<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 1998
REGISTRATION NUMBER 333-
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UNITED STATES
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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KELLEY OIL & GAS CORPORATION
KELLEY OIL CORPORATION
KELLEY OPERATING COMPANY, LTD.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
DELAWARE 1311 76-0447267
DELAWARE 1311 76-0082502
TEXAS 1311 76-0156485
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
601 JEFFERSON, SUITE 1100
HOUSTON, TEXAS 77002
(713) 652-5200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
PRINCIPAL EXECUTIVE OFFICES)
THOMAS E. BAKER
GENERAL COUNSEL AND CORPORATE SECRETARY
KELLEY OIL & GAS CORPORATION
601 JEFFERSON, SUITE 1100
HOUSTON, TEXAS 77002
(713) 652-5200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
CHARLES H. STILL
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77010-3095
(713) 651-5151
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: Approximately 20 business days after this Registration Statement
becomes effective.
If the securities being registered on this Form are being 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. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM REGISTRATION
TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER UNIT(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
10 3/8% Senior
Subordinated Notes due
2006, Series D........ $30,000,000 98% $29,400,000 $8,673.00
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</TABLE>
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(1) Represents the maximum principal amount of notes exchangeable in the
exchange offering described herein.
(2) Pursuant to Rule 457(f) under the Securities Act of 1933, the
registration fee has been calculated based on the average of the bid and
asked prices as of August 13, 1998, in the Private Offerings, Resales and
Trading through Automated Linkages (PORTAL) market, of the Registrant's
10 3/8% Senior Subordinated Notes Due 2006, Series C, for which the
securities registered hereby will be exchanged.
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 THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
PROSPECTUS
OFFER TO EXCHANGE
ALL OUTSTANDING
10 3/8% SENIOR SUBORDINATED NOTES DUE 2006, SERIES C
($30,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
10 3/8% SENIOR SUBORDINATED NOTES DUE 2006, SERIES D
($30,000,000 PRINCIPAL AMOUNT)
OF
[KELLEY OIL & GAS CORPORATION LOGO]
---------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED.
---------------
Kelley Oil & Gas Corporation, a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), on the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange up to an aggregate principal amount of
$30,000,000 of its 10 3/8% Senior Subordinated Notes Due 2006, Series D (the
"Notes") for an equal principal amount of its outstanding 10 3/8% Senior
Subordinated Notes Due 2006, Series C (the "Outstanding Notes"), in integral
multiples of $1,000.
The Notes will bear interest from the date of issuance of the Notes at a
rate per annum of 10 3/8% and on the same terms as the Outstanding Notes, and
will rank parri passu with the Outstanding Notes. See "Description of the
Notes". Interest on the Notes will be payable semiannually on April 15 and
October 15 of each year commencing on the first such date following the date
the Notes are issued. Outstanding Notes that are accepted for exchange will
cease to accrue interest on and after the date on which interest on the Notes
begins to accrue. Accrued and unpaid interest on the Outstanding Notes that
are tendered in exchange for the Notes will be payable on or before the first
April 15 or October 15 following the date the Notes are issued.
There will be no proceeds to the Company from the Exchange Offer; however,
pursuant to a Registration Agreement dated as of May 29, 1998 (the
"Registration Agreement"), among the Company and the Initial Purchasers (as
defined herein), the Company will bear certain offering expenses.
The Company will accept for exchange any and all validly tendered
Outstanding Notes on or before 5:00 p.m., New York City time, on , 1998,
unless extended (the "Expiration Date"). Tenders of Outstanding Notes may be
withdrawn at any time before 5:00 p.m., New York City time, on the Expiration
Date but after that time are irrevocable. United States Trust Company of New
York is acting as Exchange Agent in connection with the Exchange Offer. The
Exchange Offer is not conditioned on any minimum principal amount of
Outstanding Notes being tendered for exchange, but is otherwise subject to
certain customary conditions.
Each broker-dealer that receives Notes for its own account pursuant to the
Exchange Offer (a "Participating Broker-Dealer") must acknowledge that it will
deliver a prospectus in connection with any resale of 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 Notes received in exchange for Outstanding Notes where the
Outstanding Notes were acquired by the broker-dealer as a result of market-
making activities or other trading activities. The Company has agreed that,
for a period of 90 days after the Expiration Date (as defined herein), it will
make this Prospectus available to any broker-dealer for use in connection with
a resale. See "Plan of Distribution".
SEE "RISK FACTORS", BEGINNING ON PAGE 14, FOR A DESCRIPTION OF CERTAIN
FACTORS TO BE CONSIDERED BY HOLDERS WHO TENDER OUTSTANDING NOTES IN THE
EXCHANGE OFFER.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1998
<PAGE>
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
The Company sold the Outstanding Notes on May 29, 1998, to Chase Securities
Inc. and Jefferies & Company, Inc. (the "Initial Purchasers") in transactions
not registered under the Securities Act of 1933 (the "Securities Act") in
reliance on the exemption provided in Section 4(2) of the Securities Act (the
"Offering"). The Initial Purchasers then resold the Outstanding Notes to
qualified institutional buyers in reliance on Rule 144A under the Securities
Act. Accordingly, the Outstanding Notes may not be reoffered, resold or
otherwise transferred in the United States unless so registered or unless an
applicable exemption from the registration requirements of the Securities Act
is available. The Notes are being offered hereunder in order to satisfy the
obligations of the Company under the Registration Agreement. See "The Exchange
Offer".
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission" or the "SEC") set forth in no-action letters
issued to third parties, the Company believes that Notes issued pursuant to
this Exchange Offer may be offered for resale, resold and otherwise
transferred by a holder who is not an affiliate of the Company without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the holder is acquiring the Notes in its
ordinary course of business and is not participating in and has no arrangement
or understanding with any person to participate in the distribution (within
the meaning of the Securities Act) of the Notes. Persons wishing to exchange
Outstanding Notes in the Exchange Offer must represent to the Company that
these conditions have been met.
The Company does not intend to list the Notes on any national securities
exchange or to seek the admission of the Notes to trading in the National
Association of Securities Dealers Automated Quotation System. The Initial
Purchasers have advised the Company that they intend to make a market in the
Notes; however, they are not obligated to do so and may discontinue any
market-making at any time without notice. Accordingly, no assurance can be
given that an active public or other market will develop for the Notes or that
the Notes will be a liquid investment.
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered
Outstanding Notes could be adversely affected. Following consummation of the
Exchange Offer, the holders of Outstanding Notes will continue to be subject
to the existing restrictions on transfer thereof.
The Company expects that the Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Note (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Note representing the Notes will be shown on, and
transfers thereof to qualified institutional buyers will be effected through,
records maintained by DTC and its participants. After the initial issuance of
the Global Note, Notes in certificated form will be issued in exchange for the
Global Note on the terms set forth in the Indenture. See "Description of
Notes--Book Entry; Delivery and Form".
No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus.
You must not rely on any information or representation not contained herein as
having been authorized by the Company. This Prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any security other than
the Notes.
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, any security offered hereby by any person in any jurisdiction
in which it is unlawful for such person to make such an offer or solicitation.
Neither the delivery of this Prospectus nor any exchange made pursuant to the
Exchange Offer shall under any circumstances imply that there has been no
change in the affairs of the Company or its subsidiaries or that the
information set forth in this Prospectus is correct as of any date subsequent
to the date shown on the cover of this Prospectus.
i
<PAGE>
FORWARD-LOOKING INFORMATION
This Prospectus includes "forward-looking statements" within the meaning of
various provisions of the Securities Act of 1933 (the "Securities Act") and
the Securities Exchange Act of 1934 (the "Exchange Act"). All statements,
other than statements of historical facts, included in this Prospectus which
address activities, events or developments which the Company expects or
anticipates will or may occur in the future, including such things as
estimated future net revenues from oil and gas reserves and the present value
thereof, future capital expenditures (including the amount and nature
thereof), business strategy and measures to implement strategy, competitive
strengths, goals, expansion and growth of the Company's business and
operations, plans, references to future success, references to intentions as
to future matters and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company
in light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it
believes are appropriate in the circumstances. However, whether actual results
and developments will conform with the Company's expectations and projections
is subject to a number of risks and uncertainties, including the risk factors
discussed in this Prospectus; general economic, market or business conditions;
the opportunities (or lack thereof) that may be presented to and pursued by
the Company; competitive actions by other oil and gas companies; changes in
laws or regulations; and other factors, many of which are beyond the control
of the Company. Consequently, all of the forward-looking statements made in
this Prospectus are qualified by these cautionary statements and there can be
no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will
have the expected consequences to or effects on the Company or its business or
operations.
ii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. Unless the
context otherwise requires, references to "Kelley" or the "Company" are
references to Kelley Oil & Gas Corporation, its subsidiaries and their
predecessors-in-interest. Pro forma information gives effect to the SPR
Acquisition, including the related financing, and the Offering as if they had
occurred on January 1, 1997. The "Glossary" included in this Prospectus defines
certain oil and gas business terms used in this Prospectus.
THE COMPANY
Kelley Oil & Gas Corporation is engaged in the development, exploration,
acquisition and production of oil and natural gas, primarily in Louisiana and
the shallow waters of the Gulf of Mexico. The Company's activities have
historically been concentrated on lower-risk development drilling in north
Louisiana and higher-risk exploratory drilling in south Louisiana. As of
January 1, 1998, 73% of the Company's estimated proved reserves were located in
north Louisiana. Capitalizing on its development, exploration and acquisition
strategy, the Company has increased proved reserves 82% from 204.6 Bcfe at
January 1, 1996 to 372.6 Bcfe at January 1, 1998 and production has increased
132% from 19.7 Bcfe in 1995 to 45.8 Bcfe in 1997 on a pro forma basis.
Additionally, the Company has increased revenues and EBITDAX from $38.8 million
and $20.9 million, respectively, in 1995 to $112.1 million and $88.5 million,
respectively in 1997 on a pro forma basis.
At January 1, 1998, Kelley had proved reserves of 372.6 Bcfe with a present
value of estimated future net cash flows of $378.8 million. Approximately 95%
of the Company's reserves are natural gas and 73% are proved developed. As of
January 1, 1998, the Company held an interest in 241,550 gross (98,052 net)
developed acres and 622,641 gross (56,356 net) undeveloped acres and an
interest in 513 gross (249.6 net) producing wells. For 1996 and 1997, the
Company's capital spending on exploration and development activities totaled
$100.6 million, approximately 82% of which was spent on development activities.
The Company's exploration and development activities during this period
resulted in the addition of 138.4 Bcfe of proved reserves at an average cost of
$0.73 per Mcfe. For 1998, the Company has budgeted capital expenditures of
approximately $62.0 million, which is expected to be allocated equally between
development and exploration activities. The Company's capital spending on
exploration and development for the first half of 1998 totaled $21.5 million.
Effective December 1, 1997, the Company purchased substantially all the
assets of SCANA Petroleum Resources, Inc. ("SPR") for $110.0 million (the "SPR
Acquisition"). The assets acquired include interests in proved oil and natural
gas reserves primarily located in Louisiana, the shallow waters of the Gulf of
Mexico and east Texas and exploratory prospects in south Louisiana, the shallow
waters of the Gulf of Mexico, the Permian Basin of west Texas and New Mexico
(the "SPR Properties"). The SPR Properties increased the Company's proved
reserves as of January 1, 1998 by 65.6 Bcfe. On a pro forma basis, the SPR
Acquisition would have added $36.0 million to the Company's 1997 revenues and
$30.2 million to the Company's 1997 EBITDAX. The acquisition was financed with
a combination of additional borrowings under the Credit Facility and additional
equity received upon exercise of an option held by the Company's principal
stockholder.
1
<PAGE>
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths will aid in the
successful implementation of its strategy.
Balanced Portfolio of Drilling Opportunities. The Company holds a balanced
portfolio of lower-risk development properties and higher-risk exploratory
prospects. The Company's development properties provide it with cash flows to
help support its operations and its capital expenditures budget, while the
Company believes its exploratory prospects offer the potential for larger
reserves and greater production. The Company expects that, at its current rate
of production and planned capital expenditures, it has a minimum two-year
inventory of development projects and exploration prospects on its existing
properties, and that through the continuing analysis of its existing seismic
databases the Company will identify additional development projects and
exploration prospects on its existing acreage.
Operational Efficiencies. Substantially all of Kelley's proved reserves and a
majority of its operating activities are currently concentrated in Louisiana
and in the shallow waters of the Gulf of Mexico. The Company believes that this
geographic focus has enabled its operating personnel to develop operating
expertise by concentrating on areas with similar characteristics and technical
issues. Moreover, the concentration of properties operated by Kelley,
particularly in the Vacherie Salt Dome area of north Louisiana, enables it to
achieve cost and operational efficiencies. In addition, Kelley maintains an
average 41% working interest in its reserves. Kelley is the operator of
properties accounting for approximately 80% of its production at December 31,
1997. As operator, Kelley possesses the ability to better control its operating
and overhead expenses, manage production performance and regulate capital
expenditures.
Long-Lived Proved Reserves. The Company's proved reserves in north Louisiana
(which constitute 73% of the Company's proved reserves) are long-lived and
support cash flows through their low lease operating expenses and low
development costs. The Company's reserves to production ratio in north
Louisiana is approximately 10:1. The Company believes the relatively long
lives, low costs and high production rates of its north Louisiana wells provide
a solid base from which to pursue its exploration strategy and its reserve
acquisition strategy.
High Operating Margins. Kelley's oil and natural gas reserves are located
close to pipeline transportation and key market locations, and, therefore,
generally command favorable well-head prices relative to reserves located away
from major markets and in areas where transportation costs tend to lower well-
head prices. In addition, production from Kelley's south Louisiana properties
generally receives higher prices because of its relatively high BTU content.
