes and the Trustee, within 15 days after it is or would have
been required to file such with the Commission, (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-K and 10-Q if the Company was required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information
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only, reports thereon by the certified independent accountants of the Company
and (ii) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company was required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, the Company will file copies of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. In addition, the Company shall, until
the effectiveness of the registration statement relating to the Exchange Offer
pursuant to the Registration Rights Agreement, furnish to the Holders and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
SECTION 4.5. STATEMENT AS TO COMPLIANCE; NOTICE OF DEFAULT.
(a) The Company will deliver to the Trustee, within 90 days
after the end of each fiscal year ending after the date hereof, a brief
certificate of its principal executive officer, principal financial officer or
principal accounting officer stating whether, to such officer's knowledge, the
Company is in compliance with all covenants and conditions to be complied with
by it under this Indenture (including with respect to any Restricted Payments
made during such year, the basis upon which the calculations required by Section
4.11 were computed, which calculations may be based on the Company's latest
financial statements), and further stating, as to each Officer signing such
certificate, that to the best of his or her knowledge each entity is not in
default in the performance or observance of any terms, provisions and conditions
of this Indenture (or, if a Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he or she may have
knowledge and what action the Company is taking or proposes to take with respect
thereto) and that to the best of his or her knowledge no event has occurred and
remains in existence by reason of which payments on account of the principal of
or interest, if any, on the Notes is prohibited or if such event has occurred, a
description of the event and what action the Company is taking or proposes to
take with respect thereto. For purposes of this Section 4.5, such compliance
shall be determined without regard to any period of grace or requirement of
notice under this Indenture.
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(b) So long as not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
annual reports delivered pursuant to Section 4.4 above shall be accompanied by a
written statement of the Company's independent public accountants (who shall be
a firm of established national reputation) that in making the examination
necessary for certification of such financial statements, nothing has come to
their attention that would lead them to believe that the Company has violated
any provisions of Article Four or Article Five hereof or, if any such violation
has occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any Person for any failure to obtain knowledge of any such violation.
(c) The Company shall, within five Business Days, upon
becoming aware of any Default or Event of Default, deliver to the Trustee an
Officer's Certificate specifying such Default or Event of Default.
SECTION 4.6. PAYMENT OF TAXES AND OTHER CLAIMS.
The Company will pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (a) all material taxes,
assessments and governmental charges levied or imposed upon it or any Subsidiary
or upon the income, profits or property of the Company or any of its
Subsidiaries and (b) all material lawful claims for labor, materials and
supplies, which, if unpaid, might by law become a lien upon the property of the
Company or any of its Subsidiaries that could produce a material adverse effect
on the consolidated financial condition of the Company; provided, however, that
the Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings and in
respect of which appropriate reserves (in the good faith judgment of management
of the Company) are being maintained in accordance with GAAP.
SECTION 4.7. LIMITATION ON LIENS.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer
to exist or become effective any Lien securing Indebtedness of any kind (other
than Permitted Liens) upon any of
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its property or assets, now owned or hereafter acquired, unless all payments
under the Notes are secured by such Lien prior to, or on an equal and ratable
basis with if such Indebtedness is pari passu with the Notes, the Indebtedness
so secured for so long as such Indebtedness is secured by such Lien.
SECTION 4.8. CORPORATE EXISTENCE.
Subject to Article Five, the Company shall do or cause to be
done all things necessary to preserve and keep in full force and effect its
corporate existence and that of each Restricted Subsidiary of the Company and
the corporate rights (charter and statutory), corporate licenses and corporate
franchises of the Company and its Restricted Subsidiaries, except where a
failure to do so, singly or in the aggregate, is not likely to have a materially
adverse effect upon the business, assets, financial conditions or results of
operations of the Company and the Restricted Subsidiaries taken as a whole
determined on a consolidated basis in accordance with GAAP; provided that prior
to the occurrence and continuance of an Event of Default, the Company shall not
be required to preserve any such existence (except of the Company), right,
license or franchise if the Board of Directors of the Company, or of the
Restricted Subsidiary concerned, shall determine and deliver to the Trustee an
Officer's Certificate to the effect that the preservation thereof is no longer
desirable in the conduct of the business of the Company or such Restricted
Subsidiary and that the loss thereof is not disadvantageous in any material
respect to the Holders.
SECTION 4.9. OFFER TO REPURCHASE UPON CHANGE OF CONTROL.
Upon the occurrence of a Change of Control, each Holder of
Notes shall have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of purchase (the "Change of Control Payment"). Within 30 days following any
Change of Control, the Company shall mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase the Notes pursuant to the procedures required by this Indenture
and described in such notice. The Company shall comply with the
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requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this Indenture, the Company will
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations described in this Indenture by virtue
thereof.
The Change of Control Offer shall remain open for a period of
20 Business Days following its commencement and no longer, except to the extent
that a longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Offer
Period (the "Change of Control Purchase Date"), the Company shall purchase all
Notes validly tendered and not properly withdrawn pursuant to the Change of
Control Offer. Payment for any Notes so purchased will be made in the same
manner as interest payments are made on the Notes.
If the Change of Control Purchase Date is on or after Regular
Record Date and on or before the related Interest Payment Date, any accrued and
unpaid interest and Liquidated Damages, if any, will be paid to the Person in
whose name a Note is registered at the close of business on such Regular Record
Date, and no additional interest will be payable to Holders who tender Notes
pursuant to the Change of Control Offer.
Upon the commencement of a Change of Control Offer, the
Company shall send, by first class mail, a notice to each of the Holders, with a
copy of each such notice to the Trustee. The notice shall contain all
instructions and materials necessary to enable such Holders to tender Notes
pursuant to the Change of Control Offer. The Change of Control Offer shall be
made to all Holders. The notice, which shall govern the terms of the Change of
Control Offer, shall state:
(a) that the Change of Control Offer is being made
pursuant to this covenant and the length of time the Change of Control
Offer shall remain open;
(b) the purchase price and the Change of Control
Purchase Date;
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(c) that any Note which is not validly tendered or is
otherwise not accepted for payment shall continue to accrete or accrue
interest;
(d) that, unless the Company defaults in making such
payment, any Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrete or accrue interest after the
Change of Control Purchase Date;
(e) that Holders electing to have a Note purchased
pursuant to any Change of Control Offer shall be required to surrender
the Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Note completed, or transfer by book-entry
transfer, to the Company, a depositary, if appointed by the Company, or
a Paying Agent at the address specified in the notice at least three
days before the Change of Control Purchase Date;
(f) that Holders shall be entitled to withdraw their
election if the Company, the depositary or the Paying Agent, as the
case may be, receives, not later than the expiration of the Change of
Control Offer Period, a telegram, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of the Note
the Holder delivered for purchase and a statement that such Holder is
withdrawing his election to have such Note purchased;
(g) that Holders whose Notes are being purchased in
part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered, which unpurchased portion
must be equal to $1,000 in principal amount or an integral multiple
thereof;
(h) a description of the transaction resulting in
such Change of Control Offer; and
(i) any additional instructions a Holder must follow
in order to have its Notes repurchased in accordance with this Section
4.9.
On the Change of Control Purchase Date, the Company shall, to
the extent lawful, (1) accept for payment all Notes or portions thereof validly
tendered and not properly withdrawn pursuant to the Change of Control Offer, (2)
deposit with the
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Paying Agent an amount equal to the Change of Control Payment in respect of all
Notes or portions thereof so validly tendered and not properly withdrawn and (3)
deliver or cause to be delivered to the Trustee the Notes so accepted together
with an Officers' Certificate stating the aggregate principal amount of Notes or
portions thereof being purchased by the Company. The Paying Agent shall promptly
mail to each Holder of the Notes so validly tendered and not properly withdrawn
the Change of Control Payment for such Notes and the Trustee shall promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note shall be in a principal
amount of $1,000 or an integral multiple thereof. Prior to complying with the
provisions of this covenant, but in any event within 30 days following a Change
of Control, the Company shall either repay all outstanding Senior Debt or obtain
the requisite consents, if any, under all agreements governing outstanding
Senior Debt to permit the repurchase of the Notes required by this covenant. The
Company shall publicly announce the results of the Change of Control Offer on
the Change of Control Purchase Date.
SECTION 4.10. ASSET SALES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or
the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets or
Equity Interests sold or otherwise disposed of (evidenced by a resolution of the
Board of Directors of such entity set forth in an Officers' Certificate
delivered to the Trustee) and (ii) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary from such Asset Sale, plus
all other Asset Sales since the date hereof, on a cumulative basis, is in the
form of cash, Cash Equivalents, properties and capital assets to be used by the
Company or any Restricted Subsidiary in the Oil and Gas Business or oil and gas
properties owned or held by another Person which are to be used in the Oil and
Gas Business of the Company or its Restricted Subsidiaries, or any combination
thereof (collectively the "Cash Consideration" ); provided that the amount of
(x) any liabilities (as shown on the Company's or such Restricted Subsidiary's
most recent balance sheet) of the Company or any Restricted Subsidiary (other
than contingent liabilities and
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liabilities that are by their terms subordinated to the Notes or any Subsidiary
Guarantee) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Restricted
Subsidiary from further liability and (y) any non Cash Consideration received by
the Company or any such Restricted Subsidiary from such transferee that are
converted into cash by the Company or such Restricted Subsidiary within 90 days
after such Asset Sale, shall be deemed to be cash for purposes of this provision
to the extent of the cash received.
Within 360 days after the receipt of any Net Proceeds from an
Asset Sale, the Company (or the Restricted Subsidiary, as applicable) may apply,
or enter into binding contracts (subject only to obtaining required governmental
approvals) irrevocably committing the Company or such Restricted Subsidiary to
apply, such Net Proceeds to an investment in another business, the making of a
capital expenditure or the acquisition of other tangible assets, in each case in
the Oil and Gas Business, or the Company (or the Restricted Subsidiary, as
applicable) may apply such Net Proceeds to the permanent reduction of Senior
Debt. Any Net Proceeds from Asset Sales that are not applied or invested or
committed to be applied or invested, as provided in the preceding sentence of
this paragraph will be deemed to constitute "Excess Proceeds." On the 361st day
after an Asset Sale, if the aggregate amount of Excess Proceeds exceeds $10.0
million, the Company will be required to make an offer to all Holders of Notes
and, to the extent required by the terms thereof, to all holders or lenders of
Pari Passu Indebtedness (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes and any such Pari Passu Indebtedness to which the
asset sale offer applies that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest and, with respect to the Notes or similar
securities, Liquidated Damages or comparable amounts in the case of similar
securities, if any, thereon to the date of purchase, in accordance with the
procedures set forth in Section 3.10 hereof or the agreements governing the Pari
Passu Indebtedness, as applicable. To the extent that the aggregate amount of
Notes and Pari Passu Indebtedness so validly tendered and not properly withdrawn
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Notes surrendered by Holders thereof and other
Pari Passu Indebtedness
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surrendered by holders or lenders thereof, collectively, exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes and Pari Passu Indebtedness
to be purchased on a pro rata basis on the basis of the aggregate principal
amount of tendered Notes and Pari Passu Indebtedness. Upon completion of such
Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
The Company shall comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws or regulations are applicable in connection with the
repurchase of the Notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in this Indenture by virtue thereof.
SECTION 4.11. LIMITATION ON RESTRICTED PAYMENTS.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution on account of the Company's or any of its
Restricted Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving the Company)
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire
or retire for value any Equity Interests of the Company or any Restricted
Subsidiary of the Company; (iii) prepay, purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness that is subordinated to the Notes,
except a scheduled repayment of principal or a payment of principal at stated
maturity; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the
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applicable four-quarter period, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of Section 4.12 hereof; and
(c) such Restricted Payment, together with the aggregate of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date hereof, does not exceed the sum of, without
duplication, (i) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from the beginning of the
first fiscal quarter commencing after the date hereof to the end of the
Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit or loss, less 100% of such deficit or loss), plus (ii) to the
extent not included in the amount described in clause (i) above, 100%
of the aggregate net cash proceeds and the fair market value of
marketable securities (as determined in good faith by the Company)
received after the date hereof by the Company from the issue or sale
of, or from additional capital contributions in respect of, Equity
Interests of the Company (but excluding cash proceeds and marketable
securities received from the sale of Equity Interests to members of
management or directors of the Company and its Restricted Subsidiaries
after the Issue Date to the extent such amounts have been applied to
make Restricted Payments in accordance with clause (vi) of the next
succeeding paragraph) or of debt securities of the Company that have
been converted into or exchanged for Equity Interests of the Company
(other than Equity Interests (or debt securities) sold to a Subsidiary
of the Company and other than Disqualified Stock or debt securities
that have been converted into or exchanged for Disqualified Stock),
plus (iii) to the extent that any Restricted Investment that was made
after the date hereof is sold to an unaffiliated purchaser for cash or
marketable securities or otherwise liquidated or repaid for cash or
marketable securities, the lesser of the cash proceeds and/or the fair
market value of such marketable securities (as determined in good faith
by the Company), as the case may be, and the amount of the Restricted
Investment, which amount was included in the calculation of the amount
of Restricted Payments, plus (iv) the amount equal to the net reduction
in Investments in Unrestricted Subsidiaries resulting from (A)
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payments of dividends or interest or other transfers of assets to the
Company or any Restricted Subsidiary from Unrestricted Subsidiaries,
(B) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries or (C) the receipt of proceeds by the Company or any
Restricted Subsidiary from the sale or other disposition of any portion
of any Investment in an Unrestricted Subsidiary not to exceed the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, which amount was included
in the calculation of the amount of Restricted Payments under this
clause (c) and not otherwise included in the calculation of
Consolidated Net Income, plus (v) $5.0 million.
The foregoing provisions will not prohibit (i) the payment of
any dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the provisions of this
Indenture; (ii) the making of any Restricted Investment in exchange for, or out
of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of, or from substantially concurrent additional
capital contributions in respect of, Equity Interests of the Company (other than
Disqualified Stock); provided that the amount of any such cash proceeds that are
utilized for any such Restricted Investment shall be excluded from clause
(c)(ii) of the preceding paragraph; (iii) the redemption, repurchase, retirement
or other acquisition of any Equity Interests of the Company in exchange for, or
out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of, or from substantially concurrent additional
capital contributions (other than from a Subsidiary of the Company) in respect
of, other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c)(ii) of the preceding paragraph; (iv) the defeasance, redemption
or repurchase of subordinated Indebtedness with the net cash proceeds from (X)
an incurrence of Permitted Refinancing Indebtedness or (Y) the substantially
concurrent sale (other than to a Subsidiary of the Company) of, or from
substantially concurrent additional capital contributions (other than from a
Subsidiary of the Company) in respect of, Equity Interests of the Company (other
than Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such defeasance, redemption or
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repurchase shall be excluded from clause (c)(ii) of the preceding paragraph; (v)
any dividend or other distribution made by any Wholly Owned Subsidiary of the
Company to another Wholly Owned Subsidiary of the Company or to the Company; and
(vi) the repurchase, retirement or other acquisition or retirement for value of
common Equity Interests of the Company held by any future, present or former
employee or director of the Company or any of the Company's Restricted
Subsidiaries pursuant to any management equity plan or stock option plan or any
other management or employee benefit plan or agreement in connection with the
termination of such person's employment for any reason (including by reason of
death or disability); provided, however, that the aggregate Restricted Payments
made under this clause (vi) do not exceed in any calendar year $2.5 million
(with unused amounts in any calendar year being carried over to succeeding
calendar years subject to a maximum (without giving effect to the following
proviso) of $7.5 million in any calendar year); provided further that such
amount in any calendar year may be increased by an amount not to exceed (A) the
cash proceeds received by the Company from the sale of Equity Interests of the
Company to members of management or directors of the Company and its Restricted
Subsidiaries that occurs after the Issue Date (to the extent the cash proceeds
from the sale of such Equity Interests have not otherwise been applied to the
payment of Restricted Payments by virtue of the preceding paragraph (c)), plus
(B) the cash proceeds of key man life insurance policies received by the Company
and its Restricted Subsidiaries after the Issue Date, less (C) the amount of any
Restricted Payments made pursuant to clauses (A) and (B) of this subparagraph
(vi); provided however that in the case of any transaction described in clauses
(ii) through (iv) and clause (vi) no Default or Event of Default will have
occurred and be continuing immediately after such transaction. In determining
the aggregate amount of Restricted Payments made after the date hereof, 100% of
the amounts expended pursuant to the foregoing clauses (i) and (vi) shall be
included in such calculation and none of the amounts expended pursuant to the
foregoing clauses (ii), (iii), (iv) and (v) shall be included in such
calculation.
As of the date hereof, all of the Company's Subsidiaries were
Restricted Subsidiaries. The Board of Directors may designate any Subsidiary to
be an Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
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the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. Such designation will only
be permitted if such Restricted Payment would be permitted at such time and if
such Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the
fair market value (evidenced by a resolution of the Board of Directors set forth
in an Officers' Certificate delivered to the Trustee) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by the Company or
the applicable Restricted Subsidiary, as the case may be, pursuant to the
Restricted Payment. Not later than the date of making any Restricted Payment,
the Company shall deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment is permitted and setting forth the basis upon which the
calculation required by this covenant were computed, which calculations may be
based upon the Company's latest available financial statements.
SECTION 4.12. LIMITATION ON INCURRENCE OF INDEBTEDNESS AND
ISSUANCE OF PREFERRED STOCK.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness) and that the Company will not
issue any shares of Disqualified Stock and will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock; provided, however, that the
Company may incur Indebtedness (including Acquired Indebtedness) or issue shares
of Disqualified Stock if: (i) the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.5 to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period; and (ii) no Default or Event
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of Default will have occurred and be continuing or would occur as a consequence
thereof.
The foregoing provisions will not apply to:
(i) the incurrence by the Company of Indebtedness under the
Credit Agreement, so long as the aggregate principal amount of all
Indebtedness outstanding under the Credit Agreement does not, at any
one time, exceed the greater of (i) $150 million (less any amounts
outstanding under the Credit Agreement on the Issue Date after giving
effect to the repayment of Indebtedness under the Credit Agreement from
the proceeds of the offering of the Notes) (or, if there is any
permanent reduction in the aggregate principal amount permitted to be
borrowed under the Credit Agreement, such lesser aggregate principal
amount) and (ii) 30% of Adjusted Consolidated Net Tangible Assets
determined immediately after the incurrence of such Indebtedness
(including the application of the proceeds therefrom);
(ii) the incurrence by the Company of Indebtedness represented
by the Notes or by the Restricted Subsidiaries of Subsidiary
Guarantees;
(iii) the guarantee by any Subsidiary Guarantor of any
Indebtedness that is permitted by this Indenture to be incurred by the
Company at the time such Indebtedness was incurred;
(iv) the incurrence by the Company or any Restricted
Subsidiary of Permitted Refinancing Indebtedness in exchange for, or
the net proceeds of which are used to extend, refinance, renew,
replace, defease or refund, Indebtedness of such entity that was
permitted by this Indenture to be incurred (including Indebtedness
previously incurred pursuant to this clause (iv), but excluding
Indebtedness under clauses (i), (iii), (v), (vi), and (ix));
(v) the incurrence by the Company or any Restricted Subsidiary
of intercompany Indebtedness between or among the Company and any of
its Restricted Subsidiaries or between or among any Restricted
Subsidiary; provided, however, that (i) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness
being held by a Person other
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than a Restricted Subsidiary and (ii) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary will be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be; provided, further, that if the Company
is the obligor on such Indebtedness, such Indebtedness is expressly
subordinate to the payment in full of all Obligations with respect to
the Notes;
(vi) the incurrence, assumption or creation of Hedging
Obligations of the Company or a Restricted Subsidiary pursuant to
interest rate protection obligations, but only to the extent that the
stated aggregate notional amounts of such obligations do not exceed
105% of the aggregate principal amount of the Indebtedness covered by
such interest rate protection obligations; the incurrence, assumption
or creation of Hedging Obligations under currency exchange contracts
entered into in the ordinary course of business for the purpose of
limiting risks that arise in the ordinary course of business of the
Company and its Restricted Subsidiaries; and the incurrence, assumption
or creation of hedging arrangements that the Company or a Restricted
Subsidiary enters into in the ordinary course of business in the Oil
and Gas Business for the purpose of protecting its production against
fluctuations in oil or natural gas prices;
(vii) Indebtedness or Disqualified Stock of Persons that are
acquired by the Company or any of its Restricted Subsidiaries or merged
into a Restricted Subsidiary in accordance with the terms of this
Indenture; provided that such Indebtedness or Disqualified Stock is not
incurred in contemplation of such acquisition or merger; and provided
further that after giving effect to such acquisition, the Company would
be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of this covenant;
(viii) all Indebtedness of the Company and its Restricted
Subsidiaries in existence on the date of this Indenture; and
(ix) the incurrence by the Company and its Restricted
Subsidiaries of Indebtedness in an aggregate principal amount
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of up to $40 million (which shall be in addition to amounts which may
be incurred pursuant to clauses (i) through (viii) above).
In the event that Indebtedness falls within more than one
category of permitted Indebtedness under this Indenture, the Company will
determine the applicable category and such Indebtedness will only be counted
once. If Indebtedness is issued at less than the principal amount thereof, the
amount of such Indebtedness for purposes of the above limitations shall equal
the amount of the liability as determined in accordance with GAAP.
The Company shall not permit any Unrestricted Subsidiary to
incur any Indebtedness other than Non-Recourse Debt; provided, however, if any
such Indebtedness ceases to be Non-Recourse Debt, such event shall be deemed to
constitute an incurrence of Indebtedness by the Company or a Restricted
Subsidiary.
SECTION 4.13. TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is in the ordinary course
of business, (ii) the terms of such Affiliate Transaction are fair and
reasonable to the Company or such Restricted Subsidiary, as the case may be, and
are at least as favorable as the terms which could be obtained by the Company or
such Restricted Subsidiary, as the case may be, in a comparable transaction made
on an arm's-length basis between unaffiliated parties and (iii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction entered
into after the date hereof involving aggregate consideration in excess of $2.5
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clauses (i)
and (ii) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction involving aggregate consideration in excess
of $10.0 million, an opinion as to the fairness to the Company or such
Restricted Subsidiary of such Affiliate Transaction from a
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financial point of view issued by an investment banking firm of national
standing; provided that the following will not be deemed to be Affiliate
Transactions: (a) reasonable fees and compensation paid to, and indemnity
provided on behalf of, officers and directors of the Company or any Restricted
Subsidiary as determined in good faith by the appropriate Board of Directors or
senior management; (b) transactions with customers, clients, suppliers, joint
venture partners or purchasers or sellers of goods or services, in each case in
the ordinary course of business (including, without limitation, pursuant to
joint venture agreements) and otherwise in compliance with the terms of this
Indenture and which comply with the terms of clause (ii) above; (c) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary (including, without
limitation, any such employment agreements entered into prior to the date of
this Indenture); (d) transactions between or among the Company and/or its
Restricted Subsidiaries; (e) Restricted Payments and Permitted Investments that
are permitted by Section 4.11 and the definition of Permitted Investment; and
(f) any contracts, agreements or understandings existing as of the date hereof
and any amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto or any replacement agreement thereof so long
as any such amendment or replacement agreement is not more disadvantageous to
the holders of the Notes in any material respect than the original agreement as
in effect on the date hereof).
SECTION 4.14. DIVIDEND AND OTHER PAYMENT RESTRICTIONS
AFFECTING RESTRICTED SUBSIDIARIES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (i) (a) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness owed to the Company or any
of its Restricted Subsidiaries, (ii) make loans or advances to the Company or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by
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reason of (a) Existing Indebtedness as in effect on the date hereof, (b) the
Credit Agreement as in effect as of the date hereof, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Credit
Agreement as in effect on the date hereof, (c) this Indenture and the Notes, (d)
any instrument governing Acquired Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Acquired Indebtedness
was incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that the Consolidated Cashflow of such Person is
not taken into account in determining whether such acquisition was permitted by
the terms of this Indenture, (e) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (f) by
reason of customary non-assignment provisions in leases and licenses entered
into in the ordinary course of business and consistent with past practices, (g)
agreements relating to the financing of the acquisition of real or tangible
personal property acquired after the date hereof, provided, that such
encumbrance or restriction relates only to the property which is acquired and in
the case of any encumbrance or restriction that constitutes a Lien, such Lien
constitutes a Purchase Money Lien, (h) applicable law or (i) customary
restrictions contained in asset sale agreements limiting the transfer of such
assets pending the closing of such sale.
SECTION 4.15. LIMITATIONS ON GUARANTEES OF INDEBTEDNESS BY
RESTRICTED SUBSIDIARIES.
(a) The Company shall not permit any Restricted Subsidiary to
guarantee the payment of any Indebtedness of the Company unless (i) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to this Indenture providing for a Subsidiary Guarantee of such
Restricted Subsidiary except that with respect to a guarantee of Indebtedness of
the Company (A) if the Notes are subordinated in right of payment to
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such Indebtedness, the Subsidiary Guarantee under the supplemental indenture
shall be subordinated to such Restricted Subsidiary's guarantee with respect to
such Indebtedness substantially to the same extent as the Notes are subordinated
to such Indebtedness under this Indenture and (B) if such Indebtedness is by its
express terms subordinated in right of payment to the Notes, any such guarantee
of such Restricted Subsidiary with respect to such Indebtedness shall be
subordinated in right of payment to such Restricted Subsidiary's Subsidiary
Guarantee with respect to the Notes substantially to the same extent as such
Indebtedness is subordinated to the Notes; (ii) such Restricted Subsidiary
waives and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any other
rights against the Company or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Subsidiary Guarantee of the
Notes; and (iii) such Restricted Subsidiary shall deliver to the Trustee an
opinion of counsel to the effect that (A) such Subsidiary Guarantee has been
duly executed and authorized and (B) such Subsidiary Guarantee constitutes a
valid, binding and enforceable obligation of such Restricted Subsidiary, except
insofar as enforcement thereof may be limited by bankruptcy, insolvency or
similar laws (including, without limitation, all laws relating to fraudulent
transfers) and except insofar as enforcement thereof is subject to general
principles of equity; provided that this paragraph (a) shall not be applicable
to any guarantee of any Restricted Subsidiary (x) that (A) existed at the time
such Person became a Restricted Subsidiary of the Company and (B) was not
incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary of the Company or (y) that guarantees the payment of
Obligations of the Company under the Credit Agreement or any other Senior Debt
of the Company and any refunding, refinancing or replacement thereof, in whole
or in part, provided that such refunding, refinancing or replacement thereof
constitutes Senior Debt of the Company.