The Company's production expense for 1997 on a pro forma basis was $0.35 per
Mcfe resulting in a cash operating margin (excluding the effects of hedging) of
$2.12 per Mcfe. For the first six months of 1998 the cash operating margin
(excluding the effects of hedging) was $1.56. The decrease from 1997 is
primarily attributable to lower prices received in 1998 for the Company's oil
and gas production that has resulted from a price decline affecting the oil and
gas industry generally. Higher production expenses per Mcfe have also
contributed to the decrease.
Effective Use of Technology. Kelley applies advanced technology to lower the
risks and costs of exploration and development activities. The Company
constantly re-evaluates and refines its 3-D seismic databases to increase the
possibility of successful drilling and allow for better well placement. These
databases cover over 1,300 square miles, including all of its presently
identified exploration prospects. Moreover, Kelley has invested in computer-
aided exploration and development hardware and software and has an experienced
technical staff, including 11 engineers, five geologists and three
geophysicists, with extensive experience in the oil and natural gas industry.
2
<PAGE>
Experienced and Proven Management Team. The Company's senior management team,
assembled since February 1996, has extensive experience in the oil and natural
gas industry and demonstrated acquisition capabilities. In addition, the
Company has adopted employee incentive programs designed to align the interests
of management and investors.
BUSINESS STRATEGY
Kelley's strategy is to increase reserves, production and cash flows in a
cost-efficient manner, primarily through a program of balanced development and
exploration activities in its current areas of operation and through strategic
acquisitions of properties in the 48 contiguous United States and the Gulf of
Mexico.
Continue Development Activities. Kelley will continue development drilling
activities on its existing core properties in the Vacherie Salt Dome region of
north Louisiana, where the Company believes it has opportunities to increase
production and cash flow. In 1996 and 1997, the Company drilled or participated
in drilling 151 gross (68.4 net) development wells, of which 148 gross (66.6
net) were completed as producing wells, representing a 97% success rate. The
Company intends at present to continue dedicating a significant share of its
capital resources to developing its north Louisiana fields.
Focus Exploration Activities. Kelley will continue to focus its exploration
activities on its existing properties in Terrebonne Parish and the SPR
Properties located in south Louisiana and the shallow waters of the Gulf of
Mexico. During 1996 and 1997 the Company became a participant in four joint
ventures with recognized industry partners in an effort to generate a greater
number of high potential prospects while reducing exploration risks. The
Company believes that this shared risk approach, combined with the use of
advanced geophysical techniques, increases drilling success and enables the
Company to participate in a diverse portfolio of prospects with significant
reserve potential. The Company has approximately 331,800 gross acres of
exploratory properties on which it has identified over 30 prospective
exploratory drill sites. The Company expects that, at its current rate of
capital expenditures, these sites provide a minimum two-year inventory of
exploration prospects. In 1997, the Company drilled or participated in drilling
10 gross (4.0 net) exploratory wells, of which 9 gross (3.5 net) were completed
as producing wells.
Pursue Selective Acquisitions. Kelley focuses its acquisition strategy
primarily on oil and natural gas properties having development and exploration
potential to augment existing production and expand its reserve base. The
Company evaluates potential acquisitions based upon a number of factors,
including exploration and development potential, profit enhancement
opportunity, geographic concentration, working interest, size, operatorship and
various reserve and production attributes. The Company believes that its senior
management team's experience in evaluating and acquiring oil and natural gas
reserves will enable Kelley to more effectively execute its acquisition
strategy, grow its existing asset base and increase cash flows. In implementing
this strategy, the Company recently increased its proved reserves and added
significant exploration prospects to its portfolio through the SPR Acquisition.
3
<PAGE>
THE OFFERING
THE OUTSTANDING NOTES....... The Outstanding Notes were sold by the Company on
May 29, 1998, to the Initial Purchasers. The Ini-
tial Purchasers subsequently resold the Outstand-
ing Notes to qualified institutional buyers pur-
suant to Rule 144A under the Securities Act.
REGISTRATION AGREEMENT...... The Registration Agreement grants the holders of
the Outstanding Notes certain exchange and regis-
tration rights. The Exchange Offer is intended to
satisfy those exchange rights, which terminate on
the consummation of the Exchange Offer. If appli-
cable law or applicable interpretations of the
staff of the Commission do not permit the Company
to effect the Exchange Offer, or in certain other
circumstances, the Company has agreed to file a
shelf registration (the "Shelf Registration
Statement") covering resales of Transfer Re-
stricted Notes (as defined in the Registration
Agreement). See "The Exchange Offer--Shelf Regis-
tration Statement".
PRIOR OFFERING.............. On October 29, 1996, the Company issued
$125,000,000 aggregate principal amount of 10
3/8% Senior Subordinated Notes pursuant to an In-
denture (the "Existing Indenture") dated as of
October 15, 1996 among the Company, as Issuer,
its principal operating subsidiaries, as Subsidi-
ary Guarantors, and United States Trust Company
of New York, as Trustee (the "Trustee"). Those
notes, designated Series A, were subsequently ex-
changed for an equal principal amount of notes,
designated Series B (the "Existing Notes"), is-
sued under the Existing Indenture and having an
identical interest rate, maturity and other terms
as the Series A notes, which exchange was made
pursuant to an exchange offering registered with
the Securities and Exchange Commission (the "Com-
mission"). The indenture pursuant to which the
Outstanding Notes were issued and the Notes will
be issued (the "Indenture") has terms that are
substantially equivalent to the terms of the Ex-
isting Indenture. The Outstanding Notes have and
the Notes will have an identical interest rate
and maturity as, and will rank pari passu in
right of payment with, the Existing Notes.
THE EXCHANGE OFFER
SECURITIES OFFERED.......... $30,000,000 aggregate principal amount of 10 3/8%
Senior Subordinated Notes Due 2006, Series D.
THE EXCHANGE OFFER.......... $1,000 principal amount of Notes in exchange for
each $1,000 principal amount of Outstanding
Notes. As of the date hereof, $30,000,000 aggre-
gate principal amount of Outstanding Notes are
outstanding. The Company will issue the Notes as
soon as practicable after the Expiration Date.
Based on an interpretation of the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that Notes
issued pursuant to the Exchange Offer in
4
<PAGE>
exchange for Outstanding Notes may be offered for
resale, resold and otherwise transferred by any
holder thereof (other than any holder that is an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act or a Partici-
pating Broker-Dealer) without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that the Notes
are acquired in the ordinary course of the hold-
er's business and that the holder does not intend
to participate and has no arrangement or under-
standing with any person to participate in the
distribution of the Notes.
Each Participating Broker-Dealer must acknowledge
that it will deliver a prospectus in connection
with any resale of Notes. A broker-dealer that
delivers a prospectus to purchasers in connection
with resales will be subject to certain of the
civil liability provisions under the Securities
Act and will be bound by the provisions of the
Registration Agreement (including certain indem-
nification rights and obligations). This Prospec-
tus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in
connection with resales of Notes received in ex-
change for Outstanding Notes where the Outstand-
ing Notes were acquired by the broker-dealer as a
result of market-making activities or other trad-
ing activities. The Company has agreed that, for
a period of 90 days after the Expiration Date, it
will use its best efforts to make this Prospectus
available to any broker-dealer for use in connec-
tion with any resale. See "Plan of Distribution".
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the Notes
may not rely on the position of the staff of the
Commission enunciated in Exxon Capital Holdings
Corporation (available April 13, 1989) and Morgan
Stanley & Co. Incorporated (available June 5,
1991) or similar no-action letters and, in the
absence of an exemption from applicable legisla-
tive requirements, must comply with the registra-
tion and prospectus delivery requirements of the
Securities Act in connection with the resale
transaction. Failure to comply with those re-
quirements may result in the holder incurring li-
ability under the Securities Act for which the
holder is not indemnified by the Company.
EXPIRATION DATE............. 5:00 p.m., New York City time, on , 1998,
unless extended.
INTEREST ON THE NOTES....... The Notes will bear interest from the date of is-
suance of the Notes. Outstanding Notes that are
accepted for exchange will cease to accrue inter-
est on and after the date on which interest on
the Notes begins to accrue. Accrued and unpaid
interest on the Outstanding Notes that are ten-
dered in exchange for the Notes will be payable
on or before the first April 15 or October 15
following the date of issuance of the Notes.
5
<PAGE>
PROCEDURES FOR TENDERING
OUTSTANDING NOTES..........
Each holder of Outstanding Notes wishing to ac-
cept the Exchange Offer must complete, sign and
date the accompanying Letter of Transmittal (the
"Letter of Transmittal"), or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise deliver
the Letter of Transmittal, or the facsimile, to-
gether with the Outstanding Notes and any other
required documentation to the Exchange Agent at
the address set forth herein. By executing the
Letter of Transmittal, each holder will represent
to the Company that, among other things, the
holder or the person receiving Notes, whether or
not that person is the holder, is acquiring the
Notes in the ordinary course of business and that
neither the holder nor any other person has any
arrangement or understanding with any person to
participate in the distribution of the Notes. In
lieu of physical delivery of the certificates
representing Outstanding Notes, tendering holders
may transfer notes pursuant to the procedure for
book-entry transfer as set forth under "The Ex-
change Offer--Procedures for Tendering".
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS..........
Any beneficial owner whose Outstanding Notes are
registered in the name of a broker-dealer, com-
mercial bank, trust company or other nominee and
who wishes to tender should contact the regis-
tered holder of its Outstanding Notes promptly
and instruct the registered holder to tender on
it's behalf. If such a beneficial owner wishes to
tender on it's own behalf, it must, before com-
pleting and executing the Letter of Transmittal
and delivering its Outstanding Notes, either make
appropriate arrangements to register ownership of
the Outstanding Notes in it's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time.
GUARANTEED DELIVERY Holders of Outstanding Notes who wish to tender
PROCEDURES................. their Outstanding Notes and whose Outstanding
Notes are not immediately available or who cannot
deliver their Outstanding Notes, the Letter of
Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent
(or comply with the procedures for book-entry
transfer) on or before the Expiration Date must
tender their Outstanding Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures".
WITHDRAWAL RIGHTS........... Tenders may be withdrawn at any time before 5:00
p.m., New York City time, on the Expiration Date
pursuant to the procedures described under "The
Exchange Offer--Withdrawal of Tenders."
6
<PAGE>
ACCEPTANCE OF OUTSTANDING
NOTES AND DELIVERY OF
NOTES......................
Subject to certain conditions, the Company will
accept for exchange any and all Outstanding Notes
that are properly tendered in the Exchange Offer
before 5:00 p.m., New York City time, on the Ex-
piration Date. The Notes issued pursuant to the
Exchange Offer will be delivered on the date of
issuance of the Notes. See "The Exchange Offer--
Terms of the Exchange Offer".
FEDERAL INCOME TAX
CONSIDERATIONS.............
The exchange pursuant to the Exchange Offer
should not be a taxable event for federal income
tax purposes. See "Certain U.S. Federal Income
Tax Considerations".
EFFECT ON HOLDERS OF
OUTSTANDING NOTES..........
As a result of the making of this Exchange Offer,
the Company will have fulfilled one of its obli-
gations under the Registration Agreement, and,
with certain exceptions noted below, holders of
Outstanding Notes who do not tender their Out-
standing Notes will not have any further regis-
tration rights under the Registration Agreement
or otherwise. Such holders will continue to hold
the untendered Outstanding Notes and will be en-
titled to all the rights and subject to all the
limitations applicable thereto under the Inden-
ture, except to the extent those rights or limi-
tations, by their terms, terminate or cease to
have further effect as a result of the Exchange
Offer. All untendered Outstanding Notes will con-
tinue to be subject to certain restrictions on
transfer. Accordingly, if any Outstanding Notes
are tendered and accepted in the Exchange Offer,
the trading market of the untendered Outstanding
Notes could be adversely affected.
SHELF REGISTRATION If (i) the Company determines that the Exchange
STATEMENT.................. Offer may not be consummated as soon as practica-
ble after the Expiration Date because it would
violate applicable law or the applicable inter-
pretations of the staff of the Commission, (ii)
the Exchange Offer is not consummated within six
months of the date of the Registration Agreement,
(iii) the Initial Purchasers so request with re-
spect to the Outstanding Notes not eligible to be
exchanged for Notes in the Exchange Offer and
held by them following consummation of the Ex-
change Offer or (iv) any holder of an Outstanding
Note (other than an Exchanging Dealer (as defined
in the Registration Agreement)) is not eligible
to participate in the Exchange Offer or, in the
case of any holder of Outstanding Notes (other
than an Exchanging Dealer) that participates in
the Exchange Offer, the holder does not receive
freely tradeable Notes on the date of the ex-
change for validly tendered (and not withdrawn)
Outstanding Notes, the Company has agreed to file
and maintain a shelf registration statement that
would allow resales of transfer restricted Out-
standing Notes or Notes owned by such holders.
7
<PAGE>
EXCHANGE AGENT.............. United States Trust Company of New York.
THE NOTES
ISSUER...................... Kelley Oil & Gas Corporation.
MATURITY.................... October 15, 2006.
INTEREST.................... Payable semiannually in cash, on April 15 and
October 15, commencing on the first such date
following the issuance of the Notes.
OPTIONAL REDEMPTION BY
COMPANY....................
The Notes are redeemable, at the option of the
Company, in whole or in part, at any time on or
after October 15, 2001, initially at 105.188% of
their principal amount, plus accrued interest,
declining ratably to 100% of their principal
amount, plus accrued interest, on or after
October 15, 2003.
In addition, at any time prior to October 15,
1999, the Company may redeem in aggregate up to
35% of the original principal amount of Notes
with the proceeds of one or more Equity Offerings
(as defined herein), at 110.375% of their
principal amount, plus accrued interest;
provided, however, that either at least $18.0
million aggregate principal amount of Notes must
remain outstanding after each such redemption or
such redemption must retire the Notes in their
entirety. See "Description of the Notes--Optional
Redemption".