(b) Notwithstanding the foregoing and the other provisions of
this Indenture, any Subsidiary Guarantee shall provide by its terms that it
shall be automatically and unconditionally released and discharged upon (i) any
sale, exchange or transfer, to any Person not an Affiliate of the Company, of
all of the Company's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary whether by way of merger, consolidation or
otherwise (which sale, exchange or transfer is not prohibited by this
Indenture); provided that the Net Proceeds of
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such sale or other disposition are applied in accordance with Section 4.10 or
(ii) the release or discharge of the guarantee which resulted in the creation of
such Subsidiary Guarantee, except a discharge or release by or as a result of
payment under such guarantee.
SECTION 4.16. LIMITATION ON OTHER SENIOR SUBORDINATED
INDEBTEDNESS.
The Company shall not incur, create, issue, assume, guarantee
or otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to any Senior Debt and senior in any respect in right of
payment to the Notes. In addition, the Company shall not permit the Subsidiary
Guarantors, if any, directly or indirectly, to incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to Senior Debt and senior in any respect in right of
payment to the Subsidiary Guarantees, if any; provided, however, that the
foregoing limitations will not apply to distinctions between categories of
Indebtedness that exist by reason of any Liens arising or created in accordance
with the provisions of this Indenture in respect of some but not all such
Indebtedness.
SECTION 4.17. LIMITATION AS TO UNRESTRICTED SUBSIDIARIES.
The Company shall not, and shall not permit any Unrestricted
Subsidiary to create, assume, incur, guarantee or otherwise become liable in
respect of any Indebtedness except Non-Recourse Debt. The Company shall not, and
shall not permit its Restricted Subsidiaries to designate, create or purchase
any Unrestricted Subsidiary, unless the Board of Directors of the Company shall
have made a determination (as set forth in the resolution approving such
designation, creation or purchase) that the designation, creation and operation
of the Unrestricted Subsidiary is not reasonably expected to materially and
adversely affect the financial condition, business, or operations of the Company
and its Restricted Subsidiaries taken together as a whole (which resolution
shall be conclusive evidence of compliance with this provision).
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SECTION 4.18. LINE OF BUSINESS.
The Company shall not, and shall not permit any Subsidiary to,
engage in any line of business other than the Oil and Gas Business, except to
the extent as would not be material to the Company and its Subsidiaries taken as
a whole.
SECTION 4.19. EFFECTIVENESS OF COVENANTS.
The covenants described in Sections 4.7, 4.11, 4.12, 4.13,
4.14, 4.16 and 4.17 will no longer be in effect upon the Company reaching
Investment Grade Status.
ARTICLE 5
SUCCESSORS
SECTION 5.1. MERGER, CONSOLIDATION, OR SALE OF ALL OR
SUBSTANTIALLY ALL ASSETS.
(a) The Company shall not, in a single transaction or series
of related transactions, consolidate or merge with or into (whether or not the
Company is the surviving corporation), or directly and/or indirectly through its
Restricted Subsidiaries sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets determined on a
consolidated basis for the Company and its Restricted Subsidiaries taken as a
whole in one or more related transactions, to another Person unless (i) the
Company is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition will have been
made, is a corporation organized or existing under the laws of one of the states
of the United States or the District of Columbia; (ii) the Person formed by or
surviving any such consolidation or merger (if other than the Company) or the
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition will have been made assumes all the obligations of the Company,
under the Notes and this Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; (iv) the Company or the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made will, at the time of such
transaction and after giving pro forma effect thereto
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as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of Section 4.12; and (v) the Company delivers to the Trustee an
Officers' Certificate and an Opinion of Counsel addressed to the Trustee with
respect to the foregoing matters. Each Subsidiary Guarantor, if any, unless it
is the other party to the transactions described above, shall have confirmed by
supplemental indenture that its Subsidiary Guarantee shall apply to such
Person's obligations under this Indenture and the Notes.
(b) Subject to the provisions of the succeeding sentence
relating to sales of Subsidiary Guarantors, the Company shall not permit a
Subsidiary Guarantor to consolidate with, or merge with or into (whether or not
such Subsidiary Guarantor is the surviving Person), another Person other than
the Company or another Subsidiary Guarantor whether or not affiliated with such
Subsidiary Guarantor, unless (i) subject to the provisions of the following
sentence, the Person formed by or surviving any such consolidation or merger (if
other than such Subsidiary Guarantor) assumes all the obligations of such
Subsidiary Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee in respect of the Notes, this Indenture
and the Subsidiary Guarantees; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; and (iii) the Company
delivers to the Trustee an Officers' Certificate and an Opinion of Counsel
addressed to the Trustee with respect to the foregoing matters. In the event of
a sale or other disposition of all or substantially all of the assets of a
Subsidiary Guarantor to a third party (in each case, other than to an Affiliate
of the Company), by way of merger, consolidation or otherwise, or a sale or
other disposition of all of the Capital Stock of a Subsidiary Guarantor, then
such Subsidiary Guarantor (in the event of a sale or other disposition, by way
of such a merger, consolidation or otherwise, of all of the Capital Stock of
such Subsidiary Guarantor) or the Person acquiring the property (in the event of
a sale or other disposition of all or substantially all of the assets of such
Subsidiary Guarantor) will be released from and relieved of any obligations
under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with Section 4.10. Further,
notwithstanding the foregoing, the merger of the Company with an Affiliate
incorporated
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solely for the purpose of reincorporating the Company in another jurisdiction
shall be permitted.
SECTION 5.2. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger or any sale, assignment,
transfer, lease or conveyance or other disposition of all or substantially all
of the assets of the Company in accordance with Section 5.1, the Successor
Company will succeed to, and be substituted for, the Company under this
Indenture and the Notes.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT AND NOTICE THEREOF.
Each of the following constitutes an "Event of Default":
(a) default in payment when due of the principal of or
premium, if any, on the Notes;
(b) default for 30 days in the payment when due of
interest on, or Liquidated Damages with respect to,
the Notes;
(c) failure by the Company to comply with the provisions
described in Sections 4.9, 4.10, 4.11, or 5.1 of this
Indenture;
(d) failure by the Company or a Subsidiary Guarantor, if
any, for 60 days after notice from the Trustee or the
Holders of at least 25% in principal amount of the
then outstanding Notes to comply with any of its
other agreements in this Indenture, the Notes or the
Subsidiary Guarantees, if any;
(e) default under any mortgage, indenture or instrument
under which there may be issued or by which there
may be secured or evidenced any Indebtedness for
money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted
Subsidiaries), other than Indebtedness owed to the
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Company or a Wholly Owned Subsidiary, whether such
Indebtedness or guarantee now exists, or is created
after the date hereof, which default (a) is caused
by a failure to pay principal of or premium, if
any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such
Indebtedness on the date of such default unless
being contested in good faith by appropriate
proceedings (a "Payment Default") or (b) results in
the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal
amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness
under which there has been a Payment Default or the
maturity of which has been so accelerated,
aggregates $10.0 million or more;
(f) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in
excess of $10 million, which judgments are not paid,
discharged or stayed for a period of 60 days;
(g) the Company or any of its Significant Subsidiaries or
group of Restricted Subsidiaries that, together taken
(as of the latest audited consolidated financial
statements for the Company and its Subsidiaries),
would constitute a Significant Subsidiary (such group
herein referred to as a "Significant Group of
Subsidiaries"):
(i) commences a voluntary case,
(ii) consents to the entry of an order for
relief against it in an involuntary case
in which it is the debtor,
(iii) consents to the appointment of a
Custodian of it or for all or
substantially all of its property,
(iv) makes a general assignment for the
benefit of its creditors, or
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(v) admits in writing its inability
generally to pay its debts as the same
become due;
(h) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(i) is for relief against the Company, any
of its Significant Subsidiaries, or a
Significant Group of Subsidiaries in an
involuntary case in which it is the
debtor,
(ii) appoints a Custodian of the Company, any
of its Significant Subsidiaries, or a
Significant Group of Subsidiaries or for
all or substantially all of the property
of the Company, a Significant Subsidiary
or a Significant Group of Subsidiaries;
or
(iii) orders the liquidation of the Company,
any of its Significant Subsidiaries, or
a Significant Group of Subsidiaries;
and the order or decree contemplated in clauses (i), (ii) or
(iii) of this clause (h), remains unstayed and in effect for
60 consecutive days; or
(i) except as permitted herein, any Subsidiary Guarantee
shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any
reason to be in full force and effect or a
Subsidiary, or any Person acting on behalf of such
Subsidiary, shall deny or disaffirm its obligations
under its Subsidiary Guarantee.
SECTION 6.2. ACCELERATION OF MATURITY; RESCISSION.
If an Event of Default (other than of a type specified in
clauses (g) or (h) of Section 6.1) occurs and is continuing hereunder, the
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Notes may declare the principal, premium, if any, interest and any
other monetary obligations (including Liquidated Damages) on all the then
outstanding Notes to
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be due and payable immediately by notice in writing to the Company (and the
Trustee, if given by the Holders);
Notwithstanding the foregoing, in the case of an Event of
Default arising under clauses (g) or (h) of Section 6.1, all outstanding Notes
will become due and payable without further action or notice. The Holders of a
majority in principal amount of the Notes then outstanding by written notice to
the Trustee may rescind an acceleration and its consequences if the rescission
would not conflict with any judgment or decree and if all existing Events of
Default (except nonpayment of principal or interest or Liquidated Damages that
has become due solely because of the acceleration) have been cured or waived.
SECTION 6.3. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal, premium, if
any, and interest on the Notes or to enforce the performance of any provision of
the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Holder of a Note in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
SECTION 6.4. WAIVER OF PAST DEFAULTS.
Holders of a majority in aggregate principal amount of the
then outstanding Notes by notice to the Trustee may on behalf of the Holders of
all of the Notes waive an existing Default or Event of Default and its
consequences hereunder, except a continuing Default or Event of Default in the
payment interest on, or the principal of, premium, if any, or Liquidated Damages
on the Notes. Upon any such waiver, such Default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.
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SECTION 6.5. CONTROL BY MAJORITY.
The Holders of a majority in aggregate principal amount of the
then outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture that the Trustee determines
may be unduly prejudicial to the rights of other Holders of Notes or that may
involve the Trustee in personal liability. The Trustee may take any other action
which it deems proper which is not inconsistent with any such direction.
SECTION 6.6. LIMITATION ON SUITS.
No Holder of a Note will have any right to institute any
proceeding with respect to this Indenture or for any remedy hereunder, unless
(i) such Holder shall have previously given to the Trustee written notice of a
continuing Event of Default with respect to the Notes, (ii) the Holders of at
least 25% in aggregate principal amount of the Notes then outstanding shall have
made a written request to the Trustee to institute such proceeding and, if
requested by the Trustee, provided reasonable indemnity to the Trustee, with
respect to such proceeding and (iii) the Trustee shall not have received from
the Holders of a majority in aggregate principal amount of the Notes then
outstanding a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days.
SECTION 6.7. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the
right of any Holder of a Note to receive payment of principal, premium, if any,
and interest on any Note, on or after the respective due dates expressed in any
Note, or to bring suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the consent of such
Holder.
SECTION 6.8. COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.1(a) or (b)
occurs and is continuing, the Trustee is authorized to recover judgment in its
own name and as trustee of an express trust against
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the Company for the whole amount of principal of, premium, if any, and interest
and Liquidated Damages remaining unpaid on the Notes and interest on overdue
principal and, to the extent lawful, interest and such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel) and
the Holders of the Notes allowed in any judicial proceedings relative to the
Company (or any other obligor upon the Notes), its creditors or its property and
shall be entitled and empowered to collect, receive and distribute any money or
other property payable or deliverable on any such claims and any custodian in
any such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee, as administrative expenses associated with any such
proceeding and in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due to it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.7 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 7.7 hereof out of the estate in
any such proceeding, shall be denied for any reason, payment of the same shall
be secured by a Lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties that the Holders may be
entitled to receive in such proceeding whether in liquidation or under any plan
of reorganization or arrangement or otherwise. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
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SECTION 6.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article
Six, it shall pay out the money in the following order:
First: to the Trustee, its agents and attorneys for
amounts due under Section 7.7 hereof, including payment
of all compensation, expense and liabilities incurred,
and all advances made, by the Trustee and the costs and
expenses of collection;
Second: to holders of Senior Debt of the Company or
Senior Debt of the Subsidiary Guarantors, if any, to the
extent required by Article 10 hereof or any Subsidiary
Guarantee;
Third: to Holders of Notes for amounts due and unpaid on
the Notes for principal, premium, if any, and interest,
ratably, without preference or priority of any kind,
according to the amounts due and payable on the Notes for
principal, premium, if any, and interest, respectively;
Fourth: without duplication, to the Holders for any
other Obligations owing to the Holders under this
Indenture and the Notes; and
Fifth: to the Company or to such party as a court of
competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
payment to Holders of Notes pursuant to this Section 6.10.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees and expenses, against any party litigant in the suit,
having due regard to the merits and good faith of the claims or defenses made by
the party litigant. This Section does not apply to a suit by the Trustee, a suit
by a Holder of a Note
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pursuant to Section 6.7 hereof, or a suit by Holders of more than 10% in
principal amount of the then outstanding Notes.
SECTION 6.12. WAIVER OF STAY, EXTENSION OF USURY LAWS.
The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not hinder, delay or
impede the execution of any power herein granted to the Trustee, but will suffer
and permit the execution of every such power as though no such law had been
enacted.
ARTICLE 7
TRUSTEE
SECTION 7.1. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his own affairs.
(b) Except during the continuance of an Event of Default:
(1) the duties of the Trustee shall be determined
solely by the express provisions of this Indenture and the Trustee need perform
only those duties that are specifically set forth in this Indenture and no
others, and no implied covenants or obligations shall be read into this
Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or opinions
furnished to the Trustee and conforming to the requirements of this Indenture,
provided, that the Trustee
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shall examine the certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liabilities for its
own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of
paragraph (b) of this Section 7.1;
(ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5 hereof.
(d) Whether or not therein expressly so provided, every
provision of this Indenture that in any way relates to the Trustee is subject to
paragraphs (a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or incur any liability. The Trustee shall be
under no obligation to exercise any of its rights and powers under this
Indenture unless the Holders shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability, claim, damage or
expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
SECTION 7.2. RIGHTS OF TRUSTEE.
(a) The Trustee may conclusively rely upon any document
believed by it to be genuine and to have been signed or presented by the proper
person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The
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Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on such Officers' Certificate or Opinion of Counsel. The
Trustee may consult with counsel of its selection and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection from liability in respect of any action taken, suffered or omitted by
it hereunder in good faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any agent appointed
with due care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith that it believes to be authorized or within the
rights or powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders unless such Holders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee, in its individual or any other capacity, may
become the owner or pledgee of Notes and may otherwise deal with the Company
with the same rights it would have if it were not Trustee. However, in the event
that the Trustee acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue as
trustee or resign. Any Agent may do the same with like rights and duties. The
Trustee is also subject to Sections 7.10 and 7.11 hereof.
SECTION 7.4. TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture or the Notes, it
shall not be accountable for the Company's use of the
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proceeds from the Notes or any money paid to the Company or upon the direction
of the Company under any provision of this Indenture, it shall not be
responsible for the use or application of any money received by any Paying Agent
other than the Trustee, and it shall not be responsible for any statement or
recital herein or any statement in the Notes or any other document in connection
with the sale of the Notes or pursuant to this Indenture other than its
certificate of authentication.
SECTION 7.5. NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and
if it is known to the Trustee, the Trustee shall mail to Holders of Notes a
notice of the Default or Event of Default within 90 days after it occurs. Except
in the case of a Default or Event of Default in payment of principal of,
premium, if any, or interest on any Note, the Trustee may withhold the notice if
and so long as a committee of its Responsible Officers in good faith determines
that withholding the notice is in the interests of the Holders of the Notes.
SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.
Within 60 days after each February 1 beginning with the
February 1 following the date of this Indenture, and for so long as Notes remain
outstanding, the Trustee shall mail to the Holders of the Notes a brief report
dated as of such reporting date that complies with TIA ss. 313(a) (but if no
event described in TIA ss. 313(a) has occurred within the twelve months
preceding the reporting date, no report need be transmitted). The Trustee also
shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail all
reports as required by TIA ss. 313(c).
A copy of each report at the time of its mailing to the
Holders of Notes shall be mailed to the Company and filed with the Commission
and each stock exchange, if any, on which the Notes are listed in accordance
with TIA ss. 313(d). The Company shall promptly notify the Trustee when the
Notes are listed on any stock exchange or delisted therefrom.
SECTION 7.7. COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee, from time to time as may
be agreed upon between them, reasonable compensation for its
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acceptance of this Indenture and services hereunder. The Trustee's compensation
shall not be limited by any law on compensation of a trustee of an express
trust. The Company shall reimburse the Trustee promptly upon request for all
reasonable disbursements, advances and expenses incurred or made by it in
addition to the compensation for its services. Such expenses shall include the
reasonable compensation, disbursements and expenses of the Trustee's agents and
counsel.
The Company shall indemnify each of the Trustee and any
predecessor Trustee against any and all losses, liabilities or expenses
(including taxes other than taxes based on the income of the Trustee) incurred
by it arising out of or in connection with the acceptance or administration of
its duties under this Indenture, including the costs and expenses of enforcing
this Indenture against the Company (including this Section 7.7) and defending
itself against any claim (whether asserted by the Company or any Holder or any
other person) or liability in connection with the exercise or performance of any
of its powers or duties hereunder, except to the extent any such loss,
liability, claim, damage or expense may be attributable to its negligence or bad
faith. The Trustee shall notify the Company promptly of any claim for which it
may seek indemnity. Failure by the Trustee to so notify the Company shall not
relieve the Company of its obligations hereunder. The Company shall defend the
claim and the Trustee shall cooperate in the defense. The Trustee may have
separate counsel and the Company shall pay the reasonable fees and expenses of
such counsel. The Company need not pay for any settlement made without its
consent, which consent shall not be unreasonably withheld.
The obligations of the Company under this Section 7.7 shall
survive the satisfaction and discharge of this Indenture.
To secure the Company's payment obligations in this Section,
the Trustee shall have a Lien prior to the Notes on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on particular Notes. Such Lien shall survive the satisfaction and
discharge of this Indenture.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.1(g) or (h) hereof occurs, the expenses
and the compensation for the services
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(including the fees and expenses of its agents and counsel) are intended to
constitute expenses of administration under any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA ss.
313(b)(2) to the extent applicable.
SECTION 7.8. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section 7.8.
The Trustee may resign in writing at any time and be
discharged from the trust hereby created by so notifying the Company. The
Holders of Notes of a majority in principal amount of the then outstanding Notes
may remove the Trustee by so notifying the Trustee and the Company in writing.
The Company may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10
hereof,
(b) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any Bankruptcy
Law;
(c) a Custodian or public officer takes charge of the
Trustee or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office, the
Holders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company, or the Holders of Notes of at least 10% in
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principal amount of the then outstanding Notes may at the expense of the Company
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee, after written request by any Holder of a Note
who has been a Holder of a Note for at least six months, fails to comply with
Section 7.10, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, provided all sums
owing to the Trustee hereunder have been paid and subject to the Lien provided
for in Section 7.7 hereof. Notwithstanding replacement of the Trustee pursuant
to this Section 7.8, the Company's obligations under Section 7.7 hereof shall
continue for the benefit of the retiring Trustee.
SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business (including
the trust created by this Indenture) to, another corporation, the successor
corporation without any further act shall be the successor Trustee.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has, or is a wholly owned subsidiary of a
bank holding company that has, a combined capital and surplus of at least $500
million as set forth in its most recent published annual report of condition.
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This Indenture shall always have a Trustee who satisfies
the requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is
subject to TIA ss. 310(b).
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE
COMPANY.
The Trustee is subject to TIA ss. 311(a), excluding anY
creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or
been removed shall be subject to TIA ss. 311(a) to the extent indicated therein.
SECTION 7.12. RIGHTS OF HOLDERS WITH RESPECT TO TIME, METHOD
AND PLACE.
Subject to the limitations of this Article 7, a majority in
principal amount of the outstanding Notes issued hereunder shall have the right
to direct the time, method and place of conducting any proceeding for exercising
any remedy available to the Trustee, subject to certain exceptions.
SECTION 7.13. TRUSTEE'S APPLICATION FOR INSTRUCTIONS FROM THE
COMPANY.
Any application by the Trustee for written instructions from
the Company may, at the option of the Trustee, set forth in writing any actin
proposed to be taken or omitted by the Trustee under this Indenture and the date
on and/or after which such action shall be taken or such omission shall be
effective. The Trustee shall not be liable for any action taken by, or omission
of, the Trustee in accordance with a proposal included in such application on or
after the date specified in such application (which date shall not be less than
three Business Days after the date any officer of the Company actually receives
such application, unless any such officer shall have consented in writing to any
earlier date) unless prior to taking any such action (or the effective date in
the case of an omission), the Trustee shall have received written instructions
in response to such application specifying the action to be taken or omitted.
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ARTICLE 8
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.1. OPTION TO EFFECT DEFEASANCE OR COVENANT
DEFEASANCE.
The Company may, at its option by Board Resolution, at any
time, with respect to the Notes, elect to have either Section 8.2 or Section 8.3
be applied to all Notes and Subsidiary Guarantees then outstanding upon
compliance with the conditions set forth below in this Article Eight.
SECTION 8.2. DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.1 of the option
applicable to this Section 8.2, the Company and the Subsidiary Guarantors, if
any, shall be deemed to have been discharged from their respective obligations
with respect to all Notes and Subsidiary Guarantees then outstanding on the date
the conditions set forth below are satisfied (hereinafter, "defeasance"). For
this purpose, such defeasance means that the Company and any Subsidiary
Guarantor shall be deemed to have paid and discharged the entire indebtedness
represented by the Notes and any Subsidiary Guarantees outstanding, which shall
thereafter be deemed to be "outstanding" only for the purposes of Section 8.5
and the other Sections of this Indenture referred to in (A) and (B) below, and
to have satisfied all its other obligations under such Notes, Subsidiary
Guarantees and this Indenture (and the Trustee, on demand of and at the expense
of the Company, shall execute proper instruments acknowledging the same), except
for the following which shall survive until otherwise terminated or discharged
hereunder: (A) the rights of Holders of Notes then outstanding to receive solely
from the trust fund described in Section 8.4 and as more fully set forth in such
Section, payments in respect of the principal of (and premium, if any) and
interest and Liquidated Damages, if any, on such Notes when such payments are
due from the trust fund described in Section 8.4, (B) the Company's obligations
with respect to such Notes under Sections 2.3, 2.4, 2.5, 2.6, 2.7, 2.10, 4.2 and
4.3, (C) the rights, powers, trusts, duties and immunities of the Trustee
hereunder and the Company's obligations in connection therewith and (D) this
Article Eight. Subject to compliance with this Article Eight, the Company may
exercise its option under this Section 8.2 notwithstanding the prior exercise of
its option under Section 8.3 with respect to the Notes.
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SECTION 8.3. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.1 of the option
applicable to this Section 8.3, the Company and each Subsidiary Guarantor shall
be released from its obligations under the covenants contained in Article Five
and in Sections 4.4, 4.7, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17
and 4.18 with respect to the outstanding Notes and Subsidiary Guarantees, if
any, on and after the date the conditions set forth below are satisfied
(hereinafter, "covenant defeasance"), and the Notes and the Subsidiary
Guarantees, if any, shall thereafter be deemed to be not "outstanding" for the
purposes of any direction, waiver, consent or declaration or Act of Holders (and
the consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "outstanding" for all other purposes hereunder (it being
understood that such Notes and Subsidiary Guarantees, if any, shall not be
deemed outstanding for financial accounting purposes). For this purpose, such
covenant defeasance means that, with respect to the outstanding Notes and
Subsidiary Guarantees, if any, the Company and any Subsidiary Guarantor may omit
to comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any other
document and such omission to comply shall not constitute a default or an Event
of Default under Sections 6.1(c) and 6.1(d), but, except as specified above, the
remainder of this Indenture and such Notes and Subsidiary Guarantees, if any,
shall be unaffected thereby. In addition, upon the Company's exercise under
Section 8.1 of the option applicable to Section 8.3, Sections 6.1(c) through
6.1(f) and Section 6.1(i) shall not constitute Events of Default.
SECTION 8.4. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE.
The following shall be the conditions to application of either
Section 8.2 or Section 8.3 to the outstanding Notes and Subsidiary Guarantees:
(i) the Company must irrevocably deposit with the
Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public
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accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages, if any, due on the outstanding Notes on the Stated Maturity
thereof or on the applicable Redemption Date, as the case may be, and the
Company must specify whether the Notes are being defeased to maturity or to a
particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, (A) the Company has
received from, or there has been published by, the United States Internal
Revenue Service a ruling or (B) since the Issue Date, there has been a change in
the applicable U.S. federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel in the United States shall confirm
that, the Holders of the outstanding Notes will not recognize income, gain or
loss for U.S. federal income tax purposes as a result of such Legal Defeasance
and will be subject to U.S. federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, the Holders of the
outstanding Notes will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to U.S. federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred;
(iv) no Default or Event of Default (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) shall have occurred and be continuing on the date of such
deposit or, insofar as Events of Default set forth in Section 6.1(g) and (h), at
any time in the period ending on the 91st day after the date of such deposit;
(v) such Legal Defeasance or Covenant Defeasance shall
not result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than this Indenture) to which the
Company or any of its Subsidiaries, if any, is a party or by which the Company
or any of its Subsidiaries, if any, is bound;
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(vi) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that, on the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(vii) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of the Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or a Subsidiary Guarantor, if any, or others; and
(viii) the Company shall have delivered to the Trustee
an Officers' Certificate and an opinion of counsel in the United States each
stating that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have been complied
with.