CHANGE OF CONTROL........... Upon a Change of Control (as defined herein),
each holder of Notes (a "Holder") will have the
right to require the Company to repurchase such
Holder's Notes at a purchase price in cash equal
to 101% of the principal amount thereof plus
accrued and unpaid interest. See "Description of
the Notes--Certain Covenants--Change of Control".
RANKING..................... The Notes will be unsecured and will be subordi-
nated in right of payment to all existing and fu-
ture Senior Indebtedness (as defined herein) of
the Company. The Notes will rank pari passu in
right of payment with all existing and future Se-
nior Subordinated Indebtedness of the Company,
including the Existing Notes and will be senior
in right of payment to all subordinated indebted-
ness of the Company. In addition, the Notes will
be effectively subordinated to all liabilities of
the Company's subsidiaries (other than Subsidiary
Guarantors), including trade payables. As of June
30, 1998, (i) the outstanding Senior Indebtedness
of the Company was $101.1 million, of which
$100.6 million was Secured Indebtedness
8
<PAGE>
(exclusive of unused commitments under the Credit
Facility), (ii) the Company had $120.9 million
outstanding Senior Subordinated Indebtedness
(other than the Outstanding Notes) and the out-
standing indebtedness of the Company that is sub-
ordinate or junior in right of repayment to the
Notes was $55.4 million, (iii) the Subsidiary
Guarantors had no Senior Indebtedness outstanding
(exclusive of Indebtedness under the Credit
Agreement) and (iv) the Subsidiary Guarantors had
no Senior Subordinated Indebtedness outstanding
(other than the Subsidiary Guaranties and the
guaranties of the Existing Notes) and no Indebt-
edness that is subordinate or junior in right of
payment to the Subsidiary Guaranties. See "Risk
Factors--Subordination of the Notes" and "De-
scription of the Notes--Ranking".
SUBSIDIARY GUARANTIES....... The Notes will be irrevocably and unconditionally
guaranteed (the "Subsidiary Guaranties") on a se-
nior subordinated basis by Kelley Oil Corporation
("Kelley Oil") and Kelley Operating Company,
Ltd., ("Kelley Operating") each a wholly-owned
subsidiary of the Company and, in the future, may
be guaranteed by other subsidiaries of the Com-
pany (collectively, the "Subsidiary Guarantors").
The Subsidiary Guaranties will be general,
unsecured obligations of the Subsidiary Guaran-
tors, subordinated in right of payment to all ex-
isting and future Senior Indebtedness of the Sub-
sidiary Guarantors, including the obligations of
the Subsidiary Guarantors under the Credit Facil-
ity. As of June 30, 1998, the Subsidiary Guaran-
tors would have had no Senior Indebtedness out-
standing (other than Indebtedness of the Company
under the Credit Facility). The Subsidiary Guar-
antors generated approximately 74.9% of the
Company's consolidated total revenues in 1997.
See "Risk Factors--Subordination of the Notes"
and "Description of the Notes--Ranking".
CERTAIN COVENANTS........... The Indenture contains certain covenants for the
benefit of the Holders, including, among others,
covenants limiting the incurrence of additional
indebtedness, the payment of dividends, the re-
demption of capital stock, the making of certain
investments, the restriction of dividends and
other restrictions affecting subsidiaries, the
issuance of capital stock of subsidiaries, asset
sales, certain sale and leaseback transactions,
transactions with affiliates and certain mergers
and consolidations. However, these limitations
are subject to a number of important qualifica-
tions and exceptions. See "Description of the
Notes--Certain Covenants".
BOOK-ENTRY; DELIVERY AND
FORM....................... The Notes will be represented by one permanent
global Note in definitive, fully registered form
deposited with the Trustee as custodian for, and
registered in the name of a nominee of, DTC. See
"Book-Entry; Delivery and Form".
9
<PAGE>
RISK FACTORS
Prospective investors should consider carefully certain matters relating to
an investment in the Notes. See "Risk Factors".
----------------
The Company's principal executive offices are located at 601 Jefferson, Suite
1100, Houston, Texas 77002 and its phone number is (713) 652-5200.
10
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables present selected summary historical and pro forma
financial data for the Company. The historical financial information for the
years ended December 31, 1995, 1996 and 1997 is derived from the Company's
audited consolidated financial statements. The historical financial information
for the year ended December 31, 1997 reflects the impact of the SPR
Acquisition, which was consummated as of December 1, 1997. The SPR Acquisition
was treated as a purchase for financial accounting purposes. The financial
information for the year ended December 31, 1995 reflects the Consolidation (as
defined) in February 1995. See "Business and Property--Company History." The
summary historical financial data for the six month periods ended June 30, 1997
and 1998 are derived from financial statements that are unaudited but include
all adjustments, consisting solely of normal recurring adjustments, that the
Company considers necessary for a fair presentation of its financial position
and results of operations for these periods. The results for the six months
ended June 30, 1998 are not necessarily indicative of the results for the full
year. The summary unaudited pro forma data are derived from the Unaudited Pro
Forma Condensed Consolidated Financial Data included elsewhere in this
Prospectus. The unaudited pro forma income statement data and other financial
data for the year ended December 31, 1997 give effect to the SPR Acquisition
and the Offering as if they occurred on January 1, 1997. The unaudited pro
forma income statement data and other financial data as of June 30, 1998 gives
effect to the Offering as if it occurred on January 1, 1997. This information
should be read in conjunction with "Capitalization", "Selected Consolidated
Financial Data", "Unaudited Pro Forma Condensed Consolidated Financial Data",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus. The pro forma financial information presented
below is unaudited and is not necessarily indicative of financial results that
would have occurred if the SPR Acquisition and the Offering occurred on January
1, 1997 and should not be viewed as indicative of operations in future periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -----------------------------
1997 1998
1995 1996 1997 PRO FORMA 1997 1998 PRO FORMA
--------- -------- -------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues.... $ 36,998 $ 60,854 $ 75,864 $111,868 $ 35,125 $ 44,209 $ 44,209
Interest and other
income................. 1,763 1,429 274 274 234 66 66
--------- -------- -------- -------- -------- -------- --------
Total revenues......... 38,761 62,283 76,138 112,142 35,359 44,275 44,275
--------- -------- -------- -------- -------- -------- --------
Production expenses..... 10,835 10,709 10,955 16,089 4,931 10,744 10,744
Exploration expenses.... 23,387 5,438 5,433 5,433 1,882 6,669 6,669
General and
administrative
expenses............... 7,030 8,953 6,875 7,591 3,987 3,617 3,617
Interest and other debt
expenses............... 21,956 24,401 25,071 32,069 12,039 16,315 16,802
Restructuring
expenses(/1/).......... 1,115 4,276 -- -- -- -- --
Depreciation, depletion
and amortization....... 35,591 20,440 25,853 50,582 12,065 21,186 21,186
Impairment of oil and
gas properties(/2/).... 150,138 -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item.... (211,291) (11,934) 1,951 378 455 (14,256) (14,743)
Provision (benefit) for
taxes.................. -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Net income (loss)
before extraordinary
item.................. (211,291) (11,934) 1,951 378 455 (14,256) (14,743)
Extraordinary
loss(/3/).............. -- (17,030) -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $(211,291) $(28,964) $ 1,951 $ 378 $ 455 $(14,256) $(14,743)
========= ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDAX(/4/) ........... $ 20,896 $ 42,621 $ 58,308 $ 88,462 $ 26,441 $ 29,914 $ 29,914
Cash interest
expenses(/5/).......... 18,354 19,231 20,774 27,316 9,911 13,703 14,162
Capital
expenditures(/6/)...... 52,240 47,601 53,140 N/A 23,974 28,971 N/A
Ratio of EBITDAX to cash
interest expenses...... 1.1x 2.2x 2.8x 3.2x 2.7x 2.2x 2.1x
Ratio of total debt to
EBITDAX................ 7.9x 4.3x 4.9x 3.2x N/A N/A N/A
Ratio of earnings to
fixed charges(/7/)..... N/A N/A 1.1x 1.0x 1.0x N/A N/A
CASH FLOWS DATA:
Cash provided by (used
in) operating
activities............. $ (1,806) $ 9,262 $ 39,604 N/A $ 16,363 $ 15,282 N/A
Cash used in investing
activities............. (43,224) (53,392) (164,275) N/A (23,974) (28,971) N/A
Cash provided by
financing activities... 42,114 41,848 120,763 N/A 3,621 13,624 N/A
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
1998
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Total assets................................................... $321,261
Property and equipment, net ................................... 294,729
Long-term debt................................................. 306,366
Stockholders' deficit.......................................... (24,421)
</TABLE>
- -------
(1) Restructuring charges relate to the Consolidation . See "Business and
Properties--Company History".
(2) Reflects noncash impairment charges against the carrying value of proved
and unproved properties under Financial Accounting Standards Board
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" ("SFAS 121"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Notes to the Company's Consolidated Financial Statements.
(3) Includes costs incurred in connection with the refinancing of substantially
all of the Company's 13 1/2% Senior Notes due 1999 (the "13 1/2% Notes")
and represents the excess of the aggregate purchase price of the 13 1/2%
Notes over their carrying value as of the date of such refinancing.
(4) EBITDAX is calculated as income (loss) before interest and other debt
expenses, income taxes, exploration expenses, restructuring expenses,
depletion, depreciation, amortization and impairment of oil and gas
properties. EBITDAX is not a measure of cash flows as determined by
generally accepted accounting principles ("GAAP"). The Company has included
information concerning EBITDAX because EBITDAX is a measure used by certain
investors in determining a company's historical ability to service its
indebtedness. EBITDAX should not be considered as an alternative to, or
more meaningful than, net income or cash flows as determined in accordance
with GAAP as an indicator of Kelley's operating performance or liquidity,
and it may not be comparable to similarly titled measures reported by other
companies.
(5) Cash interest expenses consists of interest and other debt expenses less
accretion of original issue discount, accretion of debt valuation discount
and amortization of deferred debt issuance costs.
(6) Capital expenditures excludes oil and gas property acquisitions of $11.6
million and $111.1 million for the years ended December 31, 1996 and 1997,
respectively.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pre-tax income from continuing operations (Income (loss) before
income taxes and extraordinary item excluding interest income of $0.6
million, $0.9 million and $0.2 million for the years ended December 31,
1995, 1996 and 1997, respectively, and $0.1 million and $46,000 for the six
months ended June 30, 1997 and 1998, respectively) plus fixed charges.
Fixed charges consist of interest expense and other debt expenses. For the
years ended December 31, 1995 and 1996, earnings were insufficient to cover
fixed charges by $211.9 million and $12.8 million, respectively, and $14.3
million and $14.8 million for the six months ended June 30, 1998 and six
months ended June 30, 1998 Pro Forma, respectively.
12
<PAGE>
SUMMARY OPERATING AND RESERVE DATA
The following table sets forth summary operating and reserve data with
respect to the Company. The Company's estimated net proved oil and gas reserves
as of December 31, 1996 and 1997 are based upon reserve reports prepared by
H.J. Gruy & Associates, Inc. Pro forma 1997 data assumes that the SPR
Acquisition occurred on January 1, 1997.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- JUNE
1997 30,
1996 1997 PRO FORMA 1998
-------- -------- --------- -------
<S> <C> <C> <C> <C>
PRODUCTION DATA:
Oil and other liquid hydrocarbons
(Mbbls)................................. 232 226 473 224
Natural gas (Mmcf)....................... 23,466 30,202 42,931 19,503
Natural gas equivalent (Mmcfe)........... 24,858 31,558 45,769 20,847
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (per
Bbl).................................... $ 22.11 $ 19.34 $ 19.39 $ 13.88
Natural gas (per Mcf, including effects
of hedging)............................. 2.30 2.27 2.32 2.11
Natural gas (per Mcf, excluding effects
of hedging)............................. 2.43 2.41 2.42 2.07
Natural gas equivalent (per Mcfe,
including effects of hedging)........... 2.37 2.31 2.38 2.12
COSTS PER MCFE:
Production expenses...................... $ 0.43 $ 0.35 $ 0.35 $ 0.52
General and administrative expenses...... 0.36 0.22 0.17 0.17
Depreciation, depletion and
amortization............................ 0.82 0.82 1.11 1.02
Average finding and development
costs(/1/).............................. 0.49 1.35 N/A N/A
PROVED RESERVES:
Total proved reserves (Mmcfe)............ 306,430 372,585 372,585
Reserves to production ratio(/2/)........ 12.3 11.8 8.1
Present value of estimated future net
cash flows (in thousands)(/3/).......... $518,184 $378,811 $378,811
Standardized measure of discounted future
net cash flows (in thousands)(/4/)...... $433,771 $363,887 $363,887
</TABLE>
- --------
(1) Average finding and development costs per Mcfe are calculated by dividing
(A) capital expenditures incurred during the period (excluding expenditures
related to proved property acquisitions) by (B) the estimated proved
reserve extensions and discoveries and revisions for the same period.
Average finding and development costs for 1997 on a pro forma basis are not
presented, as such costs were incurred by SPR in accordance with SPR's
capital expenditure program and would not provide a meaningful indication
of the costs the Company would have incurred had the Company operated the
SPR Properties in 1997.
(2) The reserves to production ratio is calculated by dividing the total proved
reserves as of a specific date by production for the twelve-month period
immediately preceding such date. See "Glossary".
(3) Computed before consideration of future income taxes, general and
administrative expenses and interest expenses in accordance with SEC
regulations and is not necessarily indicative of actual future cash flows.
(4) Computed in accordance with Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 69, "Accounting for Oil and Gas
Activities", which excludes general and administrative and interest
expenses, and is not necessarily indicative of actual future cash flows.
See Note 11 to the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.
13
<PAGE>
RISK FACTORS
Prospective purchasers should consider carefully the following factors, as
well as the other information contained in this Prospectus, in evaluating an
investment in the Notes. This Prospectus contains forward-looking statements
of the Company. The Company cautions prospective investors that the following
important factors could affect the Company's actual results in the future.