SECTION 8.5. DEPOSITED MONEY AND U.S. GOVERNMENT
OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS.
Subject to the provisions of the last paragraph of Section
4.3, all money and non-callable Government Securities (including the proceeds
thereof) deposited with the Trustee (or other qualifying trustee, collectively
for purposes of this Section 8.5, the "Trustee") pursuant to Section 8.4 in
respect of the Notes then outstanding shall be held in trust and applied by the
Trustee, in accordance with the provisions of such Notes and this Indenture, to
the payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Holders of
such Notes of all sums due and to become due thereon in respect of principal
(and premium, if any) and interest, but such money need not be segregated from
other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the cash or non-callable
Government Securities deposited pursuant to Section 8.4 or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the Notes then
outstanding.
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Anything in this Article Eight to the contrary
notwithstanding, the Trustee shall deliver or pay to the Company from time to
time upon Company Request any money or non-callable Government Securities held
by it as provided in Section 8.4 which, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 8.4(i)), are in excess of the amount thereof which would
then be required to be deposited to effect an equivalent Legal Defeasance or
Covenant Defeasance.
SECTION 8.6. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any United
States dollars or non-callable Government Securities in accordance with Section
8.2 or 8.3, as the case may be, by reason of any order or judgment of any court
or governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's and any Subsidiary Guarantor's obligations under
this Indenture, the Notes and the Subsidiary Guarantees, if any, shall be
revived and reinstated as though no deposit had occurred pursuant to Section 8.2
or 8.3, as the case may be, until such time as the Trustee or Paying Agent is
permitted to apply all such money in accordance with Section 8.2 or 8.3, as the
case may be; provided, however, that if the Company or any Subsidiary Guarantor
makes any payment of principal of (or premium, if any) or interest on any Note
following the reinstatement of its obligations, the Company or any Subsidiary
Guarantor shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money held by the Trustee or Paying Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.1. WITHOUT CONSENT OF HOLDERS OF NOTES.
Notwithstanding Section 9.2 of this Indenture, the Company and
the Trustee may amend or supplement this Indenture or Notes, and with respect to
a Subsidiary Guarantee, the Subsidiary Guarantor under such Subsidiary Guarantee
and the Trustee may amend or supplement such Subsidiary Guarantee, without the
consent of any Holder of a Note:
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(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to
or in place of certificated Notes;
(c) to provide for the assumption of the Company's or any
Subsidiary Guarantor's obligations to the Holders of
the Notes in the case of a merger or consolidation as
provided in Article 5 of this Indenture;
(d) to make any change that would provide any additional
rights or benefits to the Holders of the Notes
(including additional Subsidiary Guarantees) or that
does not adversely affect the legal rights hereunder
of any such Holder; or
(e) to comply with requirements of the Commission in
order to effect or maintain the qualification of this
Indenture under the Trust Indenture Act or to provide
for the succession of a successor Trustee.
Upon the written request of the Company accompanied by
resolutions of the Board of Directors authorizing the execution of any such
amended or supplemental Indenture, and upon receipt by the Trustee of an
Officers' Certificate and an Opinion of Counsel, the Trustee shall join with the
Company and the Subsidiary Guarantors, if any, in the execution of any amended
or supplemental Indenture authorized or permitted by the terms of this Indenture
and to make any further appropriate agreements and stipulations that may be
therein contained, but the Trustee shall not be obligated to enter into such
amended or supplemental Indenture that affects its own rights, duties or
immunities under this Indenture or otherwise.
SECTION 9.2. WITH CONSENT OF HOLDERS OF NOTES.
Except as provided below in this Section 9.2, this Indenture,
the Notes and a Subsidiary Guarantee, if any, issued hereunder may be amended or
supplemented with the consent of the Holders of at least a majority in principal
amount of the Notes then outstanding (including consents obtained in connection
with a tender offer or exchange offer for the Notes), and, subject to Sections
6.2, 6.4 and 6.7 hereof, any existing default or compliance with any provision
of this Indenture, the Notes or the
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Subsidiary Guarantees, if any, may be waived with the consent of the Holders of
a majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for the Notes).
Upon the request of the Company accompanied by resolutions of
the Board of Directors authorizing the execution of any such amended or
supplemental Indenture, and upon the filing with the Trustee of evidence
satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid,
and upon receipt by the Trustee of an Officers' Certificate and an Opinion of
Counsel, the Trustee shall join with the Company and the Subsidiary Guarantors,
if any, in the execution of such amended or supplemental Indenture unless such
amended or supplemental Indenture affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise, in which case the Trustee may in
its discretion, but shall not be obligated to, enter into such amended or
supplemental Indenture.
The consent of the Holders is not necessary under this Section
9.2 to approve the particular form of any proposed amendment. It is sufficient
if such consent approves the substance of the proposed amendment.
After an amendment, supplement or waiver under this Section
9.2 becomes effective, the Company shall mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental Indenture or waiver. Subject to Sections 6.4 and 6.7 hereof, the
Holders of a majority in aggregate principal amount of the Notes then
outstanding may waive compliance in a particular instance by the Company with
any provision of this Indenture, the Notes or the Subsidiary Guarantees, if any.
However, without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes or Subsidiary Guarantee held by a non-consenting
Holder):
(i) reduce the principal amount of the Notes whose Holders
must consent to an amendment, supplement or waiver;
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(ii) reduce the principal of or change the fixed maturity of
any such Note or alter the provisions with respect to the
redemption of the Notes (other than provisions relating
to the covenants described under Sections 4.9 and 4.10);
(iii) reduce the rate of or change the time for payment of
interest or Liquidated Damages, if any, on any Note;
(iv) waive a Default or Event of Default in the payment of
principal of, premium, if any, or interest or Liquidated
Damages, if any, on the Notes (except a rescission of
acceleration of the Notes from a non- payment default by
the Holders of at least a majority in aggregate principal
amount of the Notes and a waiver of the payment default
that resulted from such acceleration);
(v) make any Note payable in money other than that stated in
the Notes;
(vi) make any change in Section 6.4 or 6.7;
(vii) waive a redemption payment with respect to any Note
(other than a payment required by Section 4.9 or Section
4.10); or
(viii) make any change in the foregoing amendment and waiver
provisions of this Article 9.
In addition, any amendment to the provisions of this Indenture
(which relate to subordination) will require the consent of the Holders of at
least 66 2/3% in principal amount of Notes then outstanding if such amendment
would adversely affect the rights of Holders of such Notes; provided, however
that no amendment may be made to the subordination provisions of this Indenture
that adversely affects the rights of any holder of Senior Debt then outstanding
unless the holders of such Senior Debt (or any group or representative thereof
authorized to give a consent) consent to such change.
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SECTION 9.3. COMPLIANCE WITH TIA.
Every amendment or supplement to this Indenture or the Notes
shall be set forth in an amended or supplemental Indenture that complies with
the TIA as then in effect.
SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder of a
Note and every subsequent Holder of a Note or portion of a Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
is not made on any Note. However, any such Holder of a Note or subsequent Holder
of a Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder.
SECTION 9.5. NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may, but shall not be required to, place an
appropriate notation about an amendment, supplement or waiver on any Note
thereafter authenticated. The Company in exchange for all Notes may issue and
the Trustee shall authenticate new Notes that reflect the amendment, supplement
or waiver.
Failure to make the appropriate notation or issue a new Note
shall not affect the validity and effect of such amendment, supplement or
waiver.
SECTION 9.6. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amended or supplemental indenture
authorized pursuant to this Article Nine if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
The Company may not sign an amendment or supplemental Indenture until the Board
of Directors approves it. In signing or refusing to sign any amended or
supplemental indenture the Trustee shall be entitled to receive and (subject to
Section 7.1) shall be fully protected in relying upon an Officer's Certificate
and an Opinion of Counsel stating that the execution of such amended or
supplemental indenture is authorized
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or permitted by this Indenture, that it is not inconsistent herewith, and that
it will be valid and binding upon the Company and the Subsidiary Guarantors, if
any, in accordance with its terms.
ARTICLE 10
SUBORDINATION
SECTION 10.1. AGREEMENT TO SUBORDINATE.
The Company agrees, and each Holder by accepting a Note
agrees, that the payment of the Subordinated Note Obligations shall be
subordinated in right of payment, as set forth in this Article 10, to the prior
payment in full in cash of all Senior Debt, whether outstanding on the date
hereof or hereafter incurred.
SECTION 10.2. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any payment or distribution of property or securities to
creditors of the Company in a liquidation or dissolution of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its property, or in an assignment for the benefit of
creditors or any marshalling of the Company's assets and liabilities, the
holders of Senior Debt shall be entitled to receive payment in full of all
Obligations due in respect of such Senior Debt (including interest after the
commencement of any such proceeding at the rate specified in the applicable
Senior Debt, whether or not a claim for such interest would be allowed in a
proceeding) before the Holders of the Notes will be entitled to receive any
payment with respect to the Notes, and until all Obligations with respect to
Senior Debt are paid in full, any distribution to which the Holders of the Notes
would be entitled shall be made to the holders of Senior Debt (except that
Holders of the Notes may receive payments made from the trust described in
Article 8 hereof).
SECTION 10.3. DEFAULT ON DESIGNATED SENIOR DEBT.
The Company also may not make any payment (whether by
redemption, purchase, retirement, defeasance or otherwise) upon or in respect of
the Notes (except from the trust described in Article 8 hereof) if (i) a default
in the payment of the principal of,
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premium, if any, or interest on Designated Senior Debt occurs ("payment
default") or (ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits, or with the giving of notice or passage of
time or both (unless cured or waived) will permit, holders of the Designated
Senior Debt as to which such default relates to accelerate its maturity
("non-payment default") and (solely with respect to this clause (ii) ) the
Trustee receives a notice of such default (a "Payment Blockage Notice") from the
Company or the holders of any Designated Senior Debt. Cash payments on the Notes
shall be resumed (a) in the case of a payment default, upon the date on which
such default is cured or waived and (b) in case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been accelerated or a
default of the type described in paragraphs (g) or (h) of Section 6.1 hereof has
occurred and is continuing. No new period of payment blockage may be commenced
unless and until 360 days have elapsed since the date of commencement of the
payment blockage period resulting from the immediately prior Payment Blockage
Notice. No nonpayment default in respect of Designated Senior Debt that existed
or was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice
unless such default shall have been cured or waived for a period of no less than
90 days.
SECTION 10.4. ACCELERATION OF SECURITIES.
If the Company fails to make any payment on the Notes when due
or within any applicable grace period, whether or not on account of the payment
blockage provision referred to above, such failure shall constitute an Event of
Default and shall entitle the holders of the Notes to accelerate the maturity
thereof. The Company shall promptly notify holders of Senior Debt if payment of
the Notes is accelerated because of an Event of Default.
SECTION 10.5. WHEN DISTRIBUTION MUST BE PAID OVER.
In the event that the Trustee or any Holder receives any
payment of any Subordinated Note Obligations at a time when the Trustee or such
Holder, as applicable, has actual knowledge that such payment is prohibited by
Section 10.2 or 10.3 hereof, such payment shall be held by the Trustee or such
Holder, in trust for
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the benefit of, and shall be paid forthwith over and delivered, upon written
request, to, the holders of Senior Debt as their interests may appear or their
representative under the indenture or other agreement (if any) pursuant to which
such Senior Debt may have been issued, as their respective interests may appear,
for application to the payment of all Obligations with respect to such Senior
Debt remaining unpaid to the extent necessary to pay such Obligations in full in
accordance with their terms, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Debt.
In the event that any Holder receives any payment of any
Subordinated Note Obligations at any time when such payment is prohibited by
Section 10.2 or 10.3 hereof, such payment shall be held by such Holder, in trust
for the benefit of, and shall be paid forthwith over and delivered, upon written
request to, the holders of Senior Debt as their interest may appear or their
representative under the indenture or other agreement (if any) pursuant to which
such Senior Debt may have been issued, as their interest may appear, for the
application to the payment of all Obligations with respect to such Senior Debt
remaining unpaid to the extent necessary to pay such Obligations in full in
accordance with their terms, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Debt.
With respect to the holders of Senior Debt, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Debt shall be read into this
Indenture against the Trustee. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt, and shall not be liable to any
such holders if the Trustee shall pay over or distribute to or on behalf of
Holders or the Company or any other Person money or assets to which any holders
of Senior Debt shall be entitled by virtue of this Article 10, except if such
payment is made as a result of the willful misconduct or gross negligence of the
Trustee.
SECTION 10.6. NOTICE BY COMPANY.
The Company shall promptly notify the Trustee and the Paying
Agent of any facts known to the Company that would cause a payment of any
Subordinated Note Obligations to violate this Article 10, but failure to give
such notice shall not affect the
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subordination of the Notes to the Senior Debt as provided in this Article 10.
SECTION 10.7. SUBROGATION.
After all Senior Debt is paid in full and until the Notes are
paid in full in cash, Holders of Notes shall be subrogated (equally and ratably
with all other Indebtedness pari passu with the Notes) to the rights of holders
of Senior Debt to receive distributions applicable to Senior Debt to the extent
that distributions otherwise payable to the Holders of Notes have been applied
to the payment of Senior Debt. A distribution made under this Article 10 to
holders of Senior Debt that otherwise would have been made to Holders of Notes
is not, as between the Company and Holders, a payment by the Company on the
Senior Debt.
SECTION 10.8. RELATIVE RIGHTS.
This Article 10 defines the relative rights of Holders of
Notes and holders of Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Holders of Notes,
the obligation of the Company, which is absolute and
unconditional, to pay principal of, premium, if any,
and interest and Liquidated Damages on the Notes in
accordance with their terms;
(2) affect the relative rights of Holders of Notes and
creditors of the Company other than their rights in
relation to holders of Senior Debt; or
(3) prevent the Trustee or any Holder of Notes from
exercising its available remedies upon a Default or
Event of Default, subject to the rights of holders
and owners of Senior Debt to receive distributions
and payments otherwise payable to Holders of Notes.
If the Company fails because of this Article 10 to pay
principal of, premium, if any, or interest or Liquidated Damages on a Note on
the due date, the failure is nevertheless a Default or an Event of Default.
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SECTION 10.9. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY.
No right of any holder of Senior Debt to enforce the
subordination of the Indebtedness evidenced by the Notes shall be impaired by
any act or failure to act by the Company or any Holder or by the failure of the
Company or any Holder to comply with this Indenture.
SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made or a notice given to
holders of Senior Debt, the distribution may be made and the notice given to
their representative.
Upon any payment or distribution of assets of the Company
referred to in this Article 10, the Trustee and the Holders of Notes shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction or upon any certificate of such representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders of Notes for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior Debt and
other Indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 10.
SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Notes, unless the Trustee shall have received at its
Corporate Trust Office at least five Business Days prior to the date of such
payment written notice of facts that would cause the payment of any Subordinated
Note Obligations to violate this Article 10. Only the Company or a
representative may give the notice. Nothing in this Article 10 shall impair the
claims of, or payments to, the Trustee under or pursuant to Section 7.7 hereof.
The Trustee in its individual or any other capacity may hold
Senior Debt with the same rights it would have if it were not the Trustee. Any
Agent may do the same with like rights.
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SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION.
Each Holder of Notes, by the Holder's acceptance thereof,
authorizes and directs the Trustee on such Holder's behalf to take such action
as may be necessary or appropriate to effectuate the subordination as provided
in this Article 10, and appoints the Trustee to act as such Holder's
attorney-in-fact for any and all such purposes. If the Trustee does not file a
proper proof of claim or proof of debt in the form required in any proceeding
referred to in Section 6.9 hereof at least 30 days before the expiration of the
time to file such claim, a representative of Designated Senior Debt is hereby
authorized to file an appropriate claim for and on behalf of the Holders of the
Notes.
ARTICLE 11
SATISFACTION AND DISCHARGE
SECTION 11.1. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall be discharged and will cease to be of
further effect as to all Notes issued hereunder, when either
(a) all such Notes theretofore authenticated and
delivered (except lost, stolen or destroyed Notes
which have been replaced or paid and Notes for
whose payment money has theretofore been deposited
in trust and thereafter repaid to the Company or
discharged from such trust, as provided in Section
4.3 hereof) have been delivered to the Trustee for
cancellation; or
(b) (i) all such Notes not theretofore delivered
to such Trustee for cancellation have
become due and payable by reason of the
making of a notice of redemption or
otherwise or will become due and payable
within one year and the Company or a
Subsidiary Guarantor, if any, has
irrevocably deposited or caused to be
deposited with such Trustee as trust
funds in trust an amount of money
sufficient to pay and discharge the
entire Obligations in respect of such
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Notes not theretofore delivered to the
Trustee for cancellation to the date of
maturity or redemption;
(ii) no Default or Event of Default with
respect to this Indenture or the Notes
shall have occurred and be continuing on
the date of such deposit or shall occur
as a result of such deposit and such
deposit will not result in a breach or
violation of, or constitute a default
under, any other instrument to which the
Company or a Subsidiary Guarantor, if
any, is a party or by which the Company
or a Subsidiary Guarantor, if any, is
bound;
(iii) the Company or a Subsidiary Guarantor,
if any, has paid or caused to be paid
all sums payable by it under this
Indenture; and
(iv) the Company has delivered irrevocable
instructions to the Trustee under this
Indenture to apply the deposited money
toward the payment of such Notes at
maturity or the redemption date, as the
case may be.
In addition, the Company must deliver an Officers' Certificate
and an opinion of counsel to the Trustee stating that all conditions precedent
to satisfaction and discharge have been satisfied.
SECTION 11.2. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section
4.3, all money deposited with the Trustee pursuant to Section 11.1 shall be held
in trust and applied by it, in accordance with the provisions of the Notes and
this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as Paying Agent) as the Trustee may determine, to
Persons entitled thereto, of the principal (and premium, if any)
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and interest and Liquidated Damages for whose payment such money has been
deposited with the Trustee.
If the Trustee or Paying Agent is unable to apply any money or
Government Securities in accordance with Section 11.1 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Notes shall be revived and
reinstated as though such deposit had occurred pursuant to Section 11.1;
provided that if the Company has made any payment of principal of, premium, if
any, or interest on any Notes because of the reinstatement of its obligations,
the Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money or Government Securities held by the Trustee
or Paying Agent.
ARTICLE 12
MISCELLANEOUS
SECTION 12.1. CONFLICT OF ANY PROVISION OF INDENTURE WITH TIA.
If any provision of this Indenture limits, qualifies, or
conflicts with the duties imposed by TIA ss. 318(c), the imposed duties shall
control.
SECTION 12.2. NOTICES.
Any notice or communication by the Company, any Subsidiary
Guarantor or the Trustee to the others is duly given if in writing and delivered
in Person or mailed by first class mail (registered or certified, return receipt
requested), telecopier or overnight air courier guaranteeing next day delivery,
to the others' address:
If to the Company or any Subsidiary Guarantor:
The Houston Exploration Company
1100 Louisiana, Suite 2000
Houston, Texas 77002
Attention: Thomas W. Powers
Facsimile: (713) 830-6885
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With a copy to:
Andrews & Kurth L.L.P.
600 Travis, Suite 4200
Houston, Texas 77002
Attention: Jeffery L. Wade, Esq.
Facsimile: (713) 220-4285
If to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Remo Reale
Facsimile: (212) 815-5915
The Company or the Trustee, by notice to the others may
designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered by hand,
if personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when answered back, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by
first class mail, certified or registered, return receipt requested, or by
overnight air courier guaranteeing next day delivery to its address shown on the
register kept by the Registrar. Any notice or communication shall also be so
mailed to any Person described in TIA ss. 313(c), to the extent required by the
TIA. Failure to mail a notice or communication to a Holder or any defect in it
shall not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the addressee
receives it.
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If the Company mails a notice or communication to Holders, it
shall mail a copy to the Trustee and each Agent at the same time.
SECTION 12.3. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER
HOLDERS OF NOTES.
Holders may communicate pursuant to TIA ss. 312(b) witH other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA ss. 312(c).
SECTION 12.4. CERTIFICATE AND OPINION AS TO CONDITIONS
PRECEDENT.
Upon any request or application by the Company to the Trustee
to take any action under this Indenture, the Company shall furnish to the
Trustee:
(a) an Officers' Certificate in form and substance
reasonably satisfactory to the Trustee (which shall
include the statements set forth in Section 1.5
hereof) stating that, in the opinion of the signers,
all conditions precedent and covenants, if any,
provided for in this Indenture relating to the
proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance
reasonably satisfactory to the Trustee (which shall
include the statements set forth in Section 1.5
hereof) stating that, in the opinion of such counsel,
all such conditions precedent and covenants have been
satisfied.
SECTION 12.5. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, any date
established for payment of Defaulted Interest pursuant to Section 2.12, or any
Maturity with respect to any Note shall not be a Business Day, then
(notwithstanding any other provisions of this Indenture, the Notes or any
Subsidiary Guarantee) payment of interest or principal (and premium, if any)
need not be made on such date but may be made on the next succeeding Business
Day with the same force and effect as if made on the Interest Payment Date or
date established for payment of Defaulted Interest pursuant to
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Section 2.12 or Maturity, and no interest shall accrue with respect to such
payment for the period from and after such Interest Payment Date or date
established for payment of Defaulted Interest pursuant to Section 2.12 or
Maturity, as the case may be, to the next succeeding Business Day.
SECTION 12.6. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS,
EMPLOYEES AND STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of
the Company or a Subsidiary Guarantor, if any, shall have any liability for any
obligations of the Company or the Subsidiary Guarantors, if any, under the
Notes, the Subsidiary Guarantees, if any, or this Indenture or for any claim
based on, in respect of, or by reason of such obligations or their creation.
Each Holder of the Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
SECTION 12.7. GOVERNING LAW.
THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES, IF
ANY, SHALL BE, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF
THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
SECTION 12.8. AGENT FOR SERVICE; SUBMISSION TO JURISDICTION;
WAIVER OF IMMUNITIES.
By the execution and delivery of this Indenture or any
amendment or supplement hereto, the Company (i) acknowledges that it has, by
separate written instrument, designated and appointed CT Corporation System (the
"Process Agent") currently located at 1633 Broadway, New York, New York 10019,
as its authorized agent upon which process may be served in any suit, action or
proceeding with respect to, arising out of, or relating to, this Indenture or
the Notes or brought under U.S. federal or state securities laws, may be
instituted in any U.S. federal or state court located in The City of New York,
New York, and acknowledges that the Process Agent has accepted such designation,
(ii) submits to the jurisdiction of any such court in any such suit, action or
proceeding, and (iii)
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agrees that service of process upon the Process Agent shall be deemed in every
respect effective service of process upon the Company in any such suit, action
or proceeding. The Company further agrees to take any and all action, including
the execution and filing of any and all such documents and instruments as may be
necessary to continue such designation and appointment of the Process Agent in
full force and effect so long as this Indenture shall be in full force and
effect; provided that the Company may and shall (to the extent the Process Agent
ceases to be able to be served on the basis contemplated herein), by written
notice to the Trustee, designate such additional or alternative agents for
service of process under this Section 12.8 that (i) maintains an office located
in the Borough of Manhattan, The City of New York in the State of New York, (ii)
are either (a) counsel for the Company or (b) a corporate service company which
acts as agent for service of process for other persons in the ordinary course of
its business and (iii) agrees to act as agent for service of process in
accordance with this Section 12.8. Such notice shall identify the name of such
agent for process and the address of such agent for process in the Borough of
Manhattan, The City of New York, State of New York. Upon the request of any
Holder of a Note, the Trustee shall deliver such information to such Holder.
Notwithstanding the foregoing, there shall, at all times, be at least one agent
for service of process for the Company appointed and acting in accordance with
this Section 12.8.
To the extent that the Company has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal process (whether
through service of notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property, the
Company hereby irrevocably waives such immunity in respect of its obligations
under this Indenture and the Notes, to the extent permitted by law.
SECTION 12.9. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret any other
indenture, loan or debt agreement of the Company or its Subsidiaries or of any
other Person. Any such indenture, loan or debt agreement may not be used to
interpret this Indenture.
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SECTION 12.10. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company
shall bind its respective successors and assigns, whether so expressed or not.
All covenants and agreements in this Indenture by the Trustee shall bind its
respective successors and assigns, whether so expressed or not.
SECTION 12.11. SEVERABILITY.
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 12.12. COUNTERPART ORIGINALS.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
SECTION 12.13. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part of this Indenture and shall
in no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
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IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed in New York, New York as of the day and year first
above written.
THE HOUSTON EXPLORATION COMPANY
Dated: March 2, 1998 By: /s/ JAMES F. WESTMORELAND
--------------------------------------
Name: James F. Westmoreland
Title: Vice President and Secretary
Dated: March 2, 1998 By: /s/ THOMAS W. POWERS
--------------------------------------
Name: Thomas W. Powers
Title: Senior Vice President and Treasurer
THE BANK OF NEW YORK
Dated: March 2, 1998 By: /s/ REMO J. REALE
--------------------------------------
Name: Remo J. Reale
Title: Assistant Vice President
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EXHIBIT A-1
(Face of Note)
___% Senior Subordinated Notes due 2008
No. Cusip No:
THE HOUSTON EXPLORATION COMPANY
promises to pay to Cede & Co. or registered assigns, the
principal sum of $ ____________________________
Dollars on __________________, 2008.