SUBSTANTIAL LEVERAGE
The Company is currently substantially leveraged. As of June 30, 1998, the
Company had total indebtedness for borrowed money of approximately $306.4
million and a stockholders' deficit of $24.4 million and had available for
borrowing approximately $36.5 million under the Credit Facility. On July 24,
1998, the Company sold its entire interest in the Waskom field in Harrison
County, Texas for the total consideration of $17.4 million. As a result of the
sale of these properties, effective on the sale date, the Company's borrowing
base under the Credit Facility was reduced by $8.0 million. The proceeds from
the sale were used to reduce outstanding borrowings under the Credit Facility.
Moreover, although the Indenture contains covenants that limit the incurrence
by the Company and its subsidiaries of additional indebtedness, those
limitations are subject to important qualifications and exceptions. In
addition, the accretion of principal of a non interest-bearing or other
discount security is not treated as the incurrence of indebtedness under the
Indenture. Further, the Company expects to incur additional future
indebtedness under the Credit Facility as it executes its strategy for
development, exploration and acquisition of oil and natural gas reserves.
The Company's leverage could have important consequences to the holders of
the Notes, including the following: (i) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions
or general corporate purposes may be impaired in the future; (ii) a
substantial portion of the Company's cash flow from operations will be
required for the payment of principal and interest on its indebtedness for
money borrowed, thereby reducing the funds available to the Company for its
operations, acquisitions and other purposes; (iii) the Company may be
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (iv) the Company's substantial
degree of leverage may hinder its ability to adjust to changing market
conditions and could make it more vulnerable in the event of a downturn in
general economic conditions or its business. In addition, certain of the
Company's borrowings are and will continue to be at variable rates of
interest, which exposes the Company to the risk of increased interest rates.
See "--Substantial Capital Requirements", "Capitalization", "Selected
Consolidated Financial Data", "Unaudited Pro Forma Condensed Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness for borrowed money (including the
Notes) depends on its future performance and successful implementation of its
strategy, which is subject not only to its own actions but also to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control, as well as to the prevailing market prices for oil,
natural gas and natural gas liquids. There can be no assurance that Kelley's
business will generate sufficient cash flow from operations or that future
credit will be available in an amount sufficient to enable the Company to
service its indebtedness for borrowed money (including the Notes) or make
necessary capital expenditures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
NECESSITY OF RESERVE REPLACEMENT
Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. Kelley's future oil and natural gas reserves and
production, and, therefore, cash flow and income, are highly dependent upon
14
<PAGE>
Kelley's success in efficiently developing its current reserves and acquiring
additional reserves that are economically recoverable. Without reserve
additions in excess of production through successful acquisition and
exploration activities, Kelley's reserves and production will decline. There
can be no assurance that Kelley will be able, on a commercially reasonable
basis, to successfully explore for or acquire additional reserves to replace
its current and future production.
SUBSTANTIAL CAPITAL REQUIREMENTS
Kelley is dependent upon its ability to obtain financing for developing,
exploring and acquiring oil and natural gas properties beyond its internally
generated cash flow. Historically, Kelley has financed these activities
primarily through the issuance of debt and equity securities, through various
credit facilities and with internally generated funds. Following the Offering
and the application of the net proceeds therefrom, the Company expects to use
one or more bank credit facilities to borrow funds required from time to time
to supplement its own available cash. However, additional financing may be
required in the future to fund the Company's development and exploration
activities and acquisition program. If revenues or the Company's borrowing
base under the Company's Amended and Restated Credit Facility, dated as of
December 1, 1997 (such facility, as amended, or its predecessor, as
applicable, the "Credit Facility") decrease as a result of lower oil and
natural gas prices, operating difficulties or declines in reserves, the
Company's ability to expend the capital necessary to undertake or complete
future activities may be limited. No assurances can be given that the Company
will have adequate funds available to it under the Credit Facility or
alternate financing arrangements to carry out its strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources".
VOLATILITY OF OIL AND NATURAL GAS PRICES
Kelley's financial results are affected significantly by the price received
for Kelley's oil, natural gas and natural gas liquids production.
Historically, the markets for oil, natural gas and natural gas liquids have
been volatile and are likely to continue to be volatile in the future. The
prices received by Kelley for its oil and natural gas production and the
levels of such production are subject to wide fluctuations and depend on
numerous factors beyond Kelley's control, including market uncertainty,
changes in global supply of and demand for oil, natural gas and natural gas
liquids, weather conditions, the condition of the United States economy
(particularly the manufacturing sector), the price and quantity of foreign
imports, the price and availability of alternative fuels, political conditions
(including embargoes) in or affecting other oil-producing and natural gas-
producing countries, the actions of the Organization of Petroleum Exporting
Countries and domestic government regulation, legislation and policies. It is
impossible to predict oil and natural gas price movements with certainty.
Declines in oil and natural gas prices may materially and adversely affect
Kelley's future financial condition, liquidity, ability to finance planned
capital expenditures, results of operations and availability pursuant to the
borrowing base under the Credit Facility. Lower oil and natural gas prices
also may reduce the amount of oil and natural gas that the Company can produce
economically and affect the Company's ability to repay outstanding amounts
under the Credit Facility, the Existing Notes, the Notes and other
indebtedness. Further, oil prices and gas prices do not necessarily move in
tandem. Because approximately 95% of the Company's reserves are currently
natural gas reserves, the Company is more susceptible to movements in natural
gas prices than certain of its competitors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
RESTRICTIVE DEBT COVENANTS
The Company is subject to a number of significant covenants that, among
other things, restrict the ability of Kelley to dispose of assets, incur
additional indebtedness, repay other indebtedness, pay dividends, enter into
certain investments or acquisitions, repurchase or redeem capital stock,
engage in mergers or consolidations, or engage in certain transactions with
subsidiaries and affiliates and that
15
<PAGE>
otherwise restrict corporate activities. There can be no assurance that such
restrictions will not adversely affect the Company's ability to finance its
future operations or capital needs or engage in other business activities that
may be in the interest of the Company. In addition, the Credit Facility
requires the Company to maintain compliance with certain financial ratios. The
ability of the Company to comply with such ratios may be affected by events
beyond the Company's control. A breach of any of these covenants or the
inability of the Company to comply with the required financial ratios could
result in a default under the Credit Facility. In the event of any such
default, all borrowings outstanding under the Credit Facility, together with
accrued interest and other fees, could be declared due and payable and the
Company could be required to sell assets and apply all of its available cash
to repay such borrowings. The indebtedness under the Credit Facility is
secured by substantially all of the oil and natural gas assets of the Company,
the Subsidiary Guarantors and certain other of the Company's subsidiaries and
the proceeds therefrom, and, as a result, the lenders thereunder would have a
right to proceed against such assets. If the indebtedness under the Credit
Facility or any other indebtedness of the Company were to be accelerated,
there can be no assurance that any assets of the Company or the Subsidiary
Guarantors would remain after payment of such debt. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of the Credit Facility".
UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET CASH FLOWS
There are numerous uncertainties in estimating quantities of proved reserves
believed to have been discovered and in projecting future rates of production
and the timing of development expenditures, including many factors beyond the
control of the Company. The reserve data included in this Prospectus are only
estimates. Reserve estimates are inherently imprecise and may be expected to
change as additional information becomes available. Furthermore, estimates of
oil and natural gas reserves, of necessity, are projections based on
engineering data, and there are uncertainties inherent in the interpretation
of such data as well as the projection of future rates of production and the
timing of development expenditures. Reservoir engineering is a subjective
process of estimating underground accumulations of oil and natural gas that
cannot be measured exactly, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Accordingly, estimates of the economically
recoverable quantities of oil and natural gas 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 at different times
may vary substantially. There also can be no assurance that the reserves set
forth herein will ultimately be produced or that the proved undeveloped
reserves set forth herein will be developed within the periods anticipated. It
is possible that variances from the estimates will be material. In addition,
the estimates of future net cash flows from proved reserves of Kelley and the
present value thereof are based upon certain assumptions about future
production levels, prices and costs that may not be correct when judged
against actual subsequent experience. The Company emphasizes with respect to
the estimates prepared by independent petroleum engineers that the discounted
future net cash flows should not be construed as representative of the fair
market value of the proved reserves owned by Kelley since discounted future
net cash flows are based upon projected cash flows which do not provide for
changes in oil and natural gas prices from those in effect on the date
indicated or for escalation of expenses and capital costs subsequent to such
date. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they were based. Actual results will
differ, and are likely to differ materially, from the results estimated.
Accordingly, investors in the Notes are cautioned not to place undue reliance
on the reserve data included in this Prospectus.
BUSINESS RISKS, OPERATING HAZARDS AND UNINSURED RISKS
Oil and natural gas drilling activities are subject to numerous risks,
including the risk that no commercially viable oil or natural gas production
will be obtained, and many of such risks are beyond
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Kelley's control. The decision to purchase, explore or develop a prospect or
property will depend in part on the evaluation of data obtained through
geophysical and geological analyses, production data and engineering studies,
the results of which are often inconclusive or subject to varying
interpretations. The cost of drilling, completing and operating wells is often
uncertain, and overruns in budgeted expenditures are common risks that can
make a particular project uneconomical. Also, technical problems encountered
in actual drilling, completion and workover activities can delay such activity
and add substantial cost to a project. Further, drilling may be curtailed,
delayed or canceled as a result of many factors, including title problems,
weather conditions, compliance with government permitting requirements,
shortages of or delays in obtaining equipment, reductions in product prices
and limitations in the market for products.
The availability of a ready market for Kelley's oil and natural gas
production also depends on a number of factors, including the demand for and
supply of oil and natural gas and the proximity of reserves to pipelines or
trucking and terminal facilities. Natural gas wells may be shut in for lack of
a market or because of inadequacy or unavailability of natural gas pipeline or
gathering system capacity.
Kelley's oil and natural gas business also is subject to all of the
operating risks associated with the drilling for and production of oil and
natural gas, including, but not limited to, uncontrollable flows of oil,
natural gas, brine or well fluids into the environment (including groundwater
and shoreline contamination), blowouts, cratering, mechanical difficulties,
fires, explosions, personal injuries, death and pollution and other damage to
the properties of the Company and others. Moreover, offshore operations are
subject to a variety of operating risks associated with the marine
environment, such as hurricanes or other adverse weather conditions, and to
interruption or termination by government authorities based on environmental
or other considerations. Although Kelley maintains insurance at levels that it
believes are consistent with industry practices, it is not fully insured
against all risks. Losses and liabilities arising from uninsured and
underinsured events could have a material adverse effect on the financial
condition and operations of Kelley.
POSSIBLE UNAVAILABILITY OF DRILLING RIGS, EQUIPMENT, SUPPLIES AND PERSONNEL
At present, the level of drilling activity in the United States has resulted
in increased demand for, and therefore increased costs associated with,
drilling rigs, equipment, supplies and personnel and the services and products
of other vendors to the industry. In particular, in connection with drilling
activities in the marshy regions of south Louisiana, there has been an
increased cost of drilling operations due to increased costs for barge rigs
necessary to conduct activity in such region. Moreover, the number of drilling
contractors offering barge drilling and workover services is limited.
Increased drilling activity in the Gulf of Mexico in recent years has also
decreased the availability of and increased the costs of offshore rigs.
Shortages of drilling rigs, equipment, supplies or personnel could delay or
adversely affect the Company's development and exploration operations, which
could have a material adverse effect on its financial condition and results of
operations. There can be no assurance that costs will not increase further or
that necessary equipment and services will be available at economical prices.
GOVERNMENT LAWS AND REGULATIONS
Kelley's operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or
have been affected by price controls, taxes and other laws relating to the oil
and natural gas industry, by changes in such laws and by changes in
administrative regulations. The Company cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings,
whether additional laws and regulations will be adopted or the effect such
changes may have on Kelley's business or financial condition. See "Business
and Properties--Regulation".
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Kelley's operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. 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 mitigate
pollution from current or former operations such as plugging abandoned wells
and cleaning up and backfilling pits, and impose substantial liabilities for
pollution resulting from Kelley's operations. The discharge of oil, natural
gas, oil and natural gas exploration and production wastes or other pollutants
into the air, soil or water may give rise to liabilities on the part of Kelley
to the government and third parties, may require Kelley to incur costs of
remediation, and could result in the temporary or permanent shut-down of
fields or wells. No assurance can be given that existing environmental laws or
regulations, as currently interpreted or reinterpreted in the future, or
future laws or regulations, will not have a material adverse effect on
Kelley's operations and financial condition or that material indemnity claims
will not arise against Kelley with respect to properties acquired or sold by
Kelley. See "Business and Properties--Regulation".
RISKS OF HEDGING TRANSACTIONS
Kelley regularly enters into hedging transactions for its natural gas
production and expects to continue to do so in the future. Such transactions
limit potential gains by Kelley if natural gas prices were to rise
substantially over the price established by the hedges and expose Kelley to
the risk of financial loss in certain circumstances, possibly including
instances where Kelley's production is less than expected, where Kelley's
customers fail to purchase quantities of natural gas contracted for or where
there is an unexpected event materially affecting prices. The natural gas swap
agreements generally provide for Kelley to receive or make counterparty
payments on the differential between a fixed price and a variable indexed
price for natural gas. Kelley is exposed to the credit risk of nonperformance
by its hedging counterparties, which generally can be quantified as the amount
of unrealized gains under the contracts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" and Note 9 to the Consolidated Financial Statements of the Company
included in this Prospectus.
HIGHLY COMPETITIVE MARKETS
Kelley operates in a highly competitive environment with respect to
acquiring reserves, marketing oil and natural gas and securing trained
personnel. Many of Kelley's larger competitors possess and employ financial
and personnel resources substantially greater than those available to Kelley.