Interest Payment Dates: ________ and ______________
Record Dates: ____________ and _____________
THE HOUSTON EXPLORATION COMPANY
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
This is one of the ___% Senior Subordinated
Notes due 2008 referred to in
the within-mentioned Indenture:
Dated February __, 1998
The Bank of New York, as Trustee
By:
------------------------------------
Authorized Signature
A-1-1
<PAGE> 135
(Back of Note)
___% Senior Subordinated Notes due 2008
[Unless and until it is exchanged in whole or in part for
Notes in definitive form, this Note may not be transferred except as a whole by
the Depository to a nominee of the Depository or by a nominee of the Depository
to the Depository or another nominee of the Depository or by the Depository or
any such nominee to a successor Depository or a nominee of such successor
Depository. Unless this certificate is presented by an authorized representative
of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"),
to the issuer or its agent for registration of transfer, exchange or payment,
and any certificate issued is registered in the name of Cede & Co. or such other
name as may be requested by an authorized representative of DTC (and any payment
is made to Cede & Co. or such other entity as may be requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.](**)
"THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND,
ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN
THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT
AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF OR OF A
BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) (A "QIB"), (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1),(2),(3) OR (7)
OF REGULATION D UNDER THE SECURITIES ACT) (AN "IAI"), (2) AGREES THAT IT WILL
NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF
ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB
PURCHASING
- --------------------
(**) This paragraph should be included only if the Note is a
Global Note.
A-1-2
<PAGE> 136
FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A UNDER THE SECURITIES ACT, (C) IN AN OFFSHORE
TRANSACTION MEETING THE REQUIREMENTS OF RULES 903 AND 904 OF THE SECURITIES ACT,
(D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES
ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A
SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND,
IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES OF LESS
THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH
TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND
BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND, IN EACH CASE,
IN ACCORDANCE WITH APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
OR ANY OTHER APPLICABLE JURISDICTION, AND (3) AGREES THAT IT WILL DELIVER TO
EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF
REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION
REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN
VIOLATION OF THE FOREGOING RESTRICTIONS."
Capitalized terms used herein shall have the meanings assigned
to them in the Indenture referred to below.
1. INTEREST. The Houston Exploration Company, a Delaware corporation (the
"Company"), promises to pay interest on the principal amount of this Note at
____% per annum from __________, 1998 until ___________ 2008. The Company shall
pay interest semi-annually in arrears on _______ and ________ of each year, or
if any such day is not a Business Day, on the next succeeding Business Day (each
an "Interest Payment Date"). Interest on the Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the Issue Date; provided that if there is no existing Default in the
payment of interest, and if this Note is authenticated between a record date
referred to on the face hereof and the next succeeding Interest Payment Date,
interest shall accrue from such next succeeding
A-1-3
<PAGE> 137
Interest Payment Date; provided, further, that the first Interest Payment Date
shall be _____________, 1998. The Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
principal and premium, if any, from time to time on demand at a rate equal to
the per annum rate on the Notes then in effect; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
2. LIQUIDATED DAMAGES. The holder of this Note is entitled to
the benefits of the Registration Rights Agreement dated as of February __, 1998
among the Company and the Initial Purchasers (the Registration Rights
Agreement").
(a) Except as expressly provided in this paragraph 2,
Liquidated Damages shall be treated as interest and shall be paid to the Holders
entitled thereto on Interest Payment Dates in the manner set forth in paragraph
1 hereof.
(b) Notwithstanding the fact that this Note may cease to be a
Transfer Restricted Security (as defined in the Registration Rights Agreement),
all obligations of the Company to pay Liquidated Damages with respect to this
Note shall survive until such time as such obligations with respect to this Note
shall have been satisfied in full.
(c) In the event that the Company is required to pay
Liquidated Damages pursuant to this paragraph 2, the Company shall notify the
Trustee in writing at least 15 days prior to the first Interest Payment Date
upon which such Liquidated Damages is due; provided that, in the event that the
obligation to pay such Liquidated Damages occurs less than 15 days prior to such
Interest Payment Date, such notice shall be provided by the Company to the
Trustee as soon as reasonably practicable prior to such Interest Payment Date.
3. METHOD OF PAYMENT. The Company shall make payments in
respect of Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) by wire transfer of immediately available funds to
the accounts specified by the Note Custodian or, at the option of the Company,
payment of interest
A-1-4
<PAGE> 138
may be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of Notes. Notwithstanding the
foregoing, all payments with respect to the Notes (the Holders of which have
provided wire transfer instructions to the Company at least ten business days
prior to the applicable payment date), will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof. Such payment shall be made in such coin or currency of the United
States of America as at the time of payment is legal tender for the payment of
public and private debts.
4. PAYING AGENT AND REGISTRAR. Initially, The Bank of New
York, the Trustee under the Indenture, will act as Paying Agent and Registrar.
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar. The Company may change any Paying Agent or Registrar
without notice to any Holder. The Company or any of its Subsidiaries may act in
any such capacity.
5. INDENTURE. The Company issued the Notes under an Indenture
dated as of March 2, 1998 ("Indenture") between the Company and the Trustee. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to all such terms, and
Holders are referred to the Indenture and such Act for a statement of such
terms. The Notes are general unsecured obligations of the Company limited to
$100,000,000 in aggregate principal amount.
6. OPTIONAL REDEMPTION.
Except as set forth in the next paragraph, the Notes will not
be redeemable at the Company's option prior to ________, 2003. On and after
________, 2003, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
written notice, at the Redemption Prices (expressed as a percentage of principal
amount) set forth below, plus accrued and unpaid interest thereon, if any, to
the applicable redemption date, if redeemed during the twelve-month period
beginning on ________ of each of the years indicated below:
A-1-5
<PAGE> 139
<TABLE>
<CAPTION>
YEAR REDEMPTION
- ---- PRICE
----------
<C> <S>
2003......................................................................... _______%
2004......................................................................... _______%
2005......................................................................... _______%
2006 and thereafter.......................................................... 100.000%
</TABLE>
In addition, at any time on or prior to ____________, 2001 the
Company may, at its option, redeem for cash up to 35% of the aggregate principal
amount of Notes originally issued under the Indenture on the Issue Date at a
Redemption Price equal to [ ]% of the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the
Redemption Date, with the net cash proceeds of an Equity Offering; provided that
at least 65% of the aggregate principal amount of Notes originally issued under
the Indenture on the Issue Date remains outstanding immediately after the
occurrence of such redemption; provided further that such redemption occurs
within 90 days of the date of closing of such Equity Offering. The Trustee shall
select the Notes to be purchased in the manner described in the Indenture.
7. MANDATORY REDEMPTION. Other than as set forth in paragraph
9, the Company shall not be required to make mandatory redemption payments with
respect to the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed
at least 30 days but not more than 60 days before the Redemption Date to each
Holder whose Notes are to be redeemed at its registered address. Notes may be
redeemed in part but only in whole multiples of $1,000. On and after the
Redemption Date interest ceases to accrue on Notes or portions thereof called
for redemption.
9. REPURCHASE AT OPTION OF HOLDERS. (a) Upon the occurrence of
a Change of Control, each Holder of Notes shall have the right to require the
Company to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of such Holder's Notes pursuant to the offer described below (the
"Change
A-1-6
<PAGE> 140
of Control Offer") at an offer price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase (the "Change of Control
Payment"). Within 30 days following any Change of Control, the Company shall
mail a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase the Notes pursuant
to the procedures required by the Indenture and described in such notice.
Holders of Notes that are subject to an offer to purchase may elect to have such
Notes purchased by completing the form entitled "Option of Holder to Elect
Purchase" on the reverse side of this Note.
(b) On the 361st day after an Asset Sale, if the aggregate
amount of Excess Proceeds exceeds $10.0 million, the Company will be required to
make an offer to all Holders of Notes and, to the extent required by the terms
thereof, to all holders or lenders of Pari Passu Indebtedness (an "Asset Sale
Offer") to purchase the maximum principal amount of Notes and any such Pari
Passu Indebtedness to which the asset sale offer applies that may be purchased
out of the Excess Proceeds, at an offer price in cash in an amount equal to 100%
of the principal amount thereof plus accrued and unpaid interest and, with
respect to the Notes or similar securities, Liquidated Damages or comparable
amounts in the case of similar securities, if any, thereon to the date of
purchase, in accordance with the procedures set forth in Section 3.10 of the
Indenture or the agreements governing the Pari Passu Indebtedness, as
applicable. To the extent that the aggregate amount of Notes and Pari Passu
Indebtedness so validly tendered and not properly withdrawn pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Notes surrendered by Holders thereof and other Pari Passu Indebtedness
surrendered by holders or lenders thereof, collectively, exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes and Pari Passu Indebtedness
to be purchased on a pro rata basis on the basis of the aggregate principal
amount of the tendered Notes and Pari Passu Indebtedness. Upon completion of
such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
Holders of Notes that are the subject of an offer to purchase will receive an
Asset Sale Offer from the Company prior to any related purchase date and may
elect to have such Notes purchased by
A-1-7
<PAGE> 141
completing the form entitled "Option of Holder to Elect Purchase" on the reverse
side of this Note.
10. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in
registered form without coupons in minimum denominations of $1,000 and integral
multiples of $1,000 in excess thereof. The transfer of Notes may be registered
and Notes may be exchanged only as provided in Article 2 of the Indenture. The
Registrar and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents (including legal opinions) and
the Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, it need not
exchange or register the transfer of any Notes for a period of 15 days before a
selection of Notes to be redeemed or during the period between a record date and
the corresponding Interest Payment Date.
11. PERSONS DEEMED OWNERS. The registered Holder of a Note
may be treated as its owner for all purposes.
12. SUBORDINATION. Each Holder by accepting a Note agrees that
the payment of principal of, premium, if any, and interest on each Note and any
other payment obligations of the Company in respect of the Notes (including any
obligation to repurchase the Notes) is subordinated in right of payment, as set
forth in Article 10 of the Indenture, to the prior payment in full in cash of
all Senior Debt (whether outstanding on the date of the Indenture or thereafter
incurred).
13. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain
exceptions, the Indenture, the Notes or any Subsidiary Guarantee may be amended
or supplemented with the consent of the Holders of at least a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for Notes), and, subject to the
terms of the Indenture and any applicable Subsidiary Guarantee, any existing
default (other than a default in the payment of the principal of, premium, if
any, or interest on, the Notes) or compliance with any provision of the
Indenture, the Notes or any Subsidiary Guarantee may be waived with the consent
of the Holders of a majority in principal amount of the then outstanding
A-1-8
<PAGE> 142
Notes (including consents obtained in connection with a tender offer or exchange
offer for Notes). Without the consent of any Holder of a Note, the Indenture,
the Notes and any Subsidiary Guarantee may be amended or supplemented to cure
any ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption of
the Company's or any Subsidiary Guarantor's obligations to Holders of the Notes
in the case of a merger or consolidation as provided in Article 5 of the
Indenture, to make any change that would provide any additional rights or
benefits to the Holders of the Notes (including additional Subsidiary
Guarantees) or that does not adversely affect the legal rights under the
Indenture of any such Holder, to comply with the requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the TIA
or to provide for the succession of a successor trustee in compliance with the
requirements of Section 7.10 of the Indenture.
14. DEFAULTS AND REMEDIES. Each of the following constitutes
an "Event of Default": (a) default in payment when due of the principal of or
premium, if any, on the Notes; (b) default for 30 days in the payment when due
of interest on, or Liquidated Damages with respect to, the Notes; (c) failure by
the Company to comply with the provisions described in Sections 4.9, 4.10, 4.11,
or 5.1 of the Indenture; (d) failure by the Company or a Subsidiary Guarantor,
if any, for 60 days after notice from the Trustee or the Holders of at least 25%
in principal amount of the then outstanding Notes to comply with any of its
other agreements in the Indenture, the Notes or the Subsidiary Guarantees, if
any; (e) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by the Company or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries) other than Indebtedness owed to the Company or a Wholly Owned
Subsidiary, whether such Indebtedness or guarantee now exists, or is created
after the date hereof, which default (x) is caused by a failure to pay principal
of or premium, if any, or interest on such Indebtedness prior to the expiration
of the grace period provided in such Indebtedness on the date of such default
unless being contested in good faith by appropriate proceedings (a "Payment
Default") or (y) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal
A-1-9
<PAGE> 143
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $10.0 million or more; (f) failure
by the Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $10 million, which judgments are not paid, discharged
or stayed for a period of 60 days; (g) the Company or any of its Significant
Subsidiaries, or group of Restricted Subsidiaries that, taken together (as of
the latest audited consolidated financial statements for the Company and its
Subsidiaries), would constitute a Significant Subsidiary (such group herein
referred to as a "Significant Group of Subsidiaries"): (i) commences a voluntary
case, (ii) consents to the entry of an order for relief against it in an
involuntary case in which it is the debtor, (iii) consents to the appointment of
a Custodian of it or for all or substantially all of its property, (iv) makes a
general assignment for the benefit of its creditors, or (v) admits in writing
its inability generally to pay its debts as the same become due; (h) a court of
competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(i) is for relief against the Company, any of its Significant Subsidiaries, or a
Significant Group of Subsidiaries in an involuntary case in which it is the
debtor, (ii) appoints a Custodian of the Company, any of its Significant
Subsidiaries, or a Significant Group of Subsidiaries or for all or substantially
all of the property of the Company, a Significant Subsidiary or a Significant
Group of Subsidiaries; or (iii) orders the liquidation of the Company, any of
its Significant Subsidiaries, or a Significant Group of Subsidiaries; and the
order or decree contemplated in clauses (i), (ii) or (iii) of this clause (h),
remains unstayed and in effect for 60 consecutive days; or (i) except as
permitted in the Indenture, any Subsidiary Guarantee shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any reason
to be in full force and effect or a Subsidiary, or any Person acting on behalf
of such Subsidiary, shall deny or disaffirm its obligations under its Subsidiary
Guarantee.
If an Event of Default (other than of a type specified in
clause (g) or (h) in the preceding paragraph) occurs and is continuing under the
Indenture, the Trustee or the Holders of at least 25% in principal amount of the
then outstanding Notes may declare the principal, premium, if any, interest and
any other monetary obligations (including Liquidated Damages) on all the
A-1-10
<PAGE> 144
then outstanding Notes to be due and payable immediately by notice in writing to
the Company (and the Trustee, if given by the Holders). Upon the effectiveness
of such declaration, such principal, premium, interest and other monetary
obligations will be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising under clause (g) or (h) of the
preceding paragraph, all outstanding Notes will become due and payable without
further action or notice. Holders of Notes may not enforce the Indenture or the
Notes except as provided under the Indenture. Subject to certain limitations,
including the provision to the Trustee of an indemnity in accordance with
Section 7.7 of the Indenture, Holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal, premium, if any, or interest) if it determines that
withholding notice is in their interest.
15. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company, and may otherwise deal with the Company, as if
it were not the Trustee.
16. NO RECOURSE AGAINST OTHERS. A director, officer, employee
or stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under these Notes or the Indenture or for any claim
based on, in respect of or by reason of such obligations or their creation. Each
Holder by accepting any of these Notes waives and releases all such liability.
17. AUTHENTICATION. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an
authenticating agent.
18. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Holder or an assignee, such as: TEN COM (= tenants in common), TENANT
(= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).
A-1-11
<PAGE> 145
19. CUSIP NUMBERS. Pursuant to a recommendation promulgated by
the Committee on Uniform Security Identification Procedures, the Company have
caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP
numbers in notices of redemption as a convenience to Holders. No representation
is made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company shall furnish to any Holder upon written request
and without charge a copy of the Indenture and/or the Registration Rights
Agreement. Requests may be made to:
The Houston Exploration Company
1100 Louisiana, Suite 2000
Houston, Texas 77002
Attention: Thomas W. Powers
Facsimile: (713) 830-6885
A-1-12
<PAGE> 146
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or
(we) assign and transfer this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may
substitute another to act for him.
- --------------------------------------------------------------------------------
Date:
------------------------
Your Signature:
-----------------------------------------------
(Sign exactly as your name appears on the face of this Note)
Signature Guarantee.
A-1-13
<PAGE> 147
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the
Company pursuant to Section 4.9 or 4.10 of the Indenture, check the box below:
[ ] Section 4.9 [ ] Section 4.10
If you want to elect to have only part of the Note purchased
by the Company pursuant to Section 4.9 or Section 4.10 of the Indenture, state
the amount you elect to have purchased:
$
-----------------
Date: Your Signature:
---------------------------- -------------------------------
(Sign exactly as your name appears on the Note)
Tax Identification No.:
-----------------------
Signature Guarantee.
A-1-14
<PAGE> 148
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE(***)
The following exchanges of a part of this Global Note for an
interest in another Global Note or for a Definitive Note, or exchanges of a part
of another Global Note or Definitive Note for an interest in this Global Note,
have been made:
<TABLE>
<CAPTION>
Principal Amount
Amount of decrease in Amount of increase in of this Signature of
Principal Amount Principal Amount Global Note authorized signatory of
of this of this following such decrease Trustee or Note
Date of Exchange Global Note Global Note (or increase) Custodian
- ----------------------- --------------------- ---------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
</TABLE>
- -------------
(***) This should be included only if the Note is a Global Note.
A-1-15
<PAGE> 149
EXHIBIT A-2
(Face of Unrestricted Note)
___% Senior Subordinated Notes due 2008
No. Cusip No:
THE HOUSTON EXPLORATION COMPANY
promises to pay to Cede & Co. or registered assigns, the
principal sum of $ ____________________________ Dollars on
__________________, 2008.
Interest Payment Dates: ___________ and __________
Record Dates: ____________ and ______________
Dated: _________, 199_
THE HOUSTON EXPLORATION COMPANY
By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
This is one of the ___% Senior Subordinated
Notes due 2008 referred to in
the within-mentioned Indenture:
Dated: February __, 1998
The Bank of New York,
as Trustee
By:
-------------------------------------
Authorized Signature
A-2-1
<PAGE> 150
(Back of Unrestricted Note)
___% Senior Subordinated Notes due 2008
[Unless and until it is exchanged in whole or in part for
Notes in definitive form, this Note may not be transferred except as a whole by
the Depository to a nominee of the Depository or by a nominee of the Depository
to the Depository or another nominee of the Depository or by the Depository or
any such nominee to a successor Depository or a nominee of such successor
Depository. Unless this certificate is presented by an authorized representative
of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"),
to the issuer or its agent for registration of transfer, exchange or payment,
and any certificate issued is registered in the name of Cede & Co. or such other
name as may be requested by an authorized representative of DTC (and any payment
is made to Cede & Co. or such other entity as may be requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.](****)
Capitalized terms used herein shall have the meanings assigned
to them in the Indenture referred to below.
1. INTEREST. The Houston Exploration Company, a Delaware corporation (the
"Company"), promises to pay interest on the principal amount of this Note at
___% per annum from ____________, 1998 until ____________, 2008. The Company
shall pay interest semi-annually in arrears on __________ and __________ of each
year, or if any such day is not a Business Day, on the next succeeding Business
Day (each an "Interest Payment Date"). Interest on the Notes will accrue from
the most recent date to which interest has been paid or, if no interest has been
paid, from the Issue Date; provided that if there is no existing Default in the
payment of interest, and if this Note is
- --------
(****) This paragraph should be included only if the Note is a
Global Note.
A-2-3
<PAGE> 151
authenticated between a record date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such next
succeeding Interest Payment Date; provided, further, that the first Interest
Payment Date shall be ________ __, 1998. The Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue principal and premium, if any, from time to time on demand at a rate
equal to the per annum rate on the Notes then in effect; it shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace
periods) from time to time on demand at the same rate to the extent lawful.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
2. METHOD OF PAYMENT. The Company shall make payments in
respect of Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) by wire transfer of immediately available funds to
the accounts specified by the Note Custodian or, at the option of the Company,
payment of interest may be made by check mailed to the Holders of the Notes at
their respective addresses set forth in the register of Holders of Notes.
Notwithstanding the foregoing, all payments with respect to the Notes (the
Holders of which have provided wire transfer instructions to the Company at
least ten business days prior to the applicable payment date), will be required
to be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Such payment shall be made in such coin or
currency of the United States of America as at the time of payment is legal
tender for the payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New
York, the Trustee under the Indenture, will act as Paying Agent and Registrar.
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar. The Company may change any Paying Agent or Registrar
without notice to any Holder. The Company or any of its Subsidiaries may act in
any such capacity.
4. INDENTURE. The Company issued the Notes under an Indenture
dated as of March 2, 1998 ("Indenture") between the Company and the Trustee. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by
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reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss.
77aaa-77bbbb). The Notes are subject to all such terms, and Holders are referred
to the Indenture and such Act for a statement of such terms. The Notes are
general unsecured obligations of the Company limited to $100,000,000 in
aggregate principal amount.
5. OPTIONAL REDEMPTION.
Except as set forth in the next paragraph, the Notes will not
be redeemable at the Company's option prior to _____________, 2003. On and after
______________, 2003, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
written notice, at the Redemption Prices (expressed as a percentage of principal
amount) set forth below, plus accrued and unpaid interest thereon, if any, to
the applicable redemption date, if redeemed during the twelve-month period
beginning on ___________ of each of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<C> <C>
2003......................................................................... _______%
2004......................................................................... _______%
2005......................................................................... _______%
2006 and thereafter.......................................................... 100.000%
</TABLE>
In addition, at any time, on or prior to ________ __, 2001,
the Company may, at its option, redeem for cash up to 35% of the aggregate
principal amount of Notes originally issued under the Indenture on the Issue
Date at a Redemption Price equal to [ ]% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the Redemption Date, with the net cash proceeds of an Equity Offering;
provided that at least 65% of the aggregate principal amount of Notes originally
issued under the Indenture on the Issue Date remains outstanding immediately
after the occurrence of such redemption; provided further that such redemption
occurs within 90 days of the date of closing of such Equity Offering.
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The Trustee shall select the Notes to be purchased in the manner described in
the Indenture.
6. MANDATORY REDEMPTION. Other than as set forth in paragraph
8, the Company shall not be required to make mandatory redemption payments with
respect to the Notes.
7. NOTICE OF REDEMPTION. Notice of redemption will be mailed
at least 30 days but not more than 60 days before the Redemption Date to each
Holder whose Notes are to be redeemed at its registered address. Notes may be
redeemed in part but only in whole multiples of $1,000. On and after the
Redemption Date interest ceases to accrue on Notes or portions thereof called
for redemption.
8. REPURCHASE AT OPTION OF HOLDERS. (a) Upon the occurrence of
a Change of Control, each Holder of Notes shall have the right to require the
Company to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase (the "Change of
Control Payment"). Within 30 days following any Change of Control, the Company
shall mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase the Notes
pursuant to the procedures required by the Indenture and described in such
notice. Holders of Notes that are subject to an offer to purchase may elect to
have such Notes purchased by completing the form entitled "Option of Holder to
Elect Purchase" on the reverse side of this Note.
(b) On the 361st day after an Asset Sale, if the aggregate
amount of Excess Proceeds exceeds $10.0 million, the Company will be required to
make an offer to all Holders of Notes and, to the extent required by the terms
thereof, to all holders or lenders of Pari Passu Indebtedness (an "Asset Sale
Offer") to purchase the maximum principal amount of Notes and any such Pari
Passu Indebtedness to which the asset sale offer applies that may be purchased
out of the Excess Proceeds, at an offer price in cash in an amount equal to 100%
of the principal amount thereof plus accrued and unpaid interest and, with
respect to the Notes or similar securities, Liquidated Damages or comparable
amounts
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in the case of similar securities, if any, thereon to the date of purchase, in
accordance with the procedures set forth in Section 3.10 of the Indenture or the
agreements governing the Pari Passu Indebtedness, as applicable. To the extent
that the aggregate amount of Notes and Pari Passu Indebtedness so validly
tendered and not properly withdrawn pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. If the aggregate principal amount of Notes
surrendered by Holders thereof and other Pari Passu Indebtedness surrendered by
holders or lenders thereof, collectively, exceeds the amount of Excess Proceeds,
the Trustee shall select the Notes and Pari Passu Indebtedness to be purchased
on a pro rata basis on the basis of the aggregate principal amount of the
tendered Notes and Pari Passu Indebtedness. Upon completion of such Asset Sale
Offer, the amount of Excess Proceeds shall be reset at zero. Holders of Notes
that are the subject of an offer to purchase will receive an Asset Sale Offer
from the Company prior to any related purchase date and may elect to have such
Notes purchased by completing the form entitled "Option of Holder to Elect
Purchase" on the reverse side of this Note.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in
registered form without coupons in minimum denominations of $1,000 and integral
multiples of $1,000 in excess thereof. The transfer of Notes may be registered
and Notes may be exchanged only as provided in Article 2 of the Indenture. The
Registrar and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents (including legal opinions) and
the Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, it need not
exchange or register the transfer of any Notes for a period of 15 days before a
selection of Notes to be redeemed or during the period between a record date and
the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a
Note may be treated as its owner for all purposes.
11. SUBORDINATION. Each Holder by accepting a Note
agrees that the payment of principal of, premium, if any, and
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interest on each Note and any other payment obligations of the Company in
respect of the Notes (including any obligation to repurchase the Notes) is
subordinated in right of payment, as set forth in Article 10 of the Indenture,
to the prior payment in full in cash of all Senior Debt (whether outstanding on
the date of the Indenture or thereafter created).
12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain
exceptions, the Indenture, the Notes or any Subsidiary Guarantee may be amended
or supplemented with the consent of the Holders of at least a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for Notes), and, subject to the
terms of the Indenture and any applicable Subsidiary Guarantee, any existing
default (other than a default in the payment of the principal of, premium, if
any, or interest on, the Notes) or compliance with any provision of the
Indenture, the Notes or any Subsidiary Guarantee may be waived with the consent
of the Holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes). Without the consent of any Holder of a Note, the Indenture, the
Notes and any Subsidiary Guarantee may be amended or supplemented to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption of
the Company's or any Subsidiary Guarantor's obligations to Holders of the Notes
in the case of a merger or consolidation as provided in Article 5 of the
Indenture, to make any change that would provide any additional rights or
benefits to the Holders of the Notes (including additional Subsidiary
Guarantees) or that does not adversely affect the legal rights under the
Indenture of any such Holder, to comply with the requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the TIA
or to provide for the succession of a successor trustee in compliance with the
requirements of Section 7.10 of the Indenture.
13. Defaults and Remedies. Each of the following constitutes
an "Event of Default": (a) default in payment when due of the principal of or
premium, if any, on the Notes; (b) default for 30 days in the payment when due
of interest on, or Liquidated Damages with respect to, the Notes; (c) failure by
the Company to comply with the provisions described in Sections 4.9, 4.10, 4.11,
or 5.1 of the Indenture; (d) failure by the
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Company or a Subsidiary Guarantor, if any, for 60 days after notice from the
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Notes to comply with any of its other agreements in the Indenture,
the Notes or the Subsidiary Guarantees, if any;(e) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
of its Restricted Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Restricted Subsidiaries) other than Indebtedness owed to
the Company or a Wholly Owned Subsidiary, whether such Indebtedness or guarantee
now exists, or is created after the date hereof, which default (x) is caused by
a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default unless being contested in good faith by
appropriate proceedings (a "Payment Default") or (y) results in the acceleration
of such Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness, together with the principal amount of
any other such Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $10.0 million or more; (f)
failure by the Company or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $10 million, which judgments are not paid,
discharged or unstayed for a period of 60 days; (g) the Company or any of its
Significant Subsidiaries, or group of Restricted Subsidiaries that, taken
together (as of the latest audited consolidated financial statements for the
Company and its Subsidiaries), would constitute a Significant Subsidiary (such
group herein referred to as a "Significant Group of Subsidiaries"): (i)
commences a voluntary case, (ii) consents to the entry of an order for relief
against it in an involuntary case in which it is the debtor, (iii) consents to
the appointment of a Custodian of it or for all or substantially all of its
property, (iv) makes a general assignment for the benefit of its creditors, or
(v) admits in writing its inability generally to pay its debts as the same
become due; (h) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that: (i) is for relief against the Company, any of its
Significant Subsidiaries, or a Significant Group of Subsidiaries in an
involuntary case in which it is the debtor, (ii) appoints a Custodian of the
Company, any of its Significant Subsidiaries, or a Significant Group of
Subsidiaries or for all or substantially
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all of the property of the Company, a Significant Subsidiary or a Significant
Group of Subsidiaries; or (iii) orders the liquidation of the Company, any of
its Significant Subsidiaries, or a Significant Group of Subsidiaries; and the
order or decree contemplated in clauses (i), (ii) or (iii) of this clause (h),
remains unstayed and in effect for 60 consecutive days; or (i) except as
permitted in the Indenture, any Subsidiary Guarantee shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any reason
to be in full force and effect or a Subsidiary, or any Person acting on behalf
of such Subsidiary, shall deny or disaffirm its obligations under its Subsidiary
Guarantee.
If an Event of Default (other than of a type specified in
clause (g) or (h) in the preceding paragraph) occurs and is continuing under the
Indenture, the Trustee or the Holders of at least 25% in principal amount of the
then outstanding Notes may declare the principal, premium, if any, interest and
any other monetary obligations (including Liquidated Damages) on all the then
outstanding Notes to be due and payable immediately by notice in writing to the
Company (and the Trustee, if given by the Holders). Upon the effectiveness of
such declaration, such principal, premium, interest and other monetary
obligations will be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising under clause (g) or (h) of the
preceding paragraph, all outstanding Notes will become due and payable without
further action or notice. Holders of Notes may not enforce the Indenture or the
Notes except as provided under the Indenture. Subject to certain limitations,
including the provision to the Trustee of an indemnity in accordance with
Section 7.7 of the Indenture, Holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal, premium, if any, or interest) if it determines that
withholding notice is in their interest.
14. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company, and may otherwise deal with the Company, as if
it were not the Trustee.
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15. NO RECOURSE AGAINST OTHERS. A director, officer, employee
or stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under these Notes or the Indenture or for any claim
based on, in respect of or by reason of such obligations or their creation. Each
Holder by accepting any of these Notes waives and releases all such liability.
16. AUTHENTICATION. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an
authenticating agent.
17. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Holder or an assignee, such as: TEN COM (= tenants in common), TENANT
(= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated
by the Committee on Uniform Security Identification Procedures, the Company have
caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP
numbers in notices of redemption as a convenience to Holders. No representation
is made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company shall furnish to any Holder upon written request
and without charge a copy of the Indenture and/or the Registration Rights
Agreement. Requests may be made to:
The Houston Exploration Company
1100 Louisiana, Suite 2000
Houston, Texas 77002
Attention: Thomas W. Powers
Facsimile: (713) 830-6885
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<PAGE> 159
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
The Houston Exploration Company
1100 Louisiana, Suite 2000
Houston, Texas 77002
The Bank of New York
Re: ___% Senior Subordinated Notes due 2008 (CUSIP ____)
Reference is hereby made to the Indenture, dated as of
February __, 1998 (the "Indenture"), between The Houston Exploration Company, as
issuer (the "Company"), and The Bank of New York, as trustee. Capitalized terms
used but not defined herein shall have the meanings given to them in the
Indenture.
__________________________, (the "Transferor") owns and
proposes to transfer the Note[s] or interest in such Note[s] specified in Annex
A hereto, in the principal amount of $________ in such Note[s] or interests (the
"Transfer"), to (the "Transferee"), as further specified in Annex A hereto. In
connection with the Transfer, the Transferor hereby certifies that:
[CHECK ALL THAT APPLY]
1. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE
144A GLOBAL NOTE OR A RESTRICTED DEFINITIVE NOTE PURSUANT TO RULE 144A. The
Transfer is being effected pursuant to and in accordance with Rule 144A under
the United States Securities Act of 1933, as amended (the "Securities Act"),
and, accordingly, the Transferor hereby further certifies that the beneficial
interest or Restricted Definitive Note is being transferred to a Person that the
Transferor reasonably believed and believes is purchasing the beneficial
interest or Restricted
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Definitive Note for its own account, or for one or more accounts with respect to
which such Person exercises sole investment discretion, and such Person and each
such account is a "qualified institutional buyer" within the meaning of Rule
144A in a transaction meeting the requirements of Rule 144A and such Transfer is
in compliance with any applicable blue sky securities laws of any state of the
United States. Upon consummation of the proposed Transfer in accordance with the
terms of the Indenture, the transferred beneficial interest or Restricted
Definitive Note will be subject to the restrictions on transfer enumerated in
the Private Placement Legend printed on the 144A Global Note and/or the
Restricted Definitive Note and in the Indenture and the Securities Act.
2. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL
INTEREST IN THE REGULATION S GLOBAL NOTE OR A RESTRICTED DEFINITIVE NOTE
PURSUANT TO REGULATION S. The Transfer is being effected pursuant to and in
accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly,
the Transferor hereby further certifies that (i) the Transfer is not being made
to a person in the United States and (x) at the time the buy order was
originated, the Transferee was outside the United States or such Transferor and
any Person acting on its behalf reasonably believed and believes that the
Transferee was outside the United States or (y) the transaction was executed in,
on or through the facilities of a designated offshore securities market and
neither such Transferor nor any Person acting on its behalf knows that the
transaction was prearranged with a buyer in the United States, (ii) no directed
selling efforts have been made in contravention of the requirements of Rule
903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the
transaction is not part of a plan or scheme to evade the registration
requirements of the Securities Act and (iv) if the proposed transfer is being
made prior to the expiration of the Restricted Period, the transfer is not being
made to a U.S. Person or for the account or benefit of a U.S. Person (other than
an Initial Purchaser). Upon consummation of the proposed transfer in accordance
with the terms of the Indenture, the transferred beneficial interest or
Restricted Definitive Note will be subject to the restrictions on Transfer
enumerated in the Private Placement Legend printed on the Regulation S Global
Note and/or the Definitive Note and in the Indenture and the Securities Act.
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3. [ ] CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY
OF A RESTRICTED DEFINITIVE NOTE OR RESTRICTED GLOBAL NOTE PURSUANT TO ANY
PROVISION OF THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The
Transfer is being effected in compliance with the transfer restrictions
applicable to Restricted Definitive Notes and pursuant to and in accordance with
the Securities Act and any applicable blue sky securities laws of any state of
the United States, and accordingly the Transferor hereby further certifies that
(check one):
(a) [ ] such Transfer is being effected pursuant to and in
accordance with Rule 144 under the Securities Act;
or
(b) [ ] such Transfer is being effected to the Company or a
Subsidiary thereof;
or
(c) [ ] such Transfer is being effected pursuant to an
effective registration statement under the Securities Act and in compliance
with the prospectus delivery requirements of the Securities Act;
or
(d) [ ] such Transfer is being effected to an Institutional
Accredited Investor and pursuant to an exemption from the registration
requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904,
and the Transferor hereby further certifies that the Transfer complies with the
transfer restrictions applicable to Restricted Definitive Notes and the
requirements of the exemption claimed, which certification is supported by a
certificate executed by the Transferee in the form of Exhibit D to the
Indenture. Upon consummation of the proposed transfer in accordance with the
terms of the Indenture, the transferred beneficial interest or Restricted
Definitive Note will be subject to the restrictions on transfer enumerated in
the Private Placement Legend printed on the Restricted Definitive Notes and in
the Indenture and the Securities Act.
4. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL
INTEREST IN AN UNRESTRICTED GLOBAL NOTE OR OF AN UNRESTRICTED DEFINITIVE NOTE.
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(a) [ ] CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The
Transfer is being effected pursuant to and in accordance with Rule 144 under the
Securities Act and in compliance with the transfer restrictions contained in the
Indenture and any applicable blue sky securities laws of any state of the United
States and (ii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act. Upon consummation of the proposed Transfer in accordance
with the terms of the Indenture, the transferred beneficial interest or
Unrestricted Definitive Note will no longer be subject to the restrictions on
transfer enumerated in the Private Placement Legend printed on the Restricted
Global Notes, on Restricted Definitive Notes and in the Indenture.
(b) [ ] CHECK IF TRANSFER IS PURSUANT TO REGULATION S.
(i) The Transfer is being effected pursuant to and in accordance with Rule 903
or Rule 904 under the Securities Act and in compliance with the transfer
restrictions contained in the Indenture and any applicable blue sky securities
laws of any state of the United States and (ii) the restrictions on transfer
contained in the Indenture and the Private Placement Legend are not required in
order to maintain compliance with the Securities Act. Upon consummation of the
proposed Transfer in accordance with the terms of the Indenture, the transferred
beneficial interest or Unrestricted Definitive Note will no longer be subject to
the restrictions on transfer enumerated in the Private Placement Legend printed
on the Restricted Global Notes, on Restricted Definitive Notes and in the
Indenture.
(c) [ ] CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION.
(i) The Transfer is being effected pursuant to and in compliance with an
exemption from the registration requirements of the Securities Act other than
Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions
contained in the Indenture and any applicable blue sky securities laws of any
State of the United States and (ii) the restrictions on transfer contained in
the Indenture and the Private Placement Legend are not required in order to
maintain compliance with the Securities Act. Upon consummation of the proposed
Transfer in accordance with the terms of the Indenture, the transferred
beneficial interest or Unrestricted Definitive Note will not be subject to the
restrictions on transfer enumerated in the Private
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Placement Legend printed on the Restricted Global Notes or Restricted Definitive
Notes and in the Indenture.
This certificate and the statements contained herein are made
for your benefit and the benefit of the Company.
-------------------------------
[Insert Name of Transferor]
By:
----------------------------
Name:
Title:
Dated: ,
---------------- ----
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<PAGE> 164
ANNEX A TO CERTIFICATE OF TRANSFER
1. The Transferor owns and proposes to transfer the following:
[CHECK ONE OF (a) OR (b)]
(a) [ ] beneficial interest in the:
(i) [ ] 144A Global Note (CUSIP _____), or
(ii) [ ] Regulation S Global Note
(CUSIP/CINS _____), or
(b) [ ] Restricted Definitive Note.
2. After the Transfer the Transferee will hold:
[CHECK ONE]
(a) [ ] beneficial interest in the:
(i) [ ] 144A Global Note (CUSIP _____), or
(ii) [ ] Regulation S Global Note
(CUSIP/CINS _____), or
(iii) [ ] Unrestricted Global Note (CUSIP
_____); or
(b) [ ] Restricted Definitive Note; or
(c) [ ] an Unrestricted Definitive Note,
in accordance with the terms of the Indenture.
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EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
The Houston Exploration Company
1100 Louisiana, Suite 2000
Houston, Texas 77002
The Bank of New York
Re: ___% Senior Subordinated Notes due 2008 (CUSIP )
Reference is hereby made to the Indenture, dated as of February ___,
1998 (the "Indenture"), between The Houston Exploration Company, as issuer (the
"Company"), and The Bank of New York, as trustee. Capitalized terms used but not
defined herein shall have the meanings given to them in the Indenture.
_______________, (the "Owner") owns and proposes to exchange the
Note[s] or interest in such Note[s] specified herein, in the principal amount of
$___________ in such Note[s] or interests (the "Exchange"). In connection with
the Exchange, the Owner hereby certifies that:
1. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL
INTERESTS IN A RESTRICTED GLOBAL NOTE FOR UNRESTRICTED DEFINITIVE
NOTES OR BENEFICIAL INTERESTS IN AN UNRESTRICTED GLOBAL NOTE
(a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A
RESTRICTED GLOBAL NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In
connection with the Exchange of the Owner's beneficial interest in a Restricted
Global Note for a beneficial interest in an Unrestricted Global Note in an equal
principal amount, the Owner hereby certifies (i) the beneficial interest is
being acquired for the Owner's own account without transfer, (ii) such Exchange
has been effected in compliance with the transfer restrictions applicable to the
Restricted Global Notes and pursuant to and in accordance with the United States
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Securities Act of 1933, as amended (the "Securities Act"), (iii) the
restrictions on transfer contained in the Indenture and the Private Placement
Legend are not required in order to maintain compliance with the Securities Act
and (iv) the beneficial interest in an Unrestricted Global Note is being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.
(b) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A
RESTRICTED GLOBAL NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the
Exchange of the Owner's beneficial interest in a Restricted Global Note for an
Unrestricted Definitive Note, the Owner hereby certifies (i) the Definitive Note
is being acquired for the Owner's own account without transfer, (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to the Restricted Global Notes and pursuant to and in accordance with
the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the Unrestricted Definitive Note is
being acquired in compliance with any applicable blue sky securities laws of any
state of the United States.
(c) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO
BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the
Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an
Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest
is being acquired for the Owner's own account without transfer, (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to Restricted Definitive Notes and pursuant to and in accordance with
the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the beneficial interest is being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.
(d) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO
UNRESTRICTED DEFINITIVE NOTE. In connection with the Owner's Exchange of a
Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby
certifies (i) the
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Unrestricted Definitive Note is being acquired for the Owner's own account
without transfer, (ii) such Exchange has been effected in compliance with the
transfer restrictions applicable to Restricted Definitive Notes and pursuant to
and in accordance with the Securities Act, (iii) the restrictions on transfer
contained in the Indenture and the Private Placement Legend are not required in
order to maintain compliance with the Securities Act and (iv) the Unrestricted
Definitive Note is being acquired in compliance with any applicable blue sky
securities laws of any state of the United States.
2. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL
INTERESTS IN RESTRICTED GLOBAL NOTES FOR RESTRICTED DEFINITIVE NOTES OR
BENEFICIAL INTERESTS IN RESTRICTED GLOBAL NOTES
(a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A
RESTRICTED GLOBAL NOTE TO RESTRICTED DEFINITIVE NOTE. In connection with the
Exchange of the Owner's beneficial interest in a Restricted Global Note for a
Restricted Definitive Note with an equal principal amount, the Owner hereby
certifies that the Restricted Definitive Note is being acquired for the Owner's
own account without transfer. Upon consummation of the proposed Exchange in
accordance with the terms of the Indenture, the Restricted Definitive Note
issued will continue to be subject to the restrictions on transfer enumerated in
the Private Placement Legend printed on the Restricted Definitive Note and in
the Indenture and the Securities Act.
(b) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE
TO BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE. In connection with the
Exchange of the Owner's Restricted Definitive Note for a beneficial interest in
the [CHECK ONE] 144A Global Note or Regulation S Global Note or IAI Global Note,
with an equal principal amount, the Owner hereby certifies (i) such Owner
acquired such Restricted Definitive Note in a transaction pursuant to Rule 144A
or Regulation S or another exemption from the registration requirements of the
Securities Act, (ii) the beneficial interest is being acquired for the Owner's
own account without transfer and (iii) such Exchange has been effected in
compliance with the transfer restrictions applicable to the Restricted Global
Notes and pursuant to and in accordance with the Securities Act, and in
compliance with any applicable blue sky securities laws of any state of the
United
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States. Upon consummation of the proposed Exchange in accordance with the terms
of the Indenture, the beneficial interest issued will be subject to the
restrictions on transfer enumerated in the Private Placement Legend printed on
the relevant Restricted Global Note and in the Indenture and the Securities Act.
This certificate and the statements contained herein are made
for your benefit and the benefit of the Company.
-------------------------------
[Insert Name of Owner]
By:
----------------------------
Name:
Title:
Dated: ,
---------------- ----
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<PAGE> 169
EXHIBIT D
FORM OF CERTIFICATE FROM
ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
The Houston Exploration Company
1100 Louisiana, Suite 2000
Houston, Texas 77002
The Bank of New York
Re: 8-5/8% Senior Subordinated Notes due 2008
Reference is hereby made to the Indenture, dated as of March
2, 1998 (the "Indenture"), between The Houston Exploration Company, as issuer
(the "Company"), and The Bank of New York, as trustee. Capitalized terms used
but not defined herein shall
have the meanings given to them in the Indenture.
In connection with our proposed purchase of $__________
aggregate principal amount of Notes we confirm that:
1. We understand that any subsequent transfer of the Notes or
any interest therein is subject to certain restrictions and conditions set forth
in the Indenture and the undersigned agrees to be bound by, and not to resell,
pledge or otherwise transfer the Notes or any interest therein except in
compliance with, such restrictions and conditions and the United States
Securities Act of 1933, as amended (the "Securities Act").
2. We understand that the Notes have not been registered under
the Securities Act, and that the Notes and any interest therein may not be
offered or sold except as permitted in the following sentence. We agree, on our
own behalf and on behalf of each account for which we acquire any Notes (for
which are acting as hereinafter stated), that such Notes may be offered, resold,
pledged or otherwise transferred only (i) to a person whom we reasonably believe
is a "qualified institutional buyer" (as defined in Rule 144A under the
Securities Act) in a transaction meeting the requirements of Rule 144A, (ii) in
an offshore transaction complying with Rule 903 or Rule 904 of Regulation S,
(iii) pursuant to an exemption from registration
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under the Securities Act provided by Rule 144 thereunder (if available), (iv) to
an institutional "accredited investor" (as defined in Rule 501 (a) (1), (2), (3)
or (7) of Regulation D under the Securities Act) that, prior to such transfer,
furnishes the trustee a signed letter containing certain representations and
agreements relating to the transfer of the Notes and, if such transfer is in
respect of an aggregate principal amount of Notes less than $250,000, an opinion
of counsel, (v) in accordance with another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
acceptable to the Company), (vi) to the Company or (vii) pursuant to an
effective registration statement under the Securities Act, and, in each case, in
accordance with all applicable U.S. state securities laws. We further agree to
provide to any person purchasing the Definitive Note or a beneficial interest in
a Global Note from us in a transaction meeting the requirements of the preceding
sentence a notice advising such purchaser that resales thereof are restricted as
stated herein.
3. We understand that, on any proposed resale of the Notes or
beneficial interest therein, we will be required to furnish to you and the
Company such certifications, legal opinions and other information as you and the
Company may reasonably require to confirm that the proposed sale complies with
the foregoing restrictions. We further understand that the Notes purchased by us
will bear a legend to the foregoing effect.
4. We are an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and
have such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the Notes, and
we and any accounts for which we are acting are each able to bear the economic
risk of our or its investment.
5. We are acquiring the Notes without a view to distribution
thereof in violation of the Securities Act for our own account or for one or
more accounts (each of which is an institutional "accredited investor") as to
each of which we exercise sole investment discretion.
Upon transfer, the Notes would be registered in the name of
the new beneficial owner as follows:
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<PAGE> 171
Name:
--------------------------------------------------
Address:
--------------------------------------------------
Taxpayer ID Number:
---------------------------------------
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby.
------------------------------------
[Insert Name of Accredited Investor]
By:
---------------------------------
Name:
Title:
Dated: ,
---------------- ----
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<PAGE> 172
EXHIBIT E
FORM OF SUPPLEMENTAL INDENTURE TO BE
DELIVERED BY SUBSIDIARY GUARANTORS
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated
as of ____________________, between ____________________ (the "Subsidiary
Guarantor"), a subsidiary of The Houston Exploration Company (or its successor),
a company incorporated under the laws of the State of Delaware (the "Company"),
and The Bank of New York, a New York banking corporation, as trustee under the
indenture referred to below (the "Trustee").
W I T N E S S E T H
WHEREAS, the Company has heretofore executed and delivered to
the Trustee an indenture (the "Indenture"), dated as of February __, 1998
providing for the issuance of an aggregate principal amount at maturity of
$150,000,000 of ___% Senior Subordinated Notes due 2008 (the "Notes");
WHEREAS, Section 4.15 of the Indenture provides that, under
certain circumstances, the Company is required to cause the Subsidiary Guarantor
to execute and deliver to the Trustee a Subsidiary Guarantee on the terms and
conditions set forth herein; and
WHEREAS, pursuant to Section 9.1 of the Indenture, the Trustee
is authorized to execute and deliver this Supplemental Indenture.
NOW, THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, the receipt of which is hereby
acknowledged, the Subsidiary Guarantor and the Trustee mutually covenant and
agree for the equal and ratable benefit of the holders of the Notes as follows:
1. CAPITALIZED TERMS. Capitalized terms used herein without
definition shall have the meanings as assigned to them in the
Indenture.
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2. INDENTURE PROVISION PURSUANT TO WHICH GUARANTEE IS GIVEN.
This Supplemental Indenture is being executed and delivered pursuant to Section
4.15 of the Indenture.
3. AGREEMENTS TO GUARANTEE. The Subsidiary Guarantor hereby
agrees as follows:
(a) The Subsidiary Guarantor, jointly and severally with all
other Subsidiary Guarantors, if any, unconditionally guarantees to each Holder
of a Note authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, regardless of the validity and enforceability of the
Indenture, the Notes and the Obligations of the Company under the Indenture and
the Notes, that:
(i) the principal of, premium, if any, and interest
and Liquidated Damages on the Notes shall be promptly paid in full when due,
whether at maturity, by acceleration, redemption or otherwise, and interest on
the overdue principal of, premium, if any, and interest and Liquidated Damages
on the Notes, to the extent lawful, and all other obligations of the Company to
the Holders or the Trustee thereunder shall be promptly paid in full, all in
accordance with the terms thereof; and
(ii) in case of any extension of time for payment or
renewal of any Notes or any of such other obligations, that the same shall be
promptly paid in full when due in accordance with the terms of the extension or
renewal, whether at Stated Maturity, by acceleration or otherwise.
Notwithstanding the foregoing, in the event that this
Subsidiary Guarantee would constitute or result in a violation of any applicable
fraudulent conveyance or similar law of any relevant jurisdiction, the liability
of the Subsidiary Guarantor under this Supplemental Indenture and its Subsidiary
Guarantee shall be limited to such amount as will not, after giving effect
thereto, and to all other liabilities of the Subsidiary Guarantor, result in
such amount constituting a fraudulent transfer or conveyance.
4. EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES
(a) To evidence its Subsidiary Guarantee set forth in
this Supplemental Indenture, the Subsidiary Guarantor hereby
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agrees that a notation of such Subsidiary Guarantee substantially in the form of
Annex A hereto shall be endorsed by an officer of such Subsidiary Guarantor on
each Note authenticated and delivered by the Trustee after the date hereof.
(b) Notwithstanding the foregoing, the Subsidiary Guarantor
hereby agrees that its Subsidiary Guarantee set forth herein shall remain in
full force and effect notwithstanding any failure to endorse on each Note a
notation of such Subsidiary Guarantee.
(c) If an officer whose signature is on this Supplemental
Indenture or on the Subsidiary Guarantee no longer holds that office at the time
the Trustee authenticates the Note on which a Subsidiary Guarantee is endorsed,
the Subsidiary Guarantee shall be valid nevertheless.
(d) The delivery of the Note by the Trustee, after the
authentication thereof under the Indenture, shall constitute due delivery of the
Subsidiary Guarantee set forth in this Supplemental Indenture on behalf of the
Subsidiary Guarantor.
(e) The Subsidiary Guarantor hereby agrees that its
obligations hereunder shall be unconditional, regardless of the validity,
regularity or enforceability of the Notes or the Indenture, the absence of any
action to enforce the same, any waiver or consent by any Holder of the Notes
with respect to any provisions hereof or thereof, the recovery of any judgment
against the Company, any action to enforce the same or any other circumstance
which might otherwise constitute a legal or equitable discharge or defense of a
guarantor.
(f) The Subsidiary Guarantor hereby waives diligence,
presentment, demand of payment, filing of claims with a court in the event of
insolvency or bankruptcy of the Company, any right to require a proceeding first
against the Company, protest, notice and all demands whatsoever and covenants
that its Subsidiary Guarantee made pursuant to this Supplemental Indenture will
not be discharged except by complete performance of the obligations contained in
the Notes and the Indenture or pursuant to Section 5(b) of this Supplemental
Indenture.
(g) If the Trustee or any Holder has instituted any proceeding
to enforce any right or remedy under this Supplemental
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Indenture and such proceeding has been discontinued or abandoned for any reason,
or has been determined adversely to the Trustee or to such Holder, then, and in
every such case, subject to any determination in such proceeding, the Subsidiary
Guarantor, the Trustee and the Holders shall be restored severally and
respectively to their former positions hereunder and thereafter all rights and
remedies of the Subsidiary Guarantor, the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
(h) The Subsidiary Guarantor hereby waives and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Subsidiary Guarantor as a result of any payment by such Subsidiary
Guarantor under its Subsidiary Guarantee. The Subsidiary Guarantor further
agrees that, as between the Subsidiary Guarantors, on the one hand, and the
Holders and the Trustee, on the other hand:
(i) the maturity of the obligations guaranteed
hereby may be accelerated as provided in Article Six of the Indenture for the
purposes of the Subsidiary Guarantee made pursuant to this Supplemental
Indenture, notwithstanding any stay, injunction or other prohibition preventing
such acceleration in respect of the Obligations guaranteed hereby; and
(ii) in the event of any declaration of acceleration
of such obligations as provided in Article Six, such obligations (whether or not
due and payable) shall forthwith become due and payable by the Subsidiary
Guarantor for the purpose of the Subsidiary Guarantee made pursuant to this
Supplemental Indenture.