Such companies may be able to pay more for productive oil and natural gas
properties and to define, evaluate, bid for and purchase a greater number of
properties than Kelley's financial or personnel resources permit. Kelley's
ability to acquire additional reserves in the future will be dependent upon
its ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. In addition, there is
substantial competition for capital available for investment in the oil and
natural gas industry. There can be no assurance that Kelley will be able to
compete successfully in the future in acquiring reserves, developing reserves,
marketing hydrocarbons, attracting and retaining quality personnel, and
raising additional capital. See "Business and Properties--Competition".
ACQUISITION RISKS
The Company constantly evaluates acquisition and joint venture opportunities
and frequently engages in bidding and negotiation for acquisitions, many of
which are substantial. If successful in this process, the Company may be
required to alter or increase its capitalization substantially to finance
these acquisitions or joint ventures through the issuance of additional debt
or equity
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securities, the sale of production payments or otherwise. These changes in
capitalization may significantly affect the risk profile of the Company.
Additionally, 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 beyond
the Company's control. Such assessments are necessarily inexact and their
accuracy inherently uncertain. In connection with such an assessment, the
Company typically performs a review of the subject properties that it believes
is consistent with industry practices. However, such a review 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. Furthermore, reviews may not always be performed on every
property, and environmental and other problems are not necessarily observable
even when a review is performed, Therefore, there can be no assurance that the
Company will be successful in the acquisition of, or in establishing joint
ventures related to, any material property interests containing economically
recoverable reserves.
CONTROL BY PRINCIPAL STOCKHOLDER
Contour Production Company L.L.C. ("Contour") owns approximately 60% of the
outstanding voting power of the Company. Accordingly, Contour is able to
control the election of the Company's directors, the Company's management,
operations and affairs and the outcome of any corporate transaction or other
matter submitted to the Company's stockholders for approval, including a
merger, consolidation or sale of all or substantially all of the Company's
assets. In addition, the Credit Facility provides that if Contour's equity
interest in the Company falls below 20%, an event of default will have
occurred under the Credit Facility. Circumstances may occur in which the
interests of Contour, as the majority stockholder of the Company, may conflict
with the interests of the holders of the Notes. See "Principal Stockholders".
SUBORDINATION OF THE NOTES
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, which includes all indebtedness
under the Credit Facility. As of June 30, 1998, the Company had $101.1 million
of outstanding Senior Indebtedness and had $36.5 million available under the
Credit Facility, which, if borrowed, would be Senior Indebtedness. On July 24,
1998, the Company sold its entire interest in the Waskom field in Harrison
County, Texas for the total consideration of $17.4 million. As a result of the
sale of these properties, effective on the sale date, the Company's borrowing
base under the Credit Facility was reduced by $8.0 million. The proceeds from
the sale were used to reduce outstanding borrowings under the Credit Facility.
The Company currently conducts all its business through subsidiaries. Claims
of creditors of the Company's subsidiaries, including trade creditors, secured
creditors and creditors holding indebtedness and guarantees issued by such
subsidiaries, and claims of preferred stockholders (if any) of such
subsidiaries, generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes, even if such obligations do not constitute
Senior Indebtedness of such subsidiaries. However, the Notes will be
guaranteed by certain, but not all, of the Company's subsidiaries. See
"Description of the Notes--Certain Covenants--Subsidiary Guaranties". Such
guaranties, however, will be subordinate in right of payment to any Senior
Indebtedness of such subsidiaries, including obligations under the Credit
Facility. Although the Indenture will limit the incurrence of Indebtedness and
preferred stock of certain subsidiaries, such limitation is subject to a
number of significant qualifications. Moreover, the Indenture will not impose
any limitation on the incurrence by subsidiaries of liabilities that are not
considered Indebtedness under the Indenture. See "Description of the Notes--
Certain Covenants--Limitation on Indebtedness".
The obligations of each Subsidiary Guarantor under its guaranty will be
senior subordinated obligations. As such, the rights of holders of the Notes
to receive payment by a Subsidiary Guarantor will be subordinated in right of
payment to the rights of holders of Senior Indebtedness of such
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Subsidiary Guarantor. The terms of the subordination with respect to the
Company's obligations under the Notes will apply equally to a Subsidiary
Guarantor and the obligations of such Subsidiary Guarantor under its guaranty.
In the event of 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 the Senior Indebtedness
of the Company has been paid in full. Accordingly, there may not be sufficient
funds remaining to pay amounts due on all or any of the Notes. In addition,
the subordination provisions of the Indenture will provide that no cash
payment may be made with respect to the Notes during the continuance of a
payment default under any Senior Indebtedness of the Company. Furthermore, if
certain non-payment defaults exist with respect to certain Senior Indebtedness
of the Company, the holders of such Senior Indebtedness will be able to
prevent payments on the Notes for certain periods of time. See "Description of
the Notes--Ranking".
HOLDING COMPANY STRUCTURE
The Company generally conducts its operations through subsidiaries.
Accordingly, the Company relies on dividends and cash advances from its
subsidiaries and repayment of loans and cash advances previously made to its
subsidiaries to provide funds necessary to meet its obligations, including the
payment of principal and interest on the Notes. The ability of any such
subsidiary to pay dividends or make cash advances is subject to applicable
laws and contractual restrictions, including restrictions under the Credit
Facility, as well as the financial condition and operating requirements of
such subsidiary.
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes and the
Exchange Notes, as well as the Existing Notes, may require the Company to
repurchase all or a portion of such holder's Notes, Exchange Notes or Existing
Notes, as the case may be, at 101% of the principal amount of the Notes, the
Exchange Notes or Existing Notes, together with accrued and unpaid interest to
the date of repurchase. The Indenture will require that, prior to such a
repurchase, the Company must either repay all outstanding Senior Indebtedness
or obtain any required consents to such repurchase. If a Change of Control
were to occur, the Company may not have the financial resources to repay all
of the Senior Indebtedness, the Notes, the Exchange Notes, the Existing Notes
and any other indebtedness that would become payable upon the occurrence of
such Change of Control. See "--Subordination of the Notes" and "Description of
the Notes--Certain Covenants--Change of Control".
FRAUDULENT TRANSFER LAWS
The proceeds of the Offering were used to repay a portion of the
Indebtedness outstanding under the Credit Facility. Under federal or state
fraudulent transfer laws, if a court of competent jurisdiction were to find,
in a lawsuit by an unpaid creditor or a representative of creditors, such as a
trustee in bankruptcy or a debtor-in-possession, that the Company issued the
Outstanding Notes with the intent to hinder, delay or defraud present or
future creditors, or received less than a reasonably equivalent value or fair
consideration for any such indebtedness, and at the time of such incurrence
(i) was insolvent, (ii) was rendered insolvent by reason of such incurrence,
(iii) was engaged or about to engage in a business or transaction for which
its remaining assets constituted unreasonably small capital to carry on its
business or (iv) intended to incur, or believed or reasonably should have
believed that it would incur, debts beyond its ability to pay as such debts
matured, such court could avoid the Company's obligations to the holders of
the Outstanding Notes and the Notes, subordinate the Company's obligations to
the holders of the Outstanding Notes and the Notes to all other indebtedness
of the Company or take other action detrimental to the holders of the Notes.
In that
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event, there can be no assurance that any repayment on the Notes could ever be
recovered by the holders of the Notes. Any Subsidiary Guaranty may also be
subject to challenge under fraudulent transfer laws and, in any case, will be
limited to amounts that any such Subsidiary Guarantor can guarantee without
violating such laws. See "Description of the Notes--Certain Definitions--
Subsidiary Guaranty".
LACK OF PUBLIC MARKET FOR THE NOTES
The Outstanding Notes currently are owned by a relatively small number of
beneficial owners. The Outstanding Notes have not been registered under the
Securities Act and are subject to significant restrictions on resale. The
Notes will constitute a new issue of securities with no established trading
market. The Company does not intend to list the Outstanding Notes or the Notes
on any national securities exchange or to seek the admission thereof to
trading in the National Association of Securities Dealers Automated Quotation
System. The Company has been advised by the Initial Purchasers that, following
consummation of the Exchange Offer, they currently intend to make a market in
the Notes. However, the Initial Purchasers are not obligated to do so, and any
market making activity with respect to the Notes may be discontinued at any
time without notice. If commenced, such market making activity will be subject
to the limits imposed in the Exchange Act, and may be limited during the
Exchange Offer or the pendency of the Shelf Registration Statement.
Accordingly no assurance can be given that an active public or other market
will develop for the Notes or as to the liquidity of or the trading market for
the Notes.
EXCHANGE OFFER PROCEDURES
Issuance of the Notes in exchange for Outstanding Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of
Outstanding Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Outstanding Notes desiring to tender their Outstanding Notes in exchange for
Notes should allow sufficient time to ensure timely delivery. The Company is
under no duty to give notification of defects or irregularities with respect
to the tenders of Outstanding Notes for exchange. Outstanding Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions on
transfer thereof. On consummation of the Exchange Offer, the registration
rights under the Registration Agreement will terminate except that if (i) the
Company determines that the Exchange Offer may not be consummated as soon as
practicable after the Expiration Date because it would violate applicable law
or the applicable interpretations of the staff of the Commission, (ii) the
Exchange Offer is not consummated within 210 days of the date of the
Registration Agreement, (iii) the Initial Purchasers so request with respect
to the Outstanding Notes not eligible to be exchanged for Notes in the
Exchange Offer and held by them following consummation of the Exchange Offer
or (iv) any holder of an Outstanding Note (other than an Exchanging Dealer) is
not eligible to participate in the Exchange Offer or, in the case of any
holder of Outstanding Notes (other than an Exchanging Dealer) that
participates in the Exchange Offer, the holder does not receive freely
tradeable Notes on the date of the exchange for validly tendered (and not
withdrawn) Notes, the Company has agreed to file and maintain a shelf
registration statement that would allow resales of transfer restricted
Outstanding Notes or Notes owned by the holders. In addition, any holder of
Outstanding Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Notes may be deemed to have received
restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives Notes
for its own account in exchange for Outstanding Notes, where the Outstanding
Notes were acquired by the 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 those Notes. See "Plan of
Distribution". To the extent that Outstanding Notes are tendered and accepted
in the
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Exchange Offer, the trading market for untendered and tendered but unaccepted
Outstanding Notes could be adversely affected. See "The Exchange Offer".
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF OUTSTANDING
NOTES
The Company intends for the Exchange Offer to satisfy its registration
obligations under the Registration Agreement. If the Exchange Offer is
consummated, the Company does not, except in very limited circumstances set
forth in the Registration Agreement, intend to file further registration
statements for the sale or other disposition of Outstanding Notes.
Consequently, following completion of the Exchange Offer, holders of
Outstanding Notes seeking liquidity in their investment would have to rely on
an exemption to the registration requirements under applicable securities
laws, including the Securities Act, with respect to any sale or other
disposition of Outstanding Notes.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on May 29, 1998, to the
Initial Purchasers. The Initial Purchasers subsequently resold the Outstanding
Notes to qualified institutional buyers in reliance on Rule 144A under the
Securities Act. In conjunction with the Offering, the Company entered into the
Registration Agreement with the Initial Purchasers, which requires, among
other things, that the Company file with the Commission a registration
statement under the Securities Act with respect to an offer by the Company to
the holders of the Outstanding Notes ("Holders") to issue and deliver to the
Holders, in exchange for Outstanding Notes, a like principal amount of Notes.
The Registration Agreement obligates the Company to use its best efforts to
cause the registration statement relating to the Exchange Offer to be declared
effective by the Commission under the Securities Act, to commence the Exchange
Offer and to issue and deliver the Notes to Holders. The Notes are to be
issued without a restrictive legend and may be reoffered and resold by the
holder without restrictions or limitations under the Securities Act (other
than any holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act). A copy of the Registration 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 the Outstanding 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.
Each broker-dealer that receives Notes for its own account in exchange for
Outstanding Notes, where the Outstanding Notes were acquired by the 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 Notes. See "Plan of Distribution".
TERMS OF THE EXCHANGE OFFER
On the terms and subject to the conditions set forth in this Prospectus and
in the Letter of Transmittal, the Company will accept any and all Outstanding
Notes validly tendered and not withdrawn before 5:00 p.m., New York City time,
on the Expiration Date. As soon as practicable after the Expiration Date, the
Company will issue $1,000 principal amount of Notes in exchange for $1,000
principal amount of Outstanding Notes accepted in the Exchange Offer. Holders
may tender some or all of their Outstanding Notes pursuant to the Exchange
Offer. However, Outstanding Notes may be tendered only in integral multiples
of $1,000.
The form and terms of the Notes are the same as the form and terms of the
Outstanding Notes except that (i) the Notes have been registered under the
Securities Act and will not bear legends restricting the transfer thereof and
(ii) the holders of the Notes will not be entitled to certain rights
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under the Registration Agreement. The Notes will evidence the same debt as the
Outstanding Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $30,000,000 aggregate principal amount of
the Outstanding Notes was outstanding and registered in the name of Cede &
Co., as nominee for the Depository Trust Company. The Company has fixed the
close of business of August , 1998, as the record date for the Exchange
Offer for purposes of determining the persons to whom this Prospectus and the
Letter of Transmittal will be mailed initially.
Holders of Outstanding Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of the State of Delaware or the Indenture in
connection with the Exchange Offer. 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 Commission thereunder, including Rule
14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Outstanding
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the Notes from the Company.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for those unaccepted Outstanding Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Outstanding 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
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "--Fees and Expenses".
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 and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice and issue a notice of such extension
by press release or other public announcement, each before 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Outstanding Notes, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under "--
Conditions" shall not have been satisfied, by giving oral or written notice of
the delay, extension or termination to the Exchange Agent or (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 to the registered holders. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose the amendment
by means of a prospectus supplement that will be distributed to the registered
Holders, and, depending on the significance of the amendment and the manner of
disclosure to the registered Holders, the Company will extend the Exchange
Offer for a period of five to 10 business days if the Exchange Offer would
otherwise expire during that five to 10 business day period.
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Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
INTEREST ON THE NOTES
The Notes will bear interest from the date of issuance of the Notes.
Interest on the Notes will be payable semiannually on each April 15 and
October 15, commencing on the first such date following the date of issuance
of the Notes. Outstanding Notes that are accepted for exchange will cease to
accrue interest on and after the date on which interest on the Notes begins to
accrue. Accrued and unpaid interest on the Outstanding Notes that are tendered
in exchange for the Notes will be payable on or before the first April 15 or
October 15 following the date of issuance of the Notes.
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes may tender those Outstanding 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 thereon guaranteed if required by the Letter of Transmittal and
mail or otherwise deliver the Letter of Transmittal or the facsimile, together
with the Outstanding Notes and any other required documents, to the Exchange
Agent before 5:00 p.m., New York City time, on the Expiration Date. To be
tendered effectively, the Outstanding Notes, Letter of Transmittal and other
required documents must be received by the Exchange Agent at the address set
forth below under "--Exchange Agent" before 5:00 p.m., New York City time, on
the Expiration Date. Delivery of the Outstanding Notes may be made by book-
entry transfer in accordance with the procedures described below. Confirmation
of book-entry transfer must be received by the Exchange Agent before the
Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the Company
the representation set forth below in the second paragraph under the heading
"--Resale of Notes".
The tender by a Holder and the acceptance thereof by the Company will
constitute agreement between the Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. 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 ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT
TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR THEM.
Any beneficial owner whose Outstanding Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct the
registered Holder to tender on it's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Outstanding 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" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, the guarantee must be by a member firm
of a registered national securities exchange or of the National Association of
Securities
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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 (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Outstanding Notes listed therein, those Outstanding Notes must
be endorsed or accompanied by a properly completed bond power, signed by the
registered Holder as the registered Holder's name appears on the Outstanding
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons 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 the Letter of Transmittal.
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
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 delivery of the Outstanding Notes by
causing the Book-Entry Transfer Facility to transfer the Outstanding Notes
into the Exchange Agent's account with respect to the Outstanding Notes in
accordance with the Book-Entry Transfer Facility's procedures for transfer.
Although delivery of the Outstanding 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 its address set forth below on or before the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under those procedures; provided,
however, that a participant in DTC's book-entry system may, in accordance with
DTC's Automated Tender Offer Program procedures and in lieu of physical
delivery to the Exchange Agent of a Letter of Transmittal, electronically
acknowledge its receipt of, and agreement to be bound by, the terms of the
Letter of Transmittal. Delivery of documents to the Book-Entry Transfer
Facility does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Outstanding 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 Outstanding Notes not properly tendered or any Outstanding Notes the
Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Outstanding
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 Outstanding 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
Outstanding Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Outstanding Notes will not be deemed to have been made until all
defects or irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering Holders, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration
Date.
Each broker-dealer that receives Notes for its own account in exchange for
Outstanding Notes, where the Outstanding Notes were acquired by the broker-
dealer as a result of market-making
25
<PAGE>
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of Notes. See "Plan of
Distribution".
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose Outstanding
Notes are not immediately available, (ii) who cannot deliver their Outstanding
Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, before the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) before the Expiration Date, the Exchange Agent receives from the
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of the Outstanding Notes and the principal amount of Outstanding Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five New York Stock Exchange trading days after the Expiration
Date, the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Outstanding Notes (or a confirmation of
book-entry transfer of those Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility) and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) the properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Outstanding Notes in proper form for transfer (or a confirmation of book-
entry transfer of those Outstanding Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility) and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within five
New York Stock Exchange trading days after the Expiration Date.
On request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time before 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Outstanding Notes in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein before 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 Outstanding Notes to be withdrawn
(the "Depositor"), (ii) identify the Outstanding Notes to be withdrawn
(including the certificate number(s) and principal amount of the Outstanding
Notes, or, in the case of Outstanding Notes transferred by book-entry
transfer, the name and number of the account at the Book-Entry Transfer
Facility to be credited), (iii) be signed by the Holder in the same manner as
the original signature on the Letter of Transmittal by which the Outstanding
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with
respect to the Outstanding Notes register the transfer of those Outstanding
Notes in the name of the person withdrawing the tender, (iv) specify the name
in which any such Outstanding Notes are to be registered, if different from
that of the Depositor and (v) if applicable because the Outstanding Notes have
been tendered pursuant to book-entry procedures, specify the name and number
of the participant's account at DTC to be credited, if different from that of
the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the
26
<PAGE>
Company, whose determination shall be final and binding on all parties. Any
Outstanding Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Notes will be issued with
respect thereto unless the Outstanding Notes so withdrawn are validly
retendered. Any Outstanding Notes that have been tendered but that are not
accepted for exchange, will be returned to the Holder thereof without cost to
the Holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time before the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to issue Notes for, any Outstanding
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of any Outstanding Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
that might materially impair the ability of the Company to proceed with the
Exchange Offer or any material adverse development has occurred in any
existing action or proceeding with respect to the Company or any of its
subsidiaries;
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred that might materially impair the ability of the Company to proceed
with the Exchange Offer;
(c) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted that might materially impair
the ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company;
(d) there shall occur a change in the current interpretation by the staff
of the Commission that permits the Notes issued pursuant to the Exchange
Offer in exchange for Outstanding Notes to be offered for resale, resold
and otherwise transferred by Holders thereof (other than broker- dealers
and any Holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act; provided that the
Notes are acquired in the ordinary course of the Holders' business and the
Holders have no arrangement or understanding with any person to participate
in the distribution of the Notes; or
(e) any governmental approval has not been obtained, which approval the
Company shall deem necessary for the consummation of the Exchange Offer as
contemplated hereby.
If the Company determines in good faith and in the exercise of its
reasonable discretion that any of the conditions are not satisfied, the
Company may (i) refuse to accept any Outstanding Notes and return all tendered
Outstanding Notes to the tendering Holders, (ii) extend the Exchange Offer and
retain all Outstanding Notes tendered before the expiration of the Exchange
Offer, subject, however, to the rights of Holders to withdraw tenders of
Outstanding Notes (see "--Withdrawal of Tenders") or (iii) waive the
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Outstanding Notes which have not been withdrawn. If such
waiver constitutes a material change to the Exchange Offer, the Company will
promptly disclose the waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and, depending on the significance of
the waiver and the manner of disclosure to the registered Holders, the Company
will extend the Exchange Offer for a period of five to 10 business days if the
Exchange Offer would otherwise expire during that five to 10 day period.
27
<PAGE>
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of his Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Hand Delivery: By Overnight Courier: By Mail:
111 Broadway 770 Broadway Box 843
Lower Level 13th Floor Peter Cooper Station
New York, NY 10005 New York, NY 10003 New York, NY 10276
Attn: Corporate Trust Attn: Corporate Trust Attn: Corporate Trust
Service Window
By Facsimile Transmission: For Information:
(For Eligible Institutions Only) (800) 548-6565
(212) 420-6152
Confirm by Telephone:
(800) 548-6565
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation is being made by mail;
however, additional solicitation may be made by telegraph, telephone or in
person by officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and registration
expenses, including fees and expenses of the Trustee, filing fees, blue sky
fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Outstanding Notes pursuant to the Exchange Offer. If, however,
certificates representing the Notes or the Outstanding Notes for the principal
amounts not tendered or accepted for exchange are to be delivered to, or are
to be issued 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 the Outstanding Notes pursuant to the Exchange Offer,
then the amount of that transfer tax (whether imposed on the registered Holder
or any other person) will be payable by the tendering Holder.
ACCOUNTING TREATMENT
The Notes will be recorded at the same carrying value as the Outstanding
Notes, which is face value as adjusted for original issue discount, as
reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be amortized over the term of the Notes.
RESALE OF NOTES
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Notes issued in the Exchange Offer in exchange for the Outstanding Notes may
be offered for sale, resold or otherwise transferred by any holder thereof
without compliance with the registration and prospectus delivery requirements
of the Securities Act. Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to third parties, the Company
believes that Notes issued pursuant to the Exchange Offer in exchange for
28
<PAGE>
Outstanding Notes may be offered for resale, resold and otherwise transferred
by any holder of Notes (other than any holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the Notes are acquired in the ordinary course of
the holder's business and the holder does not intend to participate and has no
arrangement or understanding with any person to participate in the
distribution of the Notes. Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of participating, in a
distribution of the Notes may not rely on the position of the staff of the
Commission enunciated in Exxon Capital Holdings Corporation (available April
13, 1989) and Morgan Stanley & Co., Incorporated (June 5, 1991), or similar
no-action letters, but rather must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. In addition, any such resale transaction should be covered by an
effective registration statement containing the selling security holders
information required by Item 507 of Regulation S-K of the Securities Act.
Each broker-dealer that receives Notes for its own account in exchange for
Outstanding Notes, where the Outstanding Notes were acquired by the 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 Notes. See "Plan of Distribution".
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving the Notes, whether or not that person is a Holder, (ii)
neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of the Notes
and (iii) the Holder and such other person acknowledge that if they
participate in the Exchange Offer for the purpose of distributing the Notes
(a) they must, in the absence of an exemption therefrom, comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Notes and cannot rely on the no- action
letters referenced above and (b) failure to comply with those requirements in
such instance could result in the Holder incurring liability under the
Securities Act for which the Holder is not indemnified by the Company.
Further, by tendering in the Exchange Offer, each Holder that may be deemed an
"affiliate" (as defined under Rule 405 of the Securities Act) of the Company
will represent to the Company that the Holder understands and acknowledges
that the Notes may not be offered for resale, resold or otherwise transferred
by that Holder without registration under the Securities Act or an exemption
therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Notes without compliance with the registration and prospectus
delivery requirements of the Securities Act.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Agreement, and, except
as described under "--Shelf Registration Statement", Holders of Outstanding
Notes who do not tender their Outstanding Notes will not have any further
registration rights under the Registration Agreement or otherwise.
Accordingly, any Holder of Outstanding Notes that does not exchange its
Outstanding Notes for Notes will continue to hold the untendered Outstanding
Notes and will be entitled to all the rights and limitations applicable
thereto under the Indenture, except to the extent those rights or limitations
that, by their terms, terminate or cease to have further effectiveness as a
result of the Exchange Offer.
The Outstanding Notes that are not exchanged for Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such
Outstanding Notes may be resold only (i) to the Company (on redemption thereof
or otherwise), (ii) pursuant to an effective registration statement
29
<PAGE>
under the Securities Act, (iii) so long as the Outstanding Notes are eligible
for resale pursuant to Rule 144A, to a qualified institutional buyer within
the meaning of Rule 144A under the Securities Act in a transaction meeting the
requirements of Rule 144A, (iv) outside the United States to a foreign person
pursuant to the exemption from the registration requirements of the Securities
Act provided by Regulation S thereunder, (v) to an institutional accredited
investor that, before the transfer, furnishes to United States Trust Company
of New York, as trustee, a signed letter containing certain representations
and agreements relating to the restrictions on transfer of the Outstanding
Notes evidenced thereby (the form of which letter can be obtained from the
Trustee) or (vi) pursuant to another available exemption from the registration
requirements of the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States.
Accordingly, to the extent that Outstanding Notes are tendered and accepted
in the Exchange Offer, the trading market for the untendered Outstanding Notes
could be adversely affected.
SHELF REGISTRATION STATEMENT
If (i) the Company determines that the Exchange Offer may not be consummated
as soon as practicable after the Expiration Date because it would violate
applicable law or the applicable interpretations of the staff of the
Commission, (ii) the Exchange Offer is not consummated within 210 days of the
date of the Registration Agreement, (iii) the Initial Purchasers so request
with respect to the Outstanding Notes not eligible to be exchanged for Notes
in the Exchange Offer and held by them following consummation of the Exchange
Offer or (iv) any holder of an Outstanding Note (other than an Exchanging
Dealer) is not eligible to participate in the Exchange Offer or, in the case
of any holder of Outstanding Notes (other than an Exchanging Dealer) that
participates in the Exchange Offer, the holder does not receive freely
tradeable Notes on the date of the exchange for validly tendered (and not
withdrawn) Notes, the Company has agreed to file and maintain a shelf
registration statement that would allow resales of transfer restricted
Outstanding Notes or Notes owned by those holders.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Outstanding Notes are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied on as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein. The Exchange Offer is not being made to
(nor will tender be accepted from or, on behalf of) holders of Outstanding
Notes in any jurisdiction in which the making of the Exchange Offer or the
acceptance thereof would not be in compliance with the laws of that
jurisdiction. However, the Company may, at its discretion, take such action as
it may deem necessary to make the Exchange Offer in that jurisdiction and
extend the Exchange Offer to holders of Outstanding Notes in that
jurisdiction. In any jurisdiction the securities laws or blue sky laws of
which require the Exchange Offer to be made by a licensed broker or dealer,
the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of that
jurisdiction.
The Company may in the future seek to acquire untendered Outstanding Notes
in open market or privately negotiated transactions, through subsequent
exchange offers or otherwise. The Company has no present plans to acquire any
Outstanding Notes that are not tendered in the Exchange Offer or to file a
registration statement to permit resales of any untendered Outstanding Notes,
except for the filing, if required, of the Shelf Registration Statement.
30
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Agreement. The Company will not receive any
cash proceeds from the issuance of the Notes offered hereby. In consideration
for issuing the Notes contemplated in this Prospectus, the Company will
receive Outstanding Notes in like principal amount, the form and terms of
which are the same as the form and terms of the Notes (which they replace),
except as otherwise described herein. The Outstanding Notes surrendered in
exchange for Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Notes will not result in any increase or decrease
in the indebtedness of the Company.