(i) Upon payment of all the Obligations in respect of the
Notes and the Indenture, the Subsidiary Guarantor shall have the right to seek
contribution from any other non-paying Subsidiary Guarantor.
(j) The Subsidiary Guarantor covenants (to the extent that it
may lawfully do so) that it will not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law wherever enacted, now or at any time hereafter in force,
which
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may affect the covenants or the performance of the Indenture or this Subsidiary
Guarantee; and the Subsidiary Guarantor (to the extent that it may lawfully do
so) hereby expressly waives all benefit or advantage of any such law, and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law had been enacted.
5. SUBSIDIARY GUARANTOR MAY CONSOLIDATE, ETC. ON CERTAIN
TERMS
(a) Except as set forth in Articles Four and Five of the
Indenture, nothing contained in the Indenture, this Supplemental Indenture or in
the Notes shall prevent any consolidation or merger of the Subsidiary Guarantor
with or into the Company or any other Subsidiary Guarantor or shall prevent any
transfer, sale or conveyance of the property of the Subsidiary Guarantor as an
entirety or substantially as an entirety, to the Company or any other Subsidiary
Guarantor.
(b) Except as set forth in Article Five of the Indenture, upon
the sale or other disposition of all or substantially all of the assets of the
Subsidiary Guarantor to a third party (in each case, other than to an Affiliate
of the Company) by way of a merger, consolidation or otherwise, or a sale or
other disposition of all of the Capital Stock of the Subsidiary Guarantor, then
the Subsidiary Guarantor (in the event of a sale or other disposition of all or
substantially all of the assets of the Subsidiary Guarantor), the Subsidiary
Guarantor shall be deemed automatically and unconditionally released and
discharged from all obligations under this Subsidiary Guarantee without any
further action required on the part of the Trustee or any Holder if no Default
shall have occurred and be continuing; provided, that in the event of an Asset
Sale, the Net Cash Proceeds therefrom are treated in accordance with Section
4.10 of the Indenture. Upon receipt of an Officer's Certificate of the Company
or the Subsidiary Guarantor, as the case may be, to the effect that the Company
or such Subsidiary Guarantor has complied with the first sentence of this
Section 5(b), the Trustee shall execute any documents reasonably requested by
the Company or the Subsidiary Guarantor, at the cost of the Company or such
Subsidiary Guarantor, as the case may be, in order to evidence the release of
such Subsidiary Guarantor from its obligations
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under its Guarantee endorsed on the Notes and under the Indenture
and this Supplemental Indenture.
(c) Subject to the first sentence of Section 5(b), the
Subsidiary Guarantor shall not consolidate with, or merge with or into (whether
or not the Subsidiary Guarantor is the surviving person), another Person other
than the Company or another Subsidiary Guarantor whether or not affiliated with
such Subsidiary Guarantor, unless (i) the Person formed by or surviving any such
consolidation or merger (if other than such Subsidiary Guarantor) assumes all
the obligations of such Subsidiary Guarantor pursuant to a supplemental
indenture in form and substance satisfactory to the Trustee in respect of the
Notes, this Supplemental Indenture and the Subsidiary Guarantee made pursuant
hereto; (ii) immediately after giving effect to such transaction, no Default or
Event of Default exists; and (iii) the Company delivers to the Trustee an
Officers' Certificate and an Opinion of Counsel addressed to the Trustee with
respect to the foregoing matters.
6. RELEASES UPON RELEASE OF GUARANTEE OF GUARANTEED
INDEBTEDNESS. Concurrently with the releasee or discharge of the Subsidiary
Guarantor's guarantee of the payment of Indebtedness which gave rise to the
delivery of this Supplemental Indenture in accordance with Section 4.15 of the
Indenture ("Guaranteed Indebtedness") (other than a release or discharge by or
as a result of payment under such guarantee of Guaranteed Indebtedness), the
Subsidiary Guarantor shall be automatically and unconditionally released and
relieved of its obligations under this Supplemental Indenture and its Subsidiary
Guarantee made pursuant to Section 4 of this Supplemental Indenture. Upon
delivery by the Company to the Trustee of an Officer's Certificate to the effect
that such release or discharge has occurred, the Trustee shall execute any
documents reasonably required in order to evidence the release of the Subsidiary
Guarantor from its obligations under this Supplemental Indenture and its
Subsidiary Guarantee made pursuant hereto; provided such documents shall not
affect or impair the rights of the Trustee and Paying Agent under Section 7.7 of
the Indenture.
7. SUBORDINATION.
(a) AGREEMENT TO SUBORDINATE. The Subsidiary
Guarantor agrees, and each Holder by accepting this Subsidiary
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Guarantee agrees, that the payment of the Subordinated Note Obligations by the
Subsidiary Guarantor shall be subordinated in right of payment, as set forth in
this Section 7, to the prior payment in full in cash of all Senior Debt of such
Subsidiary Guarantor whether outstanding on the date hereof or hereafter
incurred.
(b) LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any payment or
distribution of property or securities to creditors of the Subsidiary Guarantor
in a liquidation or dissolution of the Subsidiary Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Subsidiary Guarantor or its property, or in an assignment for the benefit of
creditors or any marshalling of the Subsidiary Guarantor's assets and
liabilities, the holders of Senior Debt of such Subsidiary Guarantor shall be
entitled to receive payment in full of all Obligations due in respect of such
Senior Debt (including interest after the commencement of any such proceeding at
the rate specified in the applicable Senior Debt, whether or not a claim for
such interest would be allowed in a proceeding) before the Holders of the Notes
will be entitled to receive any payment from the Subsidiary Guarantor with
respect to the Notes, and until all Obligations with respect to such Senior Debt
are paid in full, any distribution to which the Holders of the Notes would be
entitled to receive from the Subsidiary Guarantor shall be made to the holders
of such Subsidiary Guarantor's Senior Debt (except that Holders of the Notes may
receive payments made from the trust described in Article 8 of the Indenture.
(c) DEFAULT ON DESIGNATED SENIOR DEBT. The Subsidiary
Guarantor also may not make any payment (whether by redemption, purchase,
retirement, defeasance or otherwise) upon or in respect of the Notes (except
from the trust described in Article 8 of the Indenture) if (i) a default in the
payment of the principal of, premium, if any, or interest on Guarantor
Designated Senior Debt (as defined below) of the Subsidiary Guarantor occurs
("payment default") or (ii) any other default occurs and is continuing with
respect to Guarantor Designated Senior Debt of the Subsidiary Guarantor that
permits, or with the giving of notice or passage of time or both (unless cured
or waived) will permit, holders of such Guarantor Designated Senior Debt as to
which such default relates to accelerate its maturity ("non-payment default")
and (solely with respect to this clause (ii) ) the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the
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<PAGE> 179
holders or representatives of such Guarantor Designated Senior Debt of the
Subsidiary Guarantor. Cash payments on the Notes from the Subsidiary Guarantor
shall be resumed (a) in the case of a payment default, upon the date on which
such default is cured or waived and (b) in case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Guarantor Designated Senior Debt of the Subsidiary
Guarantor or Designated Senior Debt of the Company has been accelerated or a
default of the type described in paragraph (g) or (h) of Section 6.1 of the
Indenture has occurred and is continuing. No new period of payment blockage may
be commenced unless and until 360 days have elapsed since the date of
commencement of the payment blockage period resulting from the immediately prior
Payment Blockage Notice. No nonpayment default in respect of Designated Senior
Debt of the Subsidiary Guarantor that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default shall have
been cured or waived for a period of no less than 90 days. "Guarantor Designated
Senior Debt" means (i) Indebtedness of the Subsidiary Guarantor under the Credit
Agreement and (ii) any Senior Debt of the Subsidiary Guarantor permitted under
the Indenture which at the date of determination, has an aggregate principal
amount outstanding of, or under which, at the date of determination, the holders
thereof are committed to lend up to $25 million and is specifically designated
by the Subsidiary Guarantor in the instrument evidencing or governing such
Senior Debt as "Guarantor Designated Senior Debt" for purposes of this
Supplemental Indenture.
(d) ACCELERATION OF SECURITIES. If the Subsidiary Guarantor
fails to make any payment on the Notes when due or within any applicable grace
period, whether or not on account of the payment blockage provision referred to
above, such failure shall constitute an Event of Default and shall entitle the
holders of the Notes to accelerate the maturity thereof. The Subsidiary
Guarantor shall promptly notify holders of Senior Debt of the Subsidiary
Guarantor if payment of the Notes is accelerated because of an Event of Default.
(e) WHEN DISTRIBUTION MUST BE PAID OVER. In the event that
the Trustee or any Holder receives any payment of any
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Subordinated Note Obligations at a time when the Trustee or such Holder, as
applicable, has actual knowledge that such payment is prohibited by Section 7(b)
or 7(c) hereof, such payment shall be held by the Trustee or such Holder, in
trust for the benefit of, and shall be paid forthwith over and delivered, upon
written request, to, the holders of Senior Debt of the Subsidiary Guarantor as
their interests may appear or their representative under the indenture or other
agreement (if any) pursuant to which such Senior Debt may have been issued, as
their respective interests may appear, for application to the payment of all
Obligations with respect to such Senior Debt remaining unpaid to the extent
necessary to pay such Obligations in full in accordance with their terms, after
giving effect to any concurrent payment or distribution to or for the holders of
Senior Debt of the Subsidiary Guarantor.
In the event that any Holder receives any payment of any
Subordinated Note Obligations at any time when such payment is prohibited by
Section 7(b) or 7(c) hereof, such payment shall be held by such Holder, in trust
for the benefit of, and shall be paid forthwith over and delivered, upon written
request to, the Holders of Senior Debt of the Subsidiary Guarantor as their
interest may appear or their representative under the indenture or other
agreement (if any) pursuant to which such Senior Debt may have been issued, as
their interest may appear, for the application to the payment of all Obligations
with respect to such Senior Debt remaining unpaid to the extent necessary to pay
such Obligations in full in accordance with their terms, after giving effect to
any concurrent payment or distribution to or for the holders of Senior Debt.
With respect to the holders of Senior Debt of the Subsidiary
Guarantor, the Trustee undertakes to perform only such obligations on the part
of the Trustee as are specifically set forth in this Section 7, and no implied
covenants or obligations with respect to the holders of Senior Debt of the
Subsidiary Guarantor shall be read into the Indenture or this Subsidiary
Guarantee against the Trustee. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt of the Subsidiary Guarantor, and
shall not be liable to any such holders if the Trustee shall pay over or
distribute to or on behalf of Holders or the Subsidiary Guarantor or any other
Person money or assets to which any holders of Senior Debt of the Subsidiary
Guarantor shall be entitled by virtue of this Section 7, except
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if such payment is made as a result of the willful misconduct or
gross negligence of the Trustee.
(f) NOTICE BY SUBSIDIARY GUARANTOR. The Subsidiary Guarantor
shall promptly notify the Trustee and the Paying Agent of any facts known to the
Subsidiary Guarantor that would cause a payment of any Subordinated Note
Obligations to violate this Section 7, but failure to give such notice shall not
affect the subordination of this Subsidiary Guarantee to the Senior Debt of the
Subsidiary Guarantor as provided in this Section 7.
(g) SUBROGATION. After all the Senior Debt of the Subsidiary
Guarantor is paid in full and until the Notes are paid in full in cash, Holders
of Notes shall be subrogated (equally and ratably with all other Indebtedness
pari passu with the Notes) to the rights of holders of such Senior Debt of the
Subsidiary Guarantor to receive distributions applicable to Senior Debt of the
Subsidiary Guarantor to the extent that distributions otherwise payable to the
Holders of Notes have been applied to the payment of Senior Debt of the
Subsidiary Guarantor. A distribution made under this Section 7 to holders of
Senior Debt of the Subsidiary Guarantor that otherwise would have been made to
Holders of Notes is not, as between the Subsidiary Guarantor and Holders, a
payment by the Subsidiary Guarantor on the Senior Debt of the Subsidiary
Guarantor.
(h) RELATIVE RIGHTS. This Section 7 defines the relative
rights of Holders of Notes and holders of Senior Debt of the Subsidiary
Guarantor. Nothing in this Subsidiary Guarantee shall:
(a) impair, as between the Subsidiary Guarantor and
Holders of Notes, the obligation of the Subsidiary
Guarantor, which is absolute and unconditional, to
pay principal of, premium, if any, and interest and
Liquidated Damages on the Notes in accordance with
their terms;
(b) affect the relative rights of Holders of Notes and
creditors of the Subsidiary Guarantor other than
their rights in relation to holders of Senior Debt of
the Subsidiary Guarantor; or
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(c) prevent the Trustee or any Holder of Notes from
exercising its available remedies upon a Default or
Event of Default, subject to the rights of holders
and owners of Senior Debt of the Subsidiary Guarantor
to receive distributions and payments otherwise
payable to Holders of Notes.
If the Subsidiary Guarantor fails because of this Section 7 to
pay principal of, premium, if any, or interest and Liquidated Damages on a Note
on the due date, the failure is nevertheless a Default or an Event of Default.
(i) SUBORDINATION MAY NOT BE IMPAIRED BY SUBSIDIARY GUARANTOR.
No right of any holder of Senior Debt of the Subsidiary Guarantor to enforce the
subordination of the Indebtedness evidenced by the Notes shall be impaired by
any act or failure to act by the Subsidiary Guarantor or any Holder or by the
failure of the Subsidiary Guarantor or any Holder to comply with this Subsidiary
Guarantee.
(j) DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a
distribution is to be made or a notice given to holders of Senior Debt of the
Subsidiary Guarantor, the distribution may be made and the notice given to their
representative.
Upon any payment or distribution of assets of the Subsidiary
Guarantor referred to in this Section 7, the Trustee and the Holders of Notes
shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction or upon any certificate of such representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders of Notes for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior Debt of
the Subsidiary Guarantor and other Indebtedness of the Subsidiary Guarantor, the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Section 7.
(k) RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the
provisions of this Section 7 or any other provision of this Subsidiary Guarantee
or the Indenture, the Trustee shall not be charged with knowledge of the
existence of
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any facts that would prohibit the making of any payment or distribution by the
Trustee, and the Trustee and the Paying Agent may continue to make payments on
the Notes, unless the Trustee shall have received at its Corporate Trust Office
at least five Business Days prior to the date of such payment written notice of
facts that would cause the payment of any Subordinated Note Obligations to
violate this Section 7. Only the Subsidiary Guarantor or a representative may
give the notice. Nothing in this Section 7 shall impair the claims of, or
payments to, the Trustee under or pursuant to Section 7.7 of the Indenture.
The Trustee in its individual or any other capacity may hold
Senior Debt of the Subsidiary Guarantor with the same rights it would have if it
were not Trustee. Any Agent may do the same with like rights.
(l) AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of
Notes, by the Holder's acceptance thereof, authorizes and directs the Trustee on
such Holder's behalf to take such action as may be necessary or appropriate to
effectuate the subordination as provided in this Section 7, and appoints the
Trustee to act as such Holder's attorney-in-fact for any and all such purposes.
If the Trustee does not file a proper proof of claim or proof of debt in the
form required in any proceeding referred to in Section 6.9 of the Indenture at
least 30 days before the expiration of the time to file such claim, a
representative of Designated Senior Debt of the Subsidiary Guarantor is hereby
authorized to file an appropriate claim for and on behalf of the Holders of the
Notes.
8. NEW YORK LAW TO GOVERN. The internal law of the
State of New York shall govern and be used to construe this
Supplemental Indenture.
9. COUNTERPARTS. The parties may sign any number of
copies of this Supplemental Indenture. Each signed copy shall be an original,
but all of them together represent the same agreement.
10. EFFECT OF HEADINGS. The Section headings herein are
for convenience only and shall not affect the construction hereof.
E-1-12
<PAGE> 184
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed and attested, all as of the date
first above written.
Dated:___________________, ____ [SUBSIDIARY GUARANTOR]
By:__________________________
Name:
Title:
Dated:___________________, ____
as Trustee
By:__________________________
Name:
Title:
E-1-13
<PAGE> 185
ANNEX A TO SUPPLEMENTAL INDENTURE
FORM OF NOTATION OF SUBSIDIARY GUARANTEE ON NOTE
Each Subsidiary Guarantor (as defined in the Indenture) has
jointly and severally unconditionally guaranteed (a) the due and punctual
payment of the principal of, premium, if any, and interest on the Notes, whether
at Stated Maturity or an Interest Payment Date, by acceleration, call for
redemption or otherwise, (b) the due and punctual payment of interest on the
overdue principal and premium of, and interest, to the extent lawful, on the
Notes and (c) that in case of any extension of time of payment or renewal of any
Notes or any of such other obligations, the same will be promptly paid in full
when due in accordance with the terms of the extension of renewal, whether at
Stated Maturity, by acceleration or otherwise.
Notwithstanding the foregoing, in the event that the
Subsidiary Guarantee would constitute or result in a violation of any applicable
fraudulent conveyance or similar law of any relevant jurisdiction, the liability
of the Subsidiary Guarantor under its Subsidiary Guarantee shall be limited to
such amount as will not, after giving effect thereto, and to all other
liabilities of the Subsidiary Guarantor, result in such amount constituting a
fraudulent transfer or conveyance.
The Subsidiary Guarantee shall not be valid or obligatory for
any purpose until the certificate of authentication on the Note upon which the
Subsidiary Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual or facsimile signature of one of its authorized
officers.
Dated:___________________, ____ [SUBSIDIARY GUARANTOR]
By:__________________________
Name:
Title:
E-1-14
<PAGE> 1
EXHIBIT 4.2
================================================================================
A/B EXCHANGE
REGISTRATION RIGHTS AGREEMENT
Dated as of March 2, 1998
by and among
THE HOUSTON EXPLORATION COMPANY
and
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
and
CHASE SECURITIES INC.,
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED,
PAINEWEBBER INCORPORATED
and
SALOMON BROTHERS INC
================================================================================
<PAGE> 2
This Registration Rights Agreement (this "AGREEMENT") is made
and entered into as of March 2, 1998, between The Houston Exploration Company, a
Delaware corporation (the "COMPANY"), and Donaldson, Lufkin & Jenrette
Securities Corporation and Chase Securities Inc., Howard, Weil, Labouisse,
Friedrichs Incorporated, PaineWebber Incorporated and Salomon Brothers Inc (each
an "INITIAL PURCHASER" and, collectively, the "INITIAL PURCHASERS"), each of
whom has agreed to purchase the Company's 8-5/8% Series A Senior Subordinated
Notes due 2008 (the "SERIES A NOTES") pursuant to the Purchase Agreement (as
defined below).
This Agreement is made pursuant to the Purchase Agreement,
dated February 25, 1998, (the "PURCHASE AGREEMENT"), by and among the Company,
and the Initial Purchasers. In order to induce the Initial Purchasers to
purchase the Series A Notes, the Company has agreed to provide the registration
rights set forth in this Agreement. The execution and delivery of this Agreement
is a condition to the obligations of the Initial Purchasers set forth in Section
9 of the Purchase Agreement. Capitalized terms used herein and not otherwise
defined shall have the meaning assigned to them in the Indenture, dated March 2,
1998, between the Company and The Bank of New York, as Trustee, relating to the
Series A Notes and the Series B Notes (the "INDENTURE").
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms
shall have the following meanings:
ACT: The Securities Act of 1933, as amended.
AFFILIATE: As defined in Rule 144 of the Act.
BROKER-DEALER: Any broker or dealer registered under the
Exchange Act.
CLOSING DATE: The date hereof.
COMMISSION: The Securities and Exchange Commission.
CONSUMMATE: An Exchange Offer shall be deemed "Consummated"
for purposes of this Agreement upon the occurrence of (a) the filing and
effectiveness under the Act of the Exchange Offer Registration Statement
relating to the Series B Notes to be issued in the Exchange Offer, (b) the
maintenance of the continuous effectiveness of such Exchange Offer Registration
Statement and the keeping of the Exchange Offer open for a period not less than
the period required pursuant to Section 3(b) hereof and (c) the delivery by the
Company to the Registrar under the Indenture of Series B Notes in the same
aggregate principal amount as the aggregate principal amount of Series A Notes
tendered by Holders thereof pursuant to the Exchange Offer.
-2-
<PAGE> 3
EFFECTIVENESS DEADLINE: As defined in Section 3(a) and 4(a)
hereof.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
EXCHANGE OFFER: The exchange and issuance by the Company of a
principal amount of Series B Notes (which shall be registered pursuant to the
Exchange Offer Registration Statement) equal to the outstanding principal amount
of Series A Notes that are tendered by such Holders in connection with such
exchange and issuance.
EXCHANGE OFFER REGISTRATION STATEMENT: The Registration
Statement relating to the Exchange Offer, including the related Prospectus.
EXEMPT RESALES: The transactions in which the Initial
Purchasers propose to sell the Series A Notes to certain "qualified
institutional buyers," as such term is defined in Rule 144A under the Act, and
pursuant to Regulation S under the Act.
FILING DEADLINE: As defined in Sections 3(a) and 4(a) hereof.
HOLDERS: As defined in Section 2 hereof.
PROSPECTUS: The prospectus included in a Registration
Statement at the time such Registration Statement is declared effective, as
amended or supplemented by any prospectus supplement and by all other amendments
thereto, including post-effective amendments, and all material incorporated by
reference into such Prospectus.
RECOMMENCEMENT DATE: As defined in Section 6(d) hereof.
REGISTRATION DEFAULT: As defined in Section 5 hereof.
REGISTRATION STATEMENT: Any registration statement of the
Company relating to (a) an offering of Series B Notes pursuant to an Exchange
Offer or (b) the registration for resale of Transfer Restricted Securities
pursuant to the Shelf Registration Statement, in each case (i) that is filed
pursuant to the provisions of this Agreement and (ii) including the Prospectus
included therein, all amendments and supplements thereto (including
post-effective amendments) and all exhibits and material incorporated by
reference therein.
REGULATION S: Regulation S promulgated under the Act.
RULE 144: Rule 144 promulgated under the Act.
SERIES B NOTES: The Company's 8-5/8% Series B Senior
Subordinated Notes due 2008 to be issued pursuant to the Indenture: (i) in the
Exchange Offer or (ii) as contemplated by Section 4 hereof.
-3-
<PAGE> 4
SHELF REGISTRATION STATEMENT: As defined in Section 4 hereof.
SUSPENSION NOTICE: As defined in Section 6(d) hereof.
TIA: The Trust Indenture Act of 1939 (15 U.S.C.
Section 77aaa-77bbbb) as in effect on the date of the Indenture.
TRANSFER RESTRICTED SECURITIES: Each Series A Note, until the
earliest to occur of (a) the date on which such Series A Note is exchanged in
the Exchange Offer for a Series B Note which is entitled to be resold to the
public by the Holder thereof without complying with the prospectus delivery
requirements of the Act, (b) the date on which such Series A Note has been
disposed of in accordance with a Shelf Registration Statement (and the
purchasers thereof have been issued Series B Notes therefor), or (c) the date on
which such Series A Note is distributed to the public pursuant to Rule 144 under
the Act and each Series B Note until the date on which such Series B Note is
disposed of by a Broker-Dealer pursuant to the "Plan of Distribution"
contemplated by the Exchange Offer Registration Statement (including the
delivery of the Prospectus contained therein).
SECTION 2. HOLDERS
A Person is deemed to be a holder of Transfer Restricted
Securities (each, a "HOLDER") whenever such Person owns Transfer Restricted
Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permitted by
applicable federal law (after the procedures set forth in Section 6(a)(i) below
have been complied with), the Company shall (i) cause the Exchange Offer
Registration Statement to be filed with the Commission as soon as practicable
after the Closing Date, but in no event later than 45 days after the Closing
Date (such 45th day being the "FILING DEADLINE"), (ii) use its reasonable best
efforts to cause such Exchange Offer Registration Statement to become effective
at the earliest possible time, but in no event later than 150 days after the
Closing Date (such 150th day being the "EFFECTIVENESS DEADLINE"), (iii) in
connection with the foregoing, (A) file all pre-effective amendments to such
Exchange Offer Registration Statement as may be necessary in order to cause it
to become effective, (B) file, if applicable, a post-effective amendment to such
Exchange Offer Registration Statement pursuant to Rule 430A under the Act and
(C) cause all necessary filings, if any, in connection with the registration and
qualification of the Series B Notes to be made under the Blue Sky laws of such
jurisdictions as are necessary to permit Consummation of the Exchange Offer, and
(iv) upon the effectiveness of such Exchange Offer Registration Statement,
commence and Consummate the Exchange Offer. The Exchange Offer shall be on the
appropriate form permitting (i) registration of the Series B Notes to be offered
in exchange for the Series A Notes that are Transfer Restricted Securities and
(ii) resales of Series B Notes by Broker-Dealers that tendered into the Exchange
Offer Series A Notes that such Broker-Dealer acquired for its own account as a
result of market making
-4-
<PAGE> 5
activities or other trading activities (other than Series A Notes acquired
directly from the Company or any of its Affiliates) as contemplated by Section
3(c) below.
(b) The Company shall use its best efforts to cause the
Exchange Offer Registration Statement to be effective continuously, and shall
keep the Exchange Offer open for a period of not less than the minimum period
required under applicable federal and state securities laws to Consummate the
Exchange Offer; provided, however, that in no event shall such period be less
than 20 Business Days. The Company shall cause the Exchange Offer to comply with
all applicable federal and state securities laws. No securities other than the
Series B Notes shall be included in the Exchange Offer Registration Statement.
The Company shall use its reasonable best efforts to cause the Exchange Offer to
be Consummated on the earliest practicable date after the Exchange Offer
Registration Statement has become effective, but in no event later than 30
Business Days thereafter (such 30th day being the "CONSUMMATION DEADLINE").