The net proceeds to the Company from the Offering were approximately $29.7
million. The net proceeds were used to repay outstanding indebtedness under
the Credit Facility. As of June 30, 1998, borrowings outstanding under the
Credit Facility was approximately $100.0 million. Of this amount,
approximately $83.0 million was incurred to finance the SPR Acquisition, with
the remainder incurred in connection with the Company's exploration,
development and production activities (including drilling expenditures and the
acquisition of leaseholds and seismic data) and for general corporate
purposes. The indebtedness under the Credit Facility bore interest at an
average rate of 7.32% per annum as of June 30, 1998 and has a final maturity
date of December 1, 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources". The repayment of outstanding indebtedness under the Credit
Facility did not reduce the commitments under the Credit Facility, and the
Company intends to borrow additional amounts in the future under the Credit
Facility to fund its development, exploration and acquisition activities.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1998. See the consolidated financial statements of the
Company and notes thereto, "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
--------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Long-term debt:
Credit Facility(/1/)................................. $ 100,000
13 1/2% Senior Notes Due 1999........................ 435
10 3/8% Senior Subordinated Notes Due 2006, Series
B................................................... 120,858
10 3/8% Senior Subordinated Notes Due 2006, Series
D(/2/).............................................. 29,699
7 7/8% Convertible Subordinated Notes due 1999....... 30,644
8 1/2% Convertible Subordinated Debentures due 2000.. 24,730
---------
Total long-term debt............................... 306,366
Stockholders' deficit.................................. (24,421)
---------
Total capitalization............................... $ 281,945
=========
</TABLE>
- --------
(1) As of June 30, 1998, the Credit Facility had a borrowing base of $138.0
million. As of June 30, 1998, the Company had available for borrowing
thereunder $36.5 million (including outstanding letters of credit having
an aggregate face amount of $1.5 million). On July 24, 1998, the Company
sold its entire interest in the Waskom field in Harrison County, Texas
for the total consideration of $17.4 million. As a result of the sale of
these properties, effective on the sale date, the Company's borrowing
base under the Credit Facility was reduced by $8.0 million. The proceeds
from the sale were used to reduce outstanding borrowings under the Credit
Facility. The borrowing base under the Credit Facility is redetermined at
least semiannually and is scheduled to be redetermined next on November
1, 1998, at which time the borrowing base could be decreased. See
"Description of the Credit Facility".
(2) Assumes a complete exchange of Series C notes for Series D notes pursuant
to the Exchange Offer.
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected historical financial data for the
Company for the five years ended and as of December 31, 1997 and for the six
months ended and as of June 30,1997 and 1998. The historical financial
information for the five years ended December 31, 1997 is derived from the
Company's audited consolidated financial statements. The historical financial
information for the year ended December 31, 1995 reflects the Consolidation in
February 1995. See "Business and Properties--Company History". The historical
financial information for the year ended December 31, 1997 reflects the impact
of the SPR Acquisition, which was consummated as of December 1, 1997. The SPR
Acquisition was treated as a purchase for financial accounting purposes. The
selected historical financial data for the six months ended June 30, 1997 and
1998 are derived from financial statements that are unaudited but include all
adjustments, consisting solely of normal recurring adjustments, that the
Company considers necessary for a fair presentation of its financial position
and results of operations for these periods. The results for the six months
ended June 30, 1998 are not necessarily indicative of the results for the full
year. This information should be read in conjunction with "Capitalization,"
"Unaudited Condensed Consolidated Pro Forma Financial Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and related Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- --------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Oil and gas revenues.... $ 21,064 $ 16,822 $ 36,998 $ 60,854 $ 75,864 $ 35,125 $ 44,209
Interest and other in-
come................... 1,506 1,416 1,763 1,429 274 234 66
-------- -------- --------- -------- --------- -------- --------
Total revenues........ 22,570 18,238 38,761 62,283 76,138 35,359 44,275
-------- -------- --------- -------- --------- -------- --------
Production expenses..... 3,993 3,760 10,835 10,709 10,955 4,931 10,744
Exploration expenses.... 14,226 7,404 23,387 5,438 5,433 1,882 6,669
General and administra-
tive expenses.......... 4,079 5,172 7,030 8,953 6,875 3,987 3,617
Interest and other debt
expenses............... 6,638 4,571 21,956 24,401 25,071 12,039 16,315
Restructuring ex-
penses(/1/)............ -- 1,814 1,115 4,276 -- -- --
Depreciation, depletion
and amortization....... 18,857 20,474 35,591 20,440 25,853 12,065 21,186
Impairment of oil and
gas properties(/2/).... -- -- 150,138 -- -- -- --
-------- -------- --------- -------- --------- -------- --------
Income (loss) before
income taxes and
extraordinary item.... (25,223) (24,957) (211,291) (11,934) 1,951 455 (14,256)
Provision (benefit) for
taxes -- -- -- -- -- -- --
-------- -------- --------- -------- --------- -------- --------
Net income (loss) be-
fore extraordinary
item.................. (25,223) (24,957) (211,291) (11,934) 1,951 455 (14,256)
Extraordinary
loss(/3/).............. -- -- -- (17,030) -- -- --
-------- -------- --------- -------- --------- -------- --------
Net income (loss)...... $(25,223) $(24,957) $(211,291) $(28,964) $ 1,951 $ 455 $(14,256)
======== ======== ========= ======== ========= ======== ========
OTHER FINANCIAL DATA:
EBITDAX(/4/)............ $ 14,498 $ 9,306 $ 20,896 $ 42,621 $ 58,308 $ 26,441 $ 29,914
Cash interest
expenses(/5/).......... 3,686 2,739 18,354 19,231 20,774 9,911 13,703
Capital
expenditures(/6/)...... 41,055 44,976 52,240 47,601 53,140 23,974 28,971
Ratio of EBITDAX to cash
interest
expenses(/5/).......... 3.9x 3.4x 1.1x 2.2x 2.8x 2.7x 2.2x
Ratio of total debt to
EBITDAX................ 2.5x 4.3x 7.9x 4.3x 4.9x N/A N/A
Ratio of earnings to
fixed charges(/7/) .... N/A N/A N/A N/A 1.1x 1.0x N/A
STATEMENT OF CASH FLOWS
DATA:
Cash provided by (used
in) operating
activities............. $ 21,891 $ (1,672) $ (1,806) $ 9,262 $ 39,604 $ 16,363 $ 15,282
Cash used in investing
activities............. (40,973) (44,711) (43,224) (53,392) (164,275) (23,974) (28,971)
Cash provided by
financing activities... 15,370 44,944 42,114 41,848 120,763 3,621 13,624
BALANCE SHEET DATA:
Total assets............ $ 87,145 $106,513 $ 151,342 $189,227 $ 322,602 $189,398 $321,261
Property and equipment,
net.................... 58,018 74,912 128,642 158,468 293,613 168,495 294,729
Long term debt,
excluding current
maturities............. 34,814 37,242 164,980 184,253 286,183 194,216 306,366
Stockholders' equity
(deficit).............. 27,415 45,180 (45,568) (30,535) (5,621) (34,459) (24,421)
</TABLE>
32
<PAGE>
- -------
(1) Restructuring charges relate to the consolidation of the Company and its
predecessors. See "Business and Properties--Company History".
(2) Reflects noncash impairment charges against the carrying value of proved
and unproved properties under SFAS 121. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Notes
to the Company's Consolidated Financial Statements.
(3) Includes costs incurred in connection with the refinancing of
substantially all of the 13 1/2% Notes and represents the excess of the
aggregate purchase price of substantially all of the 13 1/2% Notes over
their carrying value as of the date of such refinancing.
(4) EBITDAX is calculated as income (loss) before interest and other debt
expenses, income taxes, exploration expenses, restructuring expenses,
depletion, depreciation, amortization and impairment of oil and gas
properties. EBITDAX is not a measure of cash flows as determined by GAAP.
The Company has included information concerning EBITDAX because EBITDAX is
a measure used by certain investors in determining a company's historical
ability to service its indebtedness. EBITDAX should not be considered as
an alternative to, or more meaningful than, net income or cash flows as
determined in accordance with GAAP as an indicator of Kelley's operating
performance or liquidity, and it may not be comparable to similarly titled
measures reported by other companies.
(5) Cash interest expenses consists of interest and other debt expenses less
accretion of original issue discount, accretion of debt valuation discount
and amortization of deferred debt issuance costs.
(6) Capital expenditures excludes oil and gas property acquisitions of $11.6
million and $111.1 million for the years ended December 31, 1996 and 1997,
respectively.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pre-tax income from continuing operations (Income (loss) before
income taxes and extraordinary item excluding interest income of $0.8
million, $0.8 million, $0.6 million, $0.9 million and $0.2 million for the
years ended December 31, 1993, 1994, 1995, 1996 and 1997, respectively,
and $0.1 million and $46,000 for the six months ended June 30, 1997 and
1998, respectively) plus fixed charges. Fixed charges consist of interest
expense and other debt expenses. For the years ended December 31, 1993,
1994, 1995 and 1996 earnings were insufficient to cover fixed charges by
$26.0 million, $25.8 million, $211.9 million and $12.8 million,
respectively, and $14.3 million for the six months ended June 30, 1998.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated statements of income for the
year ended December 31, 1997 give effect to the SPR Acquisition and the
Offering as if they occurred on January 1, 1997. The unaudited pro forma
condensed consolidated statement of income for the six months ended June 30,
1998 gives effect to the Offering as if it occurred on January 1, 1997. A pro
forma balance sheet as of June 30, 1998 is not presented since the Offering
occurred prior to that date and is reflected in the unaudited balance sheet as
of June 30, 1998 contained in the Consolidated Financial Statements of the
Company included elsewhere in this Prospectus.
The unaudited pro forma condensed consolidated statement of income for the
year ended December 31, 1997 is based upon the Consolidated Financial
Statements of the Company and the historical Financial Statements of the SPR
Properties included elsewhere in this Prospectus and should be read in
conjunction with such financial statements and related notes thereto. The
unaudited pro forma condensed statement of income for the six months ended
June 30, 1998 is based on the unaudited consolidated income statement of the
Company.
The pro forma adjustments are based upon available information and certain
assumptions that management of the Company believes are reasonable. The pro
forma financial information does not purport to represent what the Company's
results of operations would actually have been had the SPR Acquisition and the
Offering in fact occurred on the assumed dates. In addition, the pro forma
financial statements are not necessarily indicative of the results of future
operations of the Company and should be read in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Consolidated Financial Statements of the
Company and the related Notes thereto included elsewhere in this Prospectus.
34
<PAGE>
KELLEY OIL & GAS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 SIX MONTHS ENDED JUNE 30, 1998
---------------------------------- -------------------------------
PRO FORMA PRO FORMA PRO
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------- ---------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Revenues.......... $76,138 $36,004 (a) $112,142 $ 44,275 $ 44,275
Production expenses..... 10,955 5,134 (a) 16,089 10,744 10,744
Exploration expenses.... 5,433 5,433 6,669 6,669
General and
administrative
expenses............... 6,875 716 (b) 7,591 3,617 3,617
Interest and other debt
expenses............... 25,071 6,998 (c) 32,069 16,315 $ 487(c) 16,802
Depreciation, depletion
and amortization....... 25,853 24,729 (d) 50,582 21,186 21,186
------- ------- -------- -------- ----- --------
Total expenses........ 74,187 37,577 111,764 58,531 487 59,018
------- ------- -------- -------- ----- --------
Net income (loss)....... 1,951 (1,573) 378 (14,256) (487) (14,743)
Cumulative preferred
stock dividends........ (4,582) (4,582) (2,291) (2,291)
------- ------- -------- -------- ----- --------
Net loss applicable to
common stock .......... $(2,631) $(1,573) $ (4,204) $(16,547) $(487) $(17,034)
======= ======= ======== ======== ===== ========
Loss per common share... $ (.03) $ (.03) $ (.13) $ (.14)
======= ======== ======== ========
Average common
shares outstanding..... 100,757 24,750 (e) 125,507 125,725 125,725
======= ======= ======== ======== ===== ========
</TABLE>
- --------
(a) To reflect the historical operations of the SPR Properties for periods
prior to December 1, 1997, the closing date of the SPR Acquisition.
(b) To record general and administrative expenses to reflect salaries and
related costs associated with additional employees hired as a result of
acquiring the SPR Properties.
(c) The pro forma adjustment to interest expense includes the following:
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Credit Facility...................................... $3,429 $(1,097)
Amortization of deferred financing on Credit
Facility............................................ 408 --
Senior Subordinated Notes............................ 3,113 1,556
Amortization of premium on Senior Subordinated
Notes............................................... (37) (20)
Amortization of deferred financing costs on Senior
Subordinated Notes.................................. 85 48
------ -------
Total adjustment................................. $6,998 $ 487
====== =======
</TABLE>
The Company borrowed $83.0 million under the Credit Facility to finance the
SPR Acquisition. The net proceeds from the Offering were used to repay a
portion of the amounts outstanding with the Credit Facility.
(d) To record depreciation, depletion and amortization expense on the SPR
Properties (including a provision for future plugging and abandonment
costs) based on a preliminary purchase price allocation.
(e) Exercise by Contour Production Company L.L.C. ("Contour") of its right
pursuant to its Option Agreement dated February 15, 1996 ("Option
Agreement"), to purchase 27.0 million shares of the Company's Common
Stock.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the information
contained in the Financial Statements of the Company included elsewhere in
this Prospectus.
GENERAL
Introduction. The Company is engaged in oil and natural gas exploration,
development, production and acquisition. Effective as of December 1, 1997, the
Company consummated the SPR Acquisition for approximately $110.0 million,
which was financed through a $27.0 million equity investment in the Company
and a drawing of $83.0 million under the Credit Facility. The assets acquired
include interests in proved oil and natural gas reserves primarily located in
the shallow waters of the Gulf of Mexico, Louisiana, and east Texas, as well
as exploratory properties in leasehold acreage in those areas and in the
Permian Basin in west Texas and New Mexico. In addition to its oil and gas
development and producing activities, the Company markets natural gas and
operates natural gas gathering and transportation systems in Louisiana.