(c) The Company shall include a "Plan of Distribution"
section in the Prospectus contained in the Exchange Offer Registration Statement
and indicate therein that any Broker-Dealer who holds Transfer Restricted
Securities that were acquired for the account of such Broker-Dealer as a result
of market-making activities or other trading activities (other than Series A
Notes acquired directly from the Company or any Affiliate of the Company), may
exchange such Transfer Restricted Securities pursuant to the Exchange Offer.
Such "Plan of Distribution" section shall also contain all other information
with respect to such sales by such Broker-Dealers that the Commission may
require in order to permit such sales pursuant thereto, but such "Plan of
Distribution" shall not name any such Broker-Dealer or disclose the amount of
Transfer Restricted Securities held by any such Broker-Dealer, except to the
extent required by the Commission as a result of a change in policy, rules or
regulations after the date of this Agreement.
Because such Broker-Dealer may be deemed to be an
"underwriter" within the meaning of the Act and must, therefore, deliver a
prospectus meeting the requirements of the Act in connection with its initial
sale of any Series B Notes received by such Broker-Dealer in the Exchange Offer,
the Company shall permit the use of the Prospectus contained in the Exchange
Offer Registration Statement by such Broker-Dealer to satisfy such prospectus
delivery requirement. To the extent necessary to ensure that the prospectus
contained in the Exchange Offer Registration Statement is available for sales of
Series B Notes by Broker-Dealers and, the Company agrees to use its respective
best efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented, amended and current as required by and subject to the
provisions of Section 6(a) and (c) hereof and in conformity with the
requirements of this Agreement, the Act and the policies, rules and regulations
of the Commission as announced from time to time, for a period equal to the
lesser of (i) 180 days from the Consummation of the Exchange Offer or (ii) the
period ending on the date when all Transfer Restricted Securities covered by
such Registration Statement have been sold pursuant thereto. The Company shall
provide sufficient copies of the latest version of such Prospectus to such
Broker-Dealers, promptly upon request, and in no event later than one day after
such request, at any time during such period.
-5-
<PAGE> 6
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Company is not
required to file an Exchange Offer Registration Statement or to Consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law
(after the Company has complied with the procedures set forth in Section 6(a)(i)
below) or Commission Policy or (ii) if any Holder of Transfer Restricted
Securities shall notify the Company within 20 Business Days following the
Consummation of the Exchange Offer that (A) such Holder was prohibited by law or
Commission policy from participating in the Exchange Offer or (B) such Holder
may not resell the Series B Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the Prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales by such Holder or (C) such Holder is a Broker-Dealer and holds Series A
Notes acquired directly from the Company or any of its Affiliates, then the
Company shall:
(x) cause to be filed, on or prior to 30 days after the
earlier of (i) the date on which the Company determines that the
Exchange Offer Registration Statement cannot be filed as a result of
clause (a)(i) above and (ii) the date on which the Company receives the
notice specified in clause (a)(ii) above, (such earlier date, the
"FILING DEADLINE"), a shelf registration statement pursuant to Rule 415
under the Act (which may be an amendment to the Exchange Offer
Registration Statement (the "SHELF REGISTRATION STATEMENT")), relating
to all Transfer Restricted Securities, and
(y) shall use its reasonable best efforts to cause such Shelf
Registration Statement to become effective on or prior to 60 days after
the Filing Deadline for the Shelf Registration Statement (such 60th day
the "EFFECTIVENESS DEADLINE").
If, after the Company has filed an Exchange Offer Registration
Statement that satisfies the requirements of Section 3(a) above, the Company is
required to file and make effective a Shelf Registration Statement solely
because the Exchange Offer is not permitted under applicable federal law (i.e.,
clause (a)(i) above), then the filing of the Exchange Offer Registration
Statement shall be deemed to satisfy the requirements of clause (x) above;
provided that, in such event, the Company shall remain obligated to meet the
Effectiveness Deadline set forth in clause (y).
To the extent necessary to ensure that the Shelf Registration
Statement is available for sales of Transfer Restricted Securities by the
Holders thereof entitled to the benefit of this Section 4(a), the Company shall
use its reasonable best efforts to keep any Shelf Registration Statement
required by this Section 4(a) continuously effective, supplemented, amended and
current as required by and subject to the provisions of Sections 6(b) and (c)
hereof and in conformity with the requirements of this Agreement, the Act and
the policies, rules and regulations of the Commission as announced from time to
time, for a period of at least two years (as extended pursuant to Section
6(c)(i)) following the Closing Date, or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Shelf Registration
Statement have been sold pursuant thereto.
-6-
<PAGE> 7
(b) Provision by Holders of Certain Information in
Connection with the Shelf Registration Statement. No Holder of Transfer
Restricted Securities may include any of its Transfer Restricted Securities in
any Shelf Registration Statement pursuant to this Agreement unless and until
such Holder furnishes to the Company in writing, within 20 days after receipt of
a request therefor, the information specified in Item 507 or 508 of Regulation
S-K, as applicable, of the Act for use in connection with any Shelf Registration
Statement or Prospectus or preliminary Prospectus included therein. No Holder of
Transfer Restricted Securities shall be entitled to liquidated damages pursuant
to Section 5 hereof unless and until such Holder shall have provided all such
information. Each selling Holder agrees to promptly furnish additional
information required to be disclosed in order to make the information previously
furnished to the Company by such Holder not materially misleading.
SECTION 5. LIQUIDATED DAMAGES
If (i) any Registration Statement required by this Agreement
is not filed with the Commission on or prior to the applicable Filing Deadline,
(ii) any such Registration Statement has not been declared effective by the
Commission on or prior to the applicable Effectiveness Deadline, (iii) the
Exchange Offer has not been Consummated on or prior to the Consummation Deadline
or (iv) any Registration Statement required by this Agreement is filed and
declared effective but shall thereafter cease to be effective or fail to be
usable for its intended purpose without being succeeded immediately by a
post-effective amendment to such Registration Statement that cures such failure
and that is itself declared effective immediately (each such event referred to
in clauses (i) through (iv), a "REGISTRATION DEFAULT"), then the Company agrees
to pay to each Holder of Transfer Restricted Securities affected thereby
liquidated damages in an amount equal to $.05 per week per $1,000 in principal
amount of Transfer Restricted Securities held by such Holder for each week or
portion thereof that the Registration Default continues for the first 90-day
period immediately following the occurrence of such Registration Default. The
amount of the liquidated damages shall increase by an additional $.05 per week
per $1,000 in principal amount of Transfer Restricted Securities with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum amount of liquidated damages of $.50 per week per $1,000 in
principal amount of Transfer Restricted Securities; provided that the Company
shall in no event be required to pay liquidated damages for more than one
Registration Default at any given time. Notwithstanding anything to the contrary
set forth herein, (1) upon filing of the Exchange Offer Registration Statement
(and/or, if applicable, the Shelf Registration Statement), in the case of (i)
above, (2) upon the effectiveness of the Exchange Offer Registration Statement
(and/or, if applicable, the Shelf Registration Statement), in the case of (ii)
above, (3) upon Consummation of the Exchange Offer, in the case of (iii) above,
or (4) upon the filing of a post-effective amendment to the Registration
Statement or an additional Registration Statement that causes the Exchange Offer
Registration Statement (and/or, if applicable, the Shelf Registration Statement)
to again be declared effective or made usable in the case of (iv) above, the
liquidated damages payable with respect to the Transfer Restricted Securities as
a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease.
-7-
<PAGE> 8
All accrued liquidated damages shall be paid to the Holders
entitled thereto, in the manner provided for the payment of interest in the
Indenture, on each Interest Payment Date, as more fully set forth in the
Indenture and the Notes. Notwithstanding the fact that any securities for which
liquidated damages are due cease to be Transfer Restricted Securities, all
obligations of the Company to pay liquidated damages with respect to securities
shall survive until such time as such obligations with respect to such
securities shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection
with the Exchange Offer, the Company shall (x) comply with all applicable
provisions of Section 6(c) below, (y) use its reasonable best efforts to effect
such exchange and to permit the resale of Series B Notes by Broker-Dealers that
tendered in the Exchange Offer Series A Notes that such Broker-Dealer acquired
for its own account as a result of its market making activities or other trading
activities (other than Series A Notes acquired directly from the Company or any
of its Affiliates) being sold in accordance with the intended method or methods
of distribution thereof, and (z) comply with all of the following provisions:
(i) If, following the date hereof there has been
announced a change in Commission policy with respect to exchange offers
such as the Exchange Offer, that in the reasonable opinion of counsel
to the Company raises a substantial question as to whether the Exchange
Offer is permitted by applicable federal law, the Company hereby agrees
to seek a no-action letter or other favorable decision from the
Commission allowing the Company to Consummate an Exchange Offer for
such Transfer Restricted Securities. The Company hereby agrees to
pursue the issuance of such a decision to the Commission staff level.
In connection with the foregoing, the Company hereby agrees to take all
such other actions as may be requested by the Commission or otherwise
required in connection with the issuance of such decision, including
without limitation (A) participating in telephonic conferences with the
Commission, (B) delivering to the Commission staff an analysis prepared
by counsel to the Company setting forth the legal bases, if any, upon
which such counsel has concluded that such an Exchange Offer should be
permitted and (C) diligently pursuing a resolution (which need not be
favorable) by the Commission staff of such submission.
(ii) As a condition to its participation in the
Exchange Offer, each Holder of Transfer Restricted Securities
(including, without limitation, any Holder who is a Broker Dealer)
shall furnish, upon the request of the Company, prior to the
Consummation of the Exchange Offer, a written representation to the
Company (which may be contained in the letter of transmittal
contemplated by the Exchange Offer Registration Statement) to the
effect that (A) it is not an Affiliate of the Company, (B) it is not
engaged in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in, a distribution of the
Series B Notes to be issued in the Exchange Offer and (C) it is
acquiring the Series B Notes in its ordinary course of business. Each
Holder using the Exchange Offer to participate in a distribution of the
Series B Notes hereby acknowledges and agrees that,
-8-
<PAGE> 9
if the resales are of Series B Notes obtained by such Holder in
exchange for Series A Notes acquired directly from the Company or an
Affiliate thereof, it (1) could not, under Commission policy as in
effect on the date of this Agreement, rely on the position of the
Commission enunciated in Morgan Stanley and Co., Inc. (available June
5, 1991) and Exxon Capital Holdings Corporation (available May 13,
1988), as interpreted in the Commission's letter to Shearman & Sterling
dated July 2, 1993, and similar no-action letters (including, if
applicable, any no-action letter obtained pursuant to clause (i)
above), and (2) must comply with the registration and prospectus
delivery requirements of the Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be
covered by an effective registration statement containing the selling
security holder information required by Item 507 or 508, as applicable,
of Regulation S-K.
(iii) Prior to effectiveness of the Exchange Offer
Registration Statement, the Company shall provide a supplemental letter
to the Commission (A) stating that the Company is registering the
Exchange Offer in reliance on the position of the Commission enunciated
in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan
Stanley and Co., Inc. (available June 5, 1991) as interpreted in the
Commission's letter to Shearman & Sterling dated July 2, 1993, and, if
applicable, any no-action letter obtained pursuant to clause (i) above,
(B) including a representation that the Company has not entered into
any arrangement or understanding with any Person to distribute the
Series B Notes to be received in the Exchange Offer and that, to the
best of the Company's information and belief, each Holder participating
in the Exchange Offer is acquiring the Series B Notes in its ordinary
course of business and has no arrangement or understanding with any
Person to participate in the distribution of the Series B Notes
received in the Exchange Offer and (C) any other undertaking or
representation required by the Commission as set forth in any no-action
letter obtained pursuant to clause (i) above, if applicable.
(b) Shelf Registration Statement. (i) In connection with
the Shelf Registration Statement, the Company shall (x) comply with all the
provisions of Section 6(c) below and (y) use their respective best efforts to
effect such registration to permit the sale of the Transfer Restricted
Securities being sold in accordance with the intended method or methods of
distribution thereof (as indicated in the information furnished to the Company
pursuant to Section 4(b) hereof), and pursuant thereto the Company will prepare
and file with the Commission a Registration Statement relating to the
registration on any appropriate form under the Act, which form shall be
available for the sale of the Transfer Restricted Securities in accordance with
the intended method or methods of distribution thereof within the time periods
and otherwise in accordance with the provisions hereof.
(ii) In connection with the Shelf Registration
Statement, the Company shall issue, upon the request of any Holder or purchaser
or Series A Notes covered by any Shelf Registration Statement contemplated by
this Agreement, Series B Notes having an aggregate principal amount equal to the
aggregate principal amount of Series A Notes sold pursuant to the Shelf
Registration Statement and surrendered to the Company for cancellation; the
Company shall
-9-
<PAGE> 10
register the Series B Notes in the name of the purchaser(s) who purchased
securities subject to the Shelf Registration Statement.
(c) General Provisions. In connection with any Registration
Statement and any related Prospectus required by this Agreement, the Company
shall:
(i) use its respective best efforts to keep such
Registration Statement continuously effective and provide all requisite
financial statements for the period specified in Section 3 or 4 of this
Agreement, as applicable. Upon the occurrence of any event that would
cause any such Registration Statement or the Prospectus contained
therein (A) to contain a material misstatement or omission or (B) not
to be effective and usable for resale of Transfer Restricted Securities
during the period required by this Agreement, the Company shall file
promptly an appropriate amendment to such Registration Statement curing
such defect, and, if Commission review is required, use their
respective best efforts to cause such amendment to be declared
effective as soon as practicable.
(ii) prepare and file with the Commission such
amendments and post-effective amendments to the applicable Registration
Statement as may be necessary to keep such Registration Statement
effective for the applicable period set forth in Section 3 or 4 hereof,
as the case may be; cause the Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 under the Act, and to comply fully with Rules 424,
430A and 462, as applicable, under the Act in a timely manner; and
comply with the provisions of the Act with respect to the disposition
of all securities covered by such Registration Statement during the
applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration
Statement or supplement to the Prospectus;
(iii) advise (x) each selling Holder promptly and, if
requested by such Holder, confirm such advice in writing, (A) when the
Prospectus or any Prospectus supplement or post-effective amendment has
been filed, and, with respect to any applicable Registration Statement
or any post-effective amendment thereto, when the same has become
effective, and (B) of any request by the Commission for amendments to
the Registration Statement or amendments or supplements to the
Prospectus or for additional information relating thereto, and (y) each
Holder promptly and, if requested by such Holder, confirm such advice
in writing, (A) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement under the
Act or of the suspension by any state securities commission of the
qualification of the Transfer Restricted Securities for offering or
sale in any jurisdiction, or the initiation of any proceeding for any
of the preceding purposes, and (B) of the existence of any fact or the
happening of any event that makes any statement of a material fact made
in the Registration Statement, the Prospectus, any amendment or
supplement thereto or any document incorporated by reference therein
untrue, or that requires the making of any additions to or changes in
the Registration Statement in order to make the statements therein not
misleading, or that requires the making of any
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<PAGE> 11
additions to or changes in the Prospectus in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. If at any time the Commission shall issue
any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or other regulatory
authority shall issue an order suspending the qualification or
exemption from qualification of the Transfer Restricted Securities
under state securities or Blue Sky laws, the Company shall use its best
efforts to obtain the withdrawal or lifting of such order at the
earliest possible time;
(iv) subject to Section 6(c)(i), if any fact or event
contemplated by Section 6(c)(iii)(D) above shall exist or have
occurred, prepare a supplement or post-effective amendment to the
Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of Transfer
Restricted Securities, the Prospectus will not contain an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(v) furnish to each Holder in connection with such
exchange or sale, if any, before filing with the Commission, copies of
any Registration Statement or any Prospectus included therein or any
amendments or supplements to any such Registration Statement or
Prospectus (including all documents incorporated by reference after the
initial filing of such Registration Statement), which documents will be
subject to the review and comment of such Holders in connection with
such sale, if any, for a period of at least five Business Days, and the
Company will not file any such Registration Statement or Prospectus or
any amendment or supplement to any such Registration Statement or
Prospectus (including all such documents incorporated by reference) to
which such Holders shall reasonably object within five Business Days
after the receipt thereof. A Holder shall be deemed to have reasonably
objected to such filing if such Registration Statement, amendment,
Prospectus or supplement, as applicable, as proposed to be filed,
contains a material misstatement or omission or fails to comply with
the applicable requirements of the Act;
(vi) promptly prior to the filing of any document that
is to be incorporated by reference into a Registration Statement or
Prospectus, provide copies of such document to each Holder in
connection with such exchange or sale, if any, make the Company's
representatives available for discussion of such document and other
customary due diligence matters, and include such information in such
document prior to the filing thereof as such Holders may reasonably
request;
(vii) make available, at reasonable times, for
inspection by each selling Holder and any attorney or accountant
retained by such Holders, all financial and other records, pertinent
corporate documents of the Company cause the officers, directors and
employees to supply all information reasonably requested by any such
Holder, attorney or
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<PAGE> 12
accountant in connection with such Registration Statement or any
post-effective amendment thereto subsequent to the filing thereof and
prior to its effectiveness;
(viii) if requested by any Holders in connection with
such exchange or sale, promptly include in any Registration Statement
or Prospectus, pursuant to a supplement or post-effective amendment if
necessary, such information as such selling Holders may reasonably
request to have included therein, including, without limitation,
information relating to the "Plan of Distribution" of the Transfer
Restricted Securities; and make all required filings of such Prospectus
supplement or post-effective amendment as soon as practicable after the
Company is notified of the matters to be included in such Prospectus
supplement or post-effective amendment;
(ix) furnish to each selling Holder in connection with
such exchange or sale, without charge, at least one copy of the
Registration Statement, as first filed with the Commission, and of each
amendment thereto, including all documents incorporated by reference
therein and all exhibits (including exhibits incorporated therein by
reference);
(x) deliver to each selling Holder without charge, as
many copies of the Prospectus (including each preliminary prospectus)
and any amendment or supplement thereto as such Persons reasonably may
request; the Company hereby consents to the use (in accordance with
law) of the Prospectus and any amendment or supplement thereto by each
selling Holder in connection with the offering and the sale of the
Transfer Restricted Securities covered by the Prospectus or any
amendment or supplement thereto;
(xi) upon the request of any Holder, enter into such
agreements (including underwriting agreements) and make such
representations and warranties and take all such other actions in
connection therewith in order to expedite or facilitate the disposition
of the Transfer Restricted Securities pursuant to any applicable
Registration Statement contemplated by this Agreement as may be
reasonably requested by any Holder in connection with any sale or
resale pursuant to any applicable Registration Statement. In such
connection, the Company shall:
(A) upon request of any Holder, furnish (or in the
case of paragraphs (2) and (3), use its best efforts to cause
to be furnished) to each Holder, upon Consummation of the
Exchange Offer or upon the effectiveness of the Shelf
Registration Statement, as the case may be:
(1) a certificate, dated such date, signed on
behalf of the Company by (x) the President or any
Vice President and (y) a principal financial or
accounting officer of the Company, confirming, as of
the date thereof, the matters set forth in paragraph
(b) of Section 6 and paragraphs (a) and (b) of
Section 9 of the Purchase Agreement and such other
similar matters as such Holders may reasonably
request;
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<PAGE> 13
(2) an opinion, dated the date of Consummation
of the Exchange Offer or the date of effectiveness of
the Shelf Registration Statement, as the case may be,
of counsel for the Company covering matters and
beliefs similar to those set forth in paragraph (e)
of Section 9 of the Purchase Agreement and such other
matters as such Holder may reasonably request; and
(3) a customary comfort letter, dated the date
of Consummation of the Exchange Offer, or as of the
date of effectiveness of the Shelf Registration
Statement, as the case may be, from the Company's
independent accountants, in the customary form and
covering matters of the type customarily covered in
comfort letters to underwriters in connection with
underwritten offerings, and affirming the matters set
forth in the comfort letters delivered pursuant to
Section 9(h) of the Purchase Agreement; and
(B) deliver such other documents and certificates as
may be reasonably requested by the selling Holders to evidence
compliance with clause (A) above and with any customary
conditions contained in the any agreement entered into by the
Company pursuant to this clause (xi);
(xii) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders and their counsel in
connection with the registration and qualification of the Transfer
Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as the selling Holders may request and do any and all
other acts or things necessary or advisable to enable the disposition
in such jurisdictions of the Transfer Restricted Securities covered by
the applicable Registration Statement; provided, however, that the
Company shall not be required to register or qualify as a foreign
corporation where it is not now so qualified or to take any action that
would subject it to the service of process in suits or to taxation,
other than as to matters and transactions relating to the Registration
Statement, in any jurisdiction where it is not now so subject;
(xiii) in connection with any sale of Transfer Restricted
Securities that will result in such securities no longer being Transfer
Restricted Securities, cooperate with the Holders to facilitate the
timely preparation and delivery of certificates representing Transfer
Restricted Securities to be sold and not bearing any restrictive
legends; and to register such Transfer Restricted Securities in such
denominations and such names as the selling Holders may request at
least two Business Days prior to such sale of Transfer Restricted
Securities;
(xiv) use its reasonable best efforts to cause the
disposition of the Transfer Restricted Securities covered by the
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
seller or sellers thereof to consummate the disposition of such
Transfer Restricted Securities, subject to the proviso contained in
clause (xii) above;
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<PAGE> 14
(xv) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of a Registration
Statement covering such Transfer Restricted Securities and provide the
Trustee under the Indenture with printed certificates for the Transfer
Restricted Securities which are in a form eligible for deposit with The
Depository Trust Company;
(xvi) otherwise use its reasonable best efforts to comply
with all applicable rules and regulations of the Commission, and make
generally available to its security holders with regard to any
applicable Registration Statement, as soon as practicable, a
consolidated earnings statement meeting the requirements of Rule 158
(which need not be audited) covering a twelve-month period beginning
after the effective date of the Registration Statement (as such term is
defined in paragraph (c) of Rule 158 under the Act);
(xvii) cause the Indenture to be qualified under the TIA
not later than the effective date of the first Registration Statement
required by this Agreement and, in connection therewith, cooperate with
the Trustee and the Holders to effect such changes to the Indenture as
may be required for such Indenture to be so qualified in accordance
with the terms of the TIA; and execute and use its reasonable best
efforts to cause the Trustee to execute, all documents that may be
required to effect such changes and all other forms and documents
required to be filed with the Commission to enable such Indenture to be
so qualified in a timely manner; and
(xviii) provide promptly to each Holder, upon request, each
document filed with the Commission pursuant to the requirements of
Section 13 or Section 15(d) of the Exchange Act.
(d) Restrictions on Holders. Each Holder agrees by acquisition
of a Transfer Restricted Security that, upon receipt of the notice referred to
in Section 6(c)(iii)(C) or any notice from the Company of the existence of any
fact of the kind described in Section 6(c)(iii)(D) hereof (in each case, a
"SUSPENSION NOTICE"), such Holder will forthwith discontinue disposition of
Transfer Restricted Securities pursuant to the applicable Registration Statement
until (i) such Holder has received copies of the supplemented or amended
Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Holder is
advised in writing by the Company that the use of the Prospectus may be resumed,
and has received copies of any additional or supplemental filings that are
incorporated by reference in the Prospectus (in each case, the "RECOMMENCEMENT
DATE"). Each Holder receiving a Suspension Notice hereby agrees that it will
either (i) destroy any Prospectuses, other than permanent file copies, then in
such Holder's possession which have been replaced by the Company with more
recently dated Prospectuses or (ii) deliver to the Company (at the Company's
expense) all copies, other than permanent file copies, then in such Holder's
possession of the Prospectus covering such Transfer Restricted Securities that
was current at the time of receipt of the Suspension Notice. The time period
regarding the effectiveness of such Registration Statement set forth in Section
3 or 4 hereof, as applicable, shall be extended by a number of days equal to the
number of
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<PAGE> 15
days in the period from and including the date of delivery of the Suspension
Notice to the date of delivery of the Recommencement Date.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of or
compliance with this Agreement will be borne by the Company, regardless of
whether a Registration Statement becomes effective, including without
limitation: (i) all registration and filing fees and expenses; (ii) all fees and
expenses of compliance with federal securities and state Blue Sky or securities
laws; (iii) all expenses of printing (including printing certificates for the
Series B Notes to be issued in the Exchange Offer and printing of Prospectuses),
messenger and delivery services and telephone; (iv) all fees and disbursements
of counsel for the Company and, subject to Section 7(b) below, for the Holders
of Transfer Restricted Securities; (v) all application and filing fees in
connection with listing the Series B Notes on a national securities exchange or
automated quotation system pursuant to the requirements hereof; and (vi) all
fees and disbursements of independent certified public accountants of the
Company and (including the expenses of any special audit and comfort letters
required by or incident to such performance).
The Company will, in any event, bear its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expenses of any annual
audit and the fees and expenses of any Person, including special experts,
retained by the Company.
(b) In connection with any Registration Statement required by
this Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company will reimburse the
Initial Purchasers and the Holders of Transfer Restricted Securities who are
tendering Series A Notes into in the Exchange Offer and/or selling or reselling
Series A Notes or Series B Notes pursuant to the "Plan of Distribution"
contained in the Exchange Offer Registration Statement or the Shelf Registration
Statement, as applicable, for the reasonable fees and disbursements of not more
than one counsel, who shall be Simpson Thacher & Bartlett, unless another firm
shall be chosen by the Holders of a majority in principal amount of the Transfer
Restricted Securities for whose benefit such Registration Statement is being
prepared.
SECTION 8. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless each
Holder, its directors, officers and each Person, if any, who controls such
Holder (within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act), from and against any and all losses, claims, damages,
liabilities, judgments (including, without limitation, any legal or other
expenses incurred in connection with investigating or defending any matter,
including any action that could give rise to any such losses, claims, damages,
liabilities or judgments) caused by any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement,
preliminary prospectus or Prospectus (or any amendment or supplement thereto)
provided by the Company to
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<PAGE> 16
any holder or any prospective purchaser of Series B Notes or registered Series A
Notes, or caused by any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as such losses, claims, damages, liabilities or
judgments are caused by an untrue statement or omission or alleged untrue
statement or omission that is based upon information relating to any of the
Holders furnished in writing to the Company by any of the Holders.
(b) Each Holder of Transfer Restricted Securities agrees,
severally and not jointly, to indemnify and hold harmless the Company and its
respective directors and officers, and each person, if any, who controls (within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the
Company to the same extent as the foregoing indemnity from the Company set forth
in section (a) above, but only with reference to information relating to such
Holder furnished in writing to the Company by such Holder expressly for use in
any Registration Statement. In no event shall any Holder be liable or
responsible for any amount in excess of the amount by which the total amount
received by such Holder with respect to its sale of Transfer Restricted
Securities pursuant to a Registration Statement exceeds (i) the amount paid by
such Holder for such Transfer Restricted Securities and (ii) the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission.
(c) In case any action shall be commenced involving any person
in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b)
(the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the
person against whom such indemnity may be sought (the "INDEMNIFYING PERSON") in
writing and the indemnifying party shall assume the defense of such action,
including the employment of counsel reasonably satisfactory to the indemnified
party and the payment of all fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 8(a) and 8(b), a Holder shall not be required
to assume the defense of such action pursuant to this Section 8(c), but may
employ separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
the Holder). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all indemnified parties and all such fees and
expenses shall be
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<PAGE> 17
reimbursed as they are incurred. Such firm shall be designated in writing by a
majority of the Holders, in the case of the parties indemnified pursuant to
Section 8(a), and by the Company, in the case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the indemnifying
party shall have received a request from the indemnified party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the indemnifying party) and, prior to the date of such
settlement, the indemnifying party shall have failed to comply with such
reimbursement request. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent that the indemnification provided for in this
Section 8 is unavailable to an indemnified party in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or judgments (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company, on
the one hand, and the Holders, on the other hand, from their sale of Transfer
Restricted Securities or (ii) if the allocation provided by clause 8(d)(i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Company, on the one hand, and of the Holder, on the other
hand, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative fault of the Company, on the one hand,
and of the Holder, on the other hand, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, on the one hand, or by the Holder, on the
other hand, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and judgments referred to above shall be deemed to include, subject
to the limitations set forth in the second paragraph of Section 8(a), any legal
or other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim.
The Company and each Holder agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Holders were treated as one entity for such
purpose) or by any other method of allocation which does not take
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<PAGE> 18
account of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any matter, including any
action that could have given rise to such losses, claims, damages, liabilities
or judgments. Notwithstanding the provisions of this Section 8, no Holder, or
its directors, its officers or any Person, if any, who controls such Holder
shall be required to contribute, in the aggregate, any amount in excess of the
amount by which the total received by such Holder with respect to the sale of
its Transfer Restricted Securities pursuant to a Registration Statement exceeds
the sum of (A) the amount paid by such Holder for such Transfer Restricted
Securities plus (B) the amount of any damages which such Holder has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' obligations to contribute pursuant to this
Section 8(c) are several in proportion to the respective principal amount of
Transfer Restricted Securities held by each Holder, hereunder and not joint.
SECTION 9. RULE 144A AND RULE 144
The Company agrees with each Holder, for so long as any
Transfer Restricted Securities remain outstanding and during any period in which
the Company (i) is not subject to Section 13 or 15(d) of the Exchange Act, to
make available, upon request of any Holder of Transfer Restricted Securities, to
any Holder or beneficial owner of Transfer Restricted Securities in connection
with any sale thereof and any prospective purchaser of such Transfer Restricted
Securities designated by such Holder or beneficial owner, the information
required by Rule 144A(d)(4) under the Act in order to permit resales of such
Transfer Restricted Securities pursuant to Rule 144A, and (ii) is subject to
Section 13 or 15 (d) of the Exchange Act, to make all filings required thereby
in a timely manner in order to permit resales of such Transfer Restricted
Securities pursuant to Rule 144.
SECTION 10. MISCELLANEOUS
(a) Remedies. The Company acknowledges and agrees that any
failure by the Company to comply with their respective obligations under
Sections 3 and 4 hereof may result in material irreparable injury to the Initial
Purchasers or the Holders for which there is no adequate remedy at law, that it
will not be possible to measure damages for such injuries precisely and that, in
the event of any such failure, the Initial Purchasers or any Holder may obtain
such relief as may be required to specifically enforce the Company's obligations
under Sections 3 and 4 hereof. The Company further agrees to waive the defense
in any action for specific performance that a remedy at law would be adequate.
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<PAGE> 19
(b) No Inconsistent Agreements. The Company will not, on
or after the date of this Agreement, enter into any agreement with respect to
its securities that is inconsistent with the rights granted to the Holders in
this Agreement or otherwise conflicts with the provisions hereof. The Company
has not previously entered into any agreement granting any registration rights
with respect to its securities to any Person. The rights granted to the Holders
hereunder do not in any way conflict with and are not inconsistent with the
rights granted to the holders of the Company's securities under any agreement in
effect on the date hereof.
(c) Amendments and Waivers. The provisions of this
Agreement may not be amended, modified or supplemented, and waivers or consents
to or departures from the provisions hereof may not be given unless (i) in the
case of Section 5 hereof and this Section 10(c)(i), the Company has obtained the
written consent of Holders of all outstanding Transfer Restricted Securities and
(ii) in the case of all other provisions hereof, the Company has obtained the
written consent of Holders of a majority of the outstanding principal amount of
Transfer Restricted Securities (excluding Transfer Restricted Securities held by
the Company or its Affiliates). Notwithstanding the foregoing, a waiver or
consent to departure from the provisions hereof that relates exclusively to the
rights of Holders whose securities are being tendered pursuant to the Exchange
Offer and that does not affect directly or indirectly the rights of other
Holders whose securities are not being tendered pursuant to such Exchange Offer
may be given by the Holders of a majority of the outstanding principal amount of
Transfer Restricted Securities subject to such Exchange Offer.
(d) Third Party Beneficiary. The Holders shall be third
party beneficiaries to the agreements made hereunder between the Company, on the
one hand, and the Initial Purchasers, on the other hand, and shall have the
right to enforce such agreements directly to the extent they may deem such
enforcement necessary or advisable to protect its rights or the rights of
Holders hereunder.
(e) Notices. All notices and other communications provided
for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail (registered or certified, return receipt requested), telex,
telecopier, or air courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the
records of the Registrar under the Indenture, with a copy to the
Registrar under the Indenture; and
(ii) if to the Company:
The Houston Exploration Company
1100 Louisiana, Suite 2000
Houston, Texas 77002
Telecopier No.: (713) 830-6885
Attention: President
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<PAGE> 20
With a copy to:
Andrews & Kurth L.L.P.
600 Travis, Suite 4200
Houston, Texas 77002
Telecopier No.: (713) 220-4285
Attention: Jeffrey L. Wade, Esq.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed;
when receipt acknowledged, if telecopied; and on the next business day, if
timely delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications
shall be concurrently delivered by the Person giving the same to the Trustee at
the address specified in the Indenture.
(f) Successors and Assigns. This Agreement shall inure to
the benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities; provided, that
nothing herein shall be deemed to permit any assignment, transfer or other
disposition of Transfer Restricted Securities in violation of the terms hereof
or of the Purchase Agreement or the Indenture. If any transferee of any Holder
shall acquire Transfer Restricted Securities in any manner, whether by operation
of law or otherwise, such Transfer Restricted Securities shall be held subject
to all of the terms of this Agreement, and by taking and holding such Transfer
Restricted Securities such Person shall be conclusively deemed to have agreed to
be bound by and to perform all of the terms and provisions of this Agreement,
including the restrictions on resale set forth in this Agreement and, if
applicable, the Purchase Agreement, and such Person shall be entitled to receive
the benefits hereof.
(g) Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO THE CONFLICT OF LAW RULES THEREOF.
(j) Severability. In the event that any one or more of
the provisions contained herein, or the application thereof in any circumstance,
is held invalid, illegal or unenforceable, the
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<PAGE> 21
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be affected
or impaired thereby.
(k) Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted with respect to the
Transfer Restricted Securities. This Agreement supersedes all prior agreements
and understandings between the parties with respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
THE HOUSTON EXPLORATION COMPANY
By: /s/ JAMES F. WESTMORELAND
-------------------------------------------
Name: James F. Westmoreland
Title: Vice President and Secretary
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
CHASE SECURITIES INC.
HOWARD, WEIL, LABOUISSE, FRIEDRICHS INCORPORATED
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
By: Donaldson, Lufkin & Jenrette Securities
Corporation
By: /s/ TOWNES G. PRESSLER
------------------------------------------
Name: Townes G. Pressler
-------------------------------
Title: Senior Vice President
------------------------------
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<PAGE> 1
EXHIBIT 5.1
[ANDREWS & KURTH LLP LETTERHEAD]
April 15, 1998
Board of Directors
The Houston Exploration Company
1100 Louisiana, Suite 2000
Houston, Texas 77002
Gentlemen:
We have acted as counsel to The Houston Exploration Company, a
Delaware corporation (the "Company"), in connection with the Company's
Registration Statement on Form S-4 (the "Registration Statement") relating to
the registration under the Securities Act of 1933, as amended (the "Securities
Act"), of the offer by the Company to exchange up to $100,000,000 aggregate
principal amount of its 8 5/8% Senior Subordinated Notes Due 2008, Series B
(the "Exchange Notes") for its existing 8 5/8% Senior Subordinated Notes Due
2008, Series A (the "Old Notes"). The Exchange Notes are proposed to be issued
in accordance with the provisions of the Indenture, dated as of March 2, 1998,
between the Company and The Bank of New York, as Trustee (the "Indenture").
As the basis for the opinions expressed below, we have examined the
Registration Statement, the Prospectus contained therein, the Indenture, which
is filed as an exhibit to the Registration Statement, and such statutes,
regulations, corporate records and documents, certificates of corporate and
public officials and other instruments as we have deemed necessary or advisable
for the purposes of this opinion. In such examination, we have assumed (i)
that the signatures on all documents that we have examined are genuine, (ii)
the authenticity of all documents submitted to us as originals, and (iii) the
conformity with the original documents of all documents submitted to us as
copies.
Based upon the foregoing and having due regard for such legal
considerations as we deem relevant, we are of the opinion that the Exchange
Notes, (i) when exchanged in the manner described in the Registration
Statement, (ii) when duly executed, authenticated, issued and delivered in
accordance with the terms of the Indenture, (iii) when the Indenture has been
duly qualified under the Trust Indenture Act of 1939, as amended, and (iv) when
applicable provisions of "blue sky" laws have been complied with, will be
legally issued and constitute binding obligations of the Company, enforceable
against the Company in accordance with their terms and the terms of the
Indenture.
<PAGE> 2
[ANDREWS & KURTH LLP LETTERHEAD]
Board of Directors
The Houston Exploration Company
April 15, 1998
Page 2
The opinion expressed above with respect to the Exchange Notes is
subject to the qualifications (x) that the enforcement of the Exchange Notes may
be limited by (i) bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar laws affecting creditors' rights generally and (ii)
general principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity) and (y) that a waiver of rights under any usury
laws may be unenforceable. Furthermore, we express no opinion herein as to the
enforceability of the choice of law provisions of the Indenture or the Exchange
Notes to the extent that Section 5-1401 of the New York General Obligations Law
makes the law of another jurisdiction mandatorily applicable.
This opinion is limited in all respects to the laws of the State of
Texas and the State of New York and the Delaware General Corporation Law. We
hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of the firm name under the heading "Legal Matters" in
the Registration Statement.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
2365/1208/2442
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Gross interest expense...................... $2,442 $ 3,597 $ 5,297 $ 6,385 $ 6,811
Interest portion of rent expense............ 30 20 25 29 32
------ ------- ------- ------- -------
$2,472 $ 3,617 $ 5,322 $ 6,394 $ 6,843
Earnings:
Income before income (loss) before taxes.... $8,341 $ 5,951 $(4,112) $10,847 $33,423
Plus: fixed charges......................... 2,472 3,617 5,322 6,394 6,843
Less: capitalized interest.................. (878) (1,495) (2,899) (3,490) (5,873)
------ ------- ------- ------- -------
$8,135 $ 8,073 $(1,689) $13,751 $34,393
Ratio of Earnings to Fixed Charges............ 3.3 2.2x N/M 2.2x 5.0x
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Registration Statement on Form S-4 of our
report dated January 27, 1998 included in the Form 10-K of The Houston
Exploration Company for the year ended December 31, 1997, and to all references
to our Firm included in this Registration Statement.
ARTHUR ANDERSEN LLP
New York, New York
April 15, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
We hereby consent to the references to us under the captions "Summary
Natural Gas and Oil Reserve Data," "Business--Natural Gas and Oil Reserves" and
"Reserve Engineers" in this Registration Statement on Form S-4 of The Houston
Exploration Company and to the incorporation by reference therein of the
references to us under the caption "Item 1. Business and Properties--Natural Gas
and Oil Reserves" in the Annual Report on Form 10-K of The Houston Exploration
Company for the year ended December 31, 1997.
NETHERLAND, SEWELL & ASSOCIATES, INC.
Houston, Texas
April 15, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF MILLER AND LENTS, LTD.
We hereby consent to the references to us under the captions "Summary
Natural Gas and Oil Reserve Data," "Business--Natural Gas and Oil Reserves" and
"Reserve Engineers" in this Registration Statement on Form S-4 of The Houston
Exploration Company and to the incorporation by reference therein of the
references to us under the caption "Item 1. Business and Properties--Natural Gas
and Oil Reserves" in the Annual Report on Form 10-K of The Houston Exploration
Company for the year ended December 31, 1997.
MILLER AND LENTS, LTD.
Houston, Texas
April 15, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF RYDER SCOTT COMPANY PETROLEUM ENGINEERS
We hereby consent to the references to us under the captions "Summary
Natural Gas and Oil Reserve Data," "Business--Natural Gas and Oil Reserves" and
"Reserve Engineers" in this Registration Statement on Form S-4 of The Houston
Exploration Company and to the incorporation by reference therein of the
references to us under the caption "Item 1. Business and Properties--Natural Gas
and Oil Reserves" in the Annual Report on Form 10-K of The Houston Exploration
Company for the year ended December 31, 1997.
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
Houston, Texas
April 15, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF HUDDLESTON & CO., INC.
We hereby consent to the references to us under the captions "Summary
Natural Gas and Oil Reserve Data," "Business--Natural Gas and Oil Reserves" and
"Reserve Engineers" in this Registration Statement on Form S-4 of The Houston
Exploration Company and to the incorporation by reference therein of the
references to us under the caption "Item 1. Business and Properties--Natural Gas
and Oil Reserves" in the Annual Report on Form 10-K of The Houston Exploration
Company for the year ended December 31, 1997.
HUDDLESTON & CO., INC.
Houston, Texas
April 15, 1998
<PAGE> 1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
______________________
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
______________________
THE HOUSTON EXPLORATION COMPANY
(Exact name of obligor as specified in its charter)
Delaware 22-2674487
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1100 Louisiana, Suite 2000
Houston, Texas 77002
(Address of principal executive offices) (Zip code)
______________________
8-5/8% Senior Subordinated Notes
due 2008, Series B
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Name Address
--------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
<PAGE> 3
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-2-
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 14th day of April, 1998.
THE BANK OF NEW YORK
By: /s/ Thomas B. Zakrzewski
---------------------------
Name: Thomas B. Zakrzewski
Title: Assistant Vice President
- 3 -
<PAGE> 5
Exhibit 7
__________________________________________________________________
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business September 30,
1997, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin................................... $ 5,004,638
Interest-bearing balances............................................................ 1,271,514
Securities:
Held-to-maturity securities.......................................................... 1,105,782
Available-for-sale securities........................................................ 3,164,271
Federal funds sold and Securities purchased under agreements to resell................. 5,723,829
Loans and lease financing receivables:
Loans and leases, net of unearned income............................................. 34,916,196
LESS: Allowance for loan and lease losses............................................ 581,177
LESS: Allocated transfer risk reserve................................................ 429
Loans and leases, net of unearned income, allowance, and reserve..................... 34,334,590
Assets held in trading accounts........................................................ 2,035,284
Premises and fixed assets (including capitalized leases)............................... 671,664
Other real estate owned................................................................ 13,306
Investments in unconsolidated subsidiaries and associated companies.................... 210,685
Customers' liability to this bank on acceptances outstanding........................... 1,463,446
Intangible assets...................................................................... 753,190
Other assets........................................................................... 1,784,796
-----------
Total assets........................................................................... $57,536,995
===========
LIABILITIES
Deposits:
In domestic offices.................................................................. $27,270,824
Noninterest-bearing.................................................................. 12,160,977
Interest-bearing..................................................................... 15,109,847
In foreign offices, Edge and Agreement subsidiaries, and IBFs........................ 14,687,806
Noninterest-bearing.................................................................. 657,479
Interest-bearing..................................................................... 14,030,327
Federal funds purchased and Securities sold under agreements to repurchase............. 1,946,099
Demand notes issued to the U.S. Treasury............................................... 283,793
Trading liabilities.................................................................... 1,553,539
Other borrowed money:
With remaining maturity of one year or less.......................................... 2,245,014
With remaining maturity of more than one year through three years.................... 0
With remaining maturity of more than three years..................................... 45,664
Bank's liability on acceptances executed and outstanding............................... 1,473,588
Subordinated notes and debentures...................................................... 1,018,940
Other liabilities...................................................................... 2,193,031
-----------
Total liabilities...................................................................... 52,718,298
-----------
EQUITY CAPITAL
Common stock.......................................................................... 1,135,284
Surplus............................................................................... 731,319
Undivided profits and capital reserves................................................ 2,943,008
Net unrealized holding gains (losses) on available-for-sale securities................ 25,428
Cumulative foreign currency translation adjustments................................... (16,342)
------------
Total equity capital.................................................................. 4,818,697
-----------
Total liabilities and equity capital.................................................. $57,536,995
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
J. Carter Bacot
Thomas A. Renyi
Alan R. Griffith Directors
__________________________________________________________________
<PAGE> 1
EXHIBIT 99.1
THE HOUSTON EXPLORATION COMPANY
LETTER OF TRANSMITTAL
FOR TENDER OF ALL OUTSTANDING
8 5/8% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
IN EXCHANGE FOR
8 5/8% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED , 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS THE EXCHANGE OFFER IS
EXTENDED.
TO: THE BANK OF NEW YORK (THE "EXCHANGE AGENT")
<TABLE>
<S> <C> <C>
By Hand or Overnight Delivery: Facsimile Transmissions: By Registered or Certified Mail:
The Bank of New York (Eligible Institutions Only) The Bank of New York
Tender and Exchange Department (212) 815-5915 Tender and Exchange Department
101 Barclay Street P.O. Box 11248
Receive and Deliver Window To Confirmation by Telephone Church Street Station
New York, New York 10286 or for Information Call: New York, New York 10286-1248
Attention: Remo J. Reale (212) 815-3703 Attention: Remo J. Reale
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION TO A FACSIMILE
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. THE
METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CERTIFICATES, IS AT THE RISK OF
THE HOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned acknowledges that he or she has received the Prospectus,
dated , 1998 (the "Prospectus") of The Houston Exploration Company,
a Delaware corporation (the "Company"), and this Letter of Transmittal and the
instructions hereto (the "Letter of Transmittal"), which together constitute the
Company's offer (the "Exchange Offer") to exchange $1,000 principal amount of
its 8 5/8% Senior Subordinated Notes due 2008, Series B (the "Exchange Notes")
that have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which the Prospectus
is a part, for each $1,000 principal amount of its outstanding 8 5/8% Senior
Subordinated Notes due 2008, Series A (the "Old Notes"), of which $100,00,000
aggregate principal amount is outstanding, upon the terms and subject to the
conditions set forth in the Prospectus. The term "Expiration Date" shall mean
5:00 p.m., New York City time, on , 1998, unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term shall mean
the latest date and time to which the Exchange Offer is extended by the Company.
Capitalized terms used but not defined herein shall have the meaning given to
them in the Prospectus.
This Letter of Transmittal is to be used either if (i) certificates
representing Old Notes are to be physically delivered to the Exchange Agent
herewith by Holders, (ii) tender of Old Notes is to be made by book-entry
transfer to an account maintained by the Exchange Agent at The Depository Trust
Company ("DTC"), pursuant to the procedures set forth in "The Exchange
Offer -- Procedures for Tendering" in the Prospectus by any financial
institution that is a participant in DTC and whose name appears on a security
position listing as the owner of Old Notes or (iii) tender of Old Notes is to be
made according to the guaranteed delivery procedures set forth in the Prospectus
under "The Exchange Offer -- Guaranteed Delivery Procedures." Delivery of this
Letter of Transmittal and any other required documents must be made to the
Exchange Agent. Delivery of documents to DTC does not constitute delivery to the
Exchange Agent.
The term "Holder" as used herein means any person in whose name Old Notes
are registered on the books of the Company or any other person who has obtained
a properly completed bond power from the registered holder.
All Holders of Old Notes who wish to tender their Old Notes must, prior to
the Expiration Date: (1) complete, sign, and deliver this Letter of Transmittal,
or a facsimile thereof, to the Exchange Agent, in person or to the address set
forth above; and (2) tender (and not withdraw) his or her Old Notes or, if a
tender of Old Notes is to be made by book-entry transfer to the account
maintained by the Exchange Agent at DTC, confirm such book-entry transfer (a
"Book-Entry Confirmation"), in each case in accordance with the procedures for
tendering described in the Instructions to this Letter of Transmittal. Holders
of Old Notes whose certificates are not immediately available, or who are unable
to deliver their certificates or Book-Entry Confirmation and all other documents
required by this Letter of Transmittal to be delivered to the Exchange Agent on
or prior to the Expiration Date, must tender their Old Notes according to the
guaranteed delivery
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR 8 5/8% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
OF THE HOUSTON EXPLORATION COMPANY
As set forth in the Prospectus dated , 1998 (the "Prospectus")
of The Houston Exploration Company (the "Company") and in the Letter of
Transmittal (the "Letter of Transmittal"), this form or a form substantially
equivalent to this form must be used to accept the Exchange Offer (as defined
below) if the certificates for the outstanding 8 5/8% Senior Subordinated Notes
due 2008, Series A (the "Old Notes") of the Company and all other documents
required by the Letter of Transmittal cannot be delivered to the Exchange Agent
by the expiration of the Exchange Offer or compliance with book-entry transfer
procedures cannot be effected on a timely basis. Such form may be delivered by
hand or transmitted by facsimile transmission, telex or mail to the Exchange
Agent no later than the Expiration Date, and must include a signature guarantee
by an Eligible Institution as set forth below. Capitalized terms used herein but
not defined herein have the meanings ascribed thereto in the Prospectus.
TO: THE BANK OF NEW YORK (THE "EXCHANGE AGENT")
<TABLE>
<S> <C> <C>
By Hand or Overnight Delivery: Facsimile Transmissions: By Registered or Certified Mail:
The Bank of New York (Eligible Institutions Only) The Bank of New York
Tender and Exchange Department (212) 815-5915 Tender and Exchange Department
101 Barclay Street P.O. Box 11248
Receive and Deliver Window Church Street Station
New York, New York 10286 To Confirmation by Telephone New York, New York 10286-1248
Attention: Remo J. Reale or for Information Call: Attention: Remo J. Reale
(212) 815-3703
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
DOES NOT CONSTITUTE A VALID DELIVERY. THE METHOD OF DELIVERY OF ALL DOCUMENTS,
INCLUDING CERTIFICATES, IS AT THE RISK OF THE HOLDER. IF DELIVERY IS BY MAIL,
REGISTERED OR CERTIFIED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. THE INSTRUCTIONS ACCOMPANYING THE LETTER OF TRANSMITTAL SHOULD BE
READ CAREFULLY BEFORE THIS NOTICE OF GUARANTEED DELIVERY IS COMPLETED.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution under the instruction thereto, such
signatures must appear in the applicable space provided on the Letter of
Transmittal for Guarantee of Signature(s).
Ladies and Gentlemen:
The undersigned acknowledges receipt of the Prospectus and the related
Letter of Transmittal which describes the Company's offer (the "Exchange Offer")
to exchange $1,000 in principal amount of a new series of 8 5/8% Senior
Subordinated Notes due 2008, Series B (the "Exchange Notes") for each $1,000 in
principal amount of the Old Notes.
The undersigned hereby tenders to the Company the aggregate principal
amount of Old Notes set forth below on the terms and conditions set forth in the
Prospectus and the related Letter of Transmittal pursuant to the guaranteed
delivery procedure set forth in the "The Exchange Offer -- Guaranteed Delivery
Procedures" section in the Prospectus and the accompanying Letter of
Transmittal.
The undersigned understands that no withdrawal of a tender of Old Notes may
be made on or after the Expiration Date. The undersigned understands that for a
withdrawal of a tender of Old Notes to be effective, a written notice of
withdrawal that complies with the requirements of the Exchange Offer must be
timely received by the Exchange Agent at one of its addresses specified on the
cover of this Notice of Guaranteed Delivery prior to the Expiration Date.
The undersigned understands that the exchange of Old Notes for Exchange
Notes pursuant to the Exchange Offer will be made only after timely receipt by
the Exchange Agent of (i) such Old Notes (or Book-Entry Confirmation of the
transfer of such Old Notes into the Exchange Agent's account at The Depository
Trust Company (the "Depositary" or "DTC")) and (ii) a Letter of Transmittal (or
facsimile thereof) with respect to such Old Notes, properly completed and duly
executed, with any required signature guarantees, this Notice of Guaranteed
Delivery and any other documents required by the Letter of Transmittal or a
properly transmitted Agent's Message. The term "Agent's Message" means a message
transmitted by the Depositary to, and received by, the Exchange Agent and
forming part of the confirmation of a book-entry transfer, which states that the
Depositary has received an express acknowledgment from each participant in the
Depositary tendering the Old Notes and that such participant has received the
Letter of Transmittal and agrees to be bound by the terms of the Letter of
Transmittal and the Company may enforce such agreement against such participant.
All authority conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall not be affected by, and shall survive, the death or
incapacity of the undersigned, and every obligation of the undersigned under
this Notice of Guaranteed Delivery shall be binding upon the heirs, executors,
administrators, trustees in bankruptcy, personal and legal representatives,
successors and assigns of the undersigned.