Hedging Activities. The Company periodically uses forward sales contracts,
natural gas price swap agreements, natural gas basis swap agreements and
options to reduce exposure to downward price fluctuations on its natural gas
production. The Company does not engage in speculative transactions and
generally does not enter into hedging arrangements for more than 75% of its
anticipated future production. During 1997 and the first half of 1998, the
Company used price and basis swap agreements. Price swap agreements generally
provide for the Company to receive or make counterparty payments on the
differential between a fixed price and a variable indexed price for natural
gas. Basis swap agreements generally provide for the Company to receive or
make counterparty payments on the differential between a variable indexed
price and the price it receives from the sale of natural gas production, and
are used to hedge against unfavorable price movements in the relationship
between such variable indexed price and the price received for such
production. Gains and losses realized by the Company from hedging activities
are included in oil and gas revenues and average sales prices in the period
that the related production is sold. The Company's hedging activities also
cover the oil and gas production attributable to the interest in such
production of the public unitholders in its subsidiary partnerships. The
credit risk exposure from counterparty nonperformance on natural gas forward
sales contracts and derivative financial instruments is generally the amount
of unrealized gains under the contracts. The Company has not experienced
counterparty nonperformance on these agreements and does not anticipate any in
future periods.
Through natural gas price swap agreements, approximately 65% of the
Company's natural gas production for 1997 and 37% of the Company's natural gas
production for the first half of 1998 was affected by its hedging transactions
at an average NYMEX quoted price of $2.35 per Mmbtu and $2.31 per Mmbtu for
1997 and the first half of 1998, respectively, before transaction and
transportation costs. As of June 30, 1998, approximately 31% of the Company's
anticipated natural gas production for the remainder of 1998 had been hedged
by natural gas price swap agreements at an average NYMEX quoted price of $2.28
per Mmbtu before transaction and transportation costs. Certain natural gas
price swap agreements outstanding at June 30, 1998 grant the counterparty the
option to double the contract volume at a specified price. If this option is
exercised on all contracts outstanding at June 30, 1998, approximately 49% of
the Company's anticipated natural gas production for July 1998 through
December 1998 has been hedged by natural gas price swap agreements at an
average NYMEX quoted price of $2.30 per Mmbtu before transaction and
transportation costs. In addition, as of June 30, 1998, the Company had
outstanding natural gas basis swap agreements covering approximately 28% of
its anticipated natural gas production for July 1998 through September 1998.
At June 30, 1998, the unrealized loss of the Company's existing hedging
instruments for future production months in 1998 approximated $1.5 million.
The unrealized loss
36
<PAGE>
would be $2.5 million assuming that counterparties exercise their option to
double the contract volume where allowed, as discussed above.
Hedging activities decreased revenues by approximately $4.2 million in 1997
and increased revenues by approximately $0.8 million in the first half of 1998
as compared to estimated revenues for those periods had no hedging activities
been conducted. At December 31, 1997, the unrealized gain on the Company's
existing hedging instruments for future production months in 1998 approximated
$1.4 million.
Subsequent Event
On July 24, 1998, the Company sold, effective June 1, 1998, its entire
interest in the Waskom field in Harrison County, Texas for total consideration
of $17.4 million. These non-core assets were acquired by the Company in the
December 1997 asset purchase from SCANA Petroleum Resources, Inc. The
properties were producing approximately 4.5 million cubic feet equivalent per
day. The Company does not anticipate that the sale of these properties will
have a material impact on its financial position or results of operations. See
Capital Resources.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 and 1997. The Company's oil and gas revenues
of $44.2 million for the first half of 1998 increased 26% compared to $35.1
million in the same period of 1997 primarily as a result of an increase in gas
production (36%) and oil production (122%), partially offset by decreases in
gas prices (6%) and oil prices (31%). The increase in gas and oil production
is primarily attributable to properties acquired by the Company during the
fourth quarter of 1997. Gas production and average prices for the six months
ended June 30, 1998 were 19.5 Bcf and $2.11 per Mcf, compared to 14.3 Bcf and
$2.24 per Mcf for the same period in 1997. Oil production and average prices
for the six months ended June 30, 1998 were 224,000 barrels and $13.88 per
barrel, compared to 101,000 barrels and $20.25 per barrel for the same period
in 1997.
Production expenses for the first six months of 1998 increased 118% to $10.7
million from $4.9 million in the same period last year, resulting primarily
from properties acquired during the fourth quarter of 1997 and higher current
period workover expenses. Higher cost production from the acquired Gulf of
Mexico properties contributed to an 82% increase in lifting costs (production
expenses less ad valorem and severance taxes) per Mcfe for the first six
months of 1998 to $0.40, when compared to the same period in 1997.
Exploration expenses totaled $6.7 million in the first half of 1998 and $1.9
million in the corresponding period of 1997, an increase of 253%, primarily
due to higher current period seismic expenditures ($2.4 million), dry hole
expenses ($1.5 million) and unevaluated leasehold abandonment expenses ($0.6
million).
General and administrative expenses of $3.6 million in the first six months
of 1998 decreased 10% compared to $4.0 million in the corresponding period
last year, reflecting the Company's cost containment efforts. On a unit of
production basis, general and administrative expenses were $0.17 per Mcfe in
the first half of 1998 compared to $0.27 per Mcfe in the corresponding period
of 1997 primarily reflecting higher production levels in the current period
without a corresponding increase in general and administrative expenses.
Interest and other debt expenses of $16.3 million in the first half of 1998
increased 36% from $12.0 million in the same period of 1997. The increase in
interest expenses resulted primarily from higher average debt levels during
the current period. In addition to its 1998 interest expenses of $13.7
million, the Company recorded non-cash charges in the first six months of 1998
of $1.1 million for amortization of debt issuance costs, $0.5 million for
accretion of note discount, net of accretion of note premium and $1.0 million
for accretion of debt valuation discount.
37
<PAGE>
Depreciation, depletion and amortization expenses increased 75% from $12.1
million in the first six months of 1997 to $21.2 million in the current
period, primarily as a result of higher first half 1998 production and an
increase in the units-of-production depreciation, depletion and amortization
rate for oil and gas activities from $0.80 per Mcfe in the first half of 1997
to $1.00 per Mcfe in the current period.
The Company recognized a net loss of $14.3 million in the first six months
of 1998 and net income of $0.5 million in the same period last year. The
reasons for the decline in earnings are described in the foregoing discussion.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of results to be expected for the full year.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996. The
Company's oil and gas revenues of $75.9 million for 1997 increased 25%
compared to $60.9 million in 1996 primarily as a result of an increase in gas
production (29%), partially offset by lower oil prices (13%) and gas prices
(1%). Gas production and average prices for the year ended December 31, 1997
were 30.2 Bcf and $2.27 per Mcf, compared to 23.5 Bcf and $2.30 per Mcf for
the same period in 1996. Oil production and average prices for the year ended
December 31, 1997 were 226,000 barrels and $19.34 per barrel compared to
232,000 barrels and $22.11 per barrel for the same period in 1996. The
increase in gas production is primarily due to the Company's drilling
activities in north Louisiana and the addition of one month of production from
the SPR properties partially offset by the sale of one-half of its interest in
23 wells and related facilities in the Houma Embayment in Terrebonne Parish,
Louisiana in the fourth quarter of 1996.
Interest and other income decreased 79% from $1.4 million in 1996 to $0.3
million in 1997 primarily due to higher 1996 interest income resulting from
invested funds received from the sale of common stock in February 1996 and
gains on the sale of assets recognized in 1996.
Production expenses for 1997 increased 3% to $11.0 million from $10.7
million in the prior year, primarily reflecting higher overall production
levels. On a unit basis, lifting costs decreased to $0.23 per Mcfe in 1997
compared to $0.31 per Mcfe in 1996, primarily reflecting lower average costs
on north Louisiana production, which increased in proportion to other higher
cost production.
Exploration expenses remained constant from 1996 to 1997 at $5.4 million.
Increased dry hole expenses were offset by a reduction in lease rental expense
reflecting a joint exploration agreement effective December 1996 in south
Louisiana.
General and administrative expenses of $6.9 million in 1997 decreased 23%
compared to $9.0 million last year, reflecting efficiencies obtained in the
realignment of the workforce. This decrease was somewhat offset by a reduction
in 1997 in the level of general and administrative expenses either being
capitalized or allocated to exploration expense. On a unit basis, general and
administrative expenses were $0.22 per Mcfe in 1997 compared to $0.36 per Mcfe
in 1996.
Interest and other debt expenses of $25.1 million in 1997 increased 3% from
$24.4 million in 1996. The increase in interest expense resulted primarily
from higher average debt levels during 1997 and the payment of interest
associated with the settlement of a lawsuit relating to the consolidation of
the Company's predecessor in 1995. See Note 8 to the Consolidated Financial
Statements appearing elsewhere in this Prospectus. These were partially offset
by lower interest rates under the 10 3/8% Senior Subordinated Notes than under
the 13 1/2% Senior Notes retired in October 1996, and lower debt amortization
expenses as a result of the refinancing of the 13 1/2% Senior Notes and the
Credit Facility. See "--Liquidity and Capital Resources." In addition to its
1997 interest
38
<PAGE>
expense of $20.9 million, the Company recorded non-cash charges in 1997 of
$1.3 million for amortization of debt issuance costs, $0.9 million for
accretion of note discount and $2.0 million for accretion of debt valuation
discount.
Restructuring expense in 1996 was $4.3 million. There was no restructuring
expense in 1997.
Depreciation, depletion and amortization expense increased 27% from $20.4
million in 1996 to $25.9 million in 1997, primarily as a result of higher 1997
production levels. The units-of-production depreciation, depletion and
amortization rate for oil and gas activities was $0.80 per Mcfe in both 1996
and 1997.
The Company recognized net income of $2.0 million in 1997 and a net loss
before extraordinary item of $(11.9) million in the prior year. The reasons
for the earnings improvement are described in the foregoing discussion.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995. The
Company's oil and natural gas revenues of $60.9 million for 1996 increased 65%
compared to $37.0 million for 1995 as a result of increased natural gas prices
and a 32% increase in natural gas production to 23.5 Mmcf in 1996. The average
price of natural gas increased 35% to $2.30 per Mcf in 1996 from $1.71 per Mcf
in 1995. The Company's production of natural gas steadily declined during the
second and third quarters of 1995 as a result of poor drilling results in
south Louisiana. During the fourth quarter of 1995, the Company's prior
management implemented a significant reduction in drilling activity, which
adversely affected production in the first half of 1996. The Company's
accelerated drilling program during 1996 increased production substantially in
the second half of 1996. Production of crude oil and natural gas liquids
during 1996 totaled 232,000 barrels with an average sales price of $22.11 per
barrel compared to 319,000 barrels at $17.37 per barrel in 1995, representing
a volume decrease of 27% and a price increase of 27%. The decline in oil and
condensate volumes was due to the decline in south Louisiana gas production.
Production expenses for 1996 decreased 1% to $10.7 million from $10.8
million in 1995. On a unit basis, production expenses decreased 22% from $0.55
per Mcfe in 1995 to $0.43 per Mcfe in 1996, reflecting lower average costs on
production from north Louisiana, which increased in proportion to other higher
cost production from south Louisiana.
Exploration expenses totaled $5.4 million in 1996 and $23.4 million in 1995,
a decrease of 77%, primarily as a result of a temporary suspension of
exploratory drilling pending negotiation of a joint exploration agreement in
south Louisiana. The decrease in this activity also reflected lower geological
and geophysical expenses and unproved leasehold impairment costs.
General and administrative expenses of $9.0 million in 1996 increased 29%
compared to $7.0 million in 1995. The increase in expense was primarily
attributable to bonuses and interim salaries paid in connection with the
Contour Transaction (as defined) to certain members of the Company's prior
management team and a decrease in the level of general and administrative
expenses capitalized or charged to exploration expense. See "Business and
Properties--Company History." The amounts capitalized or charged to
exploration expense were $3.3 million in 1996 compared to $6.2 million in
1995. On a unit basis, general and administrative expenses were $0.36 per Mcfe
in 1995 and 1996.
Interest and other debt expenses of $24.4 million in 1996 increased 11% from
$22.0 million in 1995. The increase in interest expense resulted primarily
from higher interest rates under the 13 1/2% Notes than under the $90.0
million of bank debt refinanced with proceeds from the offering of the 13 1/2%
Notes in June 1995 and higher average debt levels during 1996. Interest
expense on the 13 1/2% Notes was recorded for approximately ten months in 1996
compared to six months in 1995. In October 1996 substantially all of the 13
1/2% Notes were replaced with the Existing Notes. Included
39
<PAGE>
in 1996 interest expense were non-cash charges of $2.1 million for
amortization of debt issuance costs, $0.9 million for accretion of note
discount, $2.0 million for accretion of debt valuation discount and $0.1
million in imputed interest associated with the acquisition of oil and natural
gas properties.
Depreciation, depletion and amortization decreased 43% from $35.6 million in
1995 to $20.4 million in 1996 despite the increase in production during 1996,
primarily as a result of lower depletion rates following impairment charges
aggregating $150.1 million recognized in the fourth quarter of 1995 against
the carrying value of the Company's oil and natural gas properties under
Financial Accounting Standards Board's Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121") and an increase in quantities of proved developed reserves. On a
unit basis, depreciation, depletion and amortization for oil and natural gas
activities decreased from $1.79 per Mcfe in 1995 to $0.80 per Mcfe in 1996.
The Company's cost-cutting measures during 1996 included a $4.3 million
restructuring charge in 1996 associated primarily with staff reductions and
related severance settlements with certain employees and various
reorganization costs.
The Company recognized net losses before extraordinary items of $(11.9)
million in 1996 and $(211.3) million in 1995. The reasons for the earnings
improvement are described in the foregoing discussion.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Net cash provided by operating activities, before working capital
adjustments, during the first six months of 1998 aggregated $16.2 million.
Funds used in investing activities were comprised of capital expenditures of
$29.0 million. Funds provided by financing activities of $13.6 million were
comprised primarily of net proceeds of $29.7 million from the sale of the
Company's 10 3/8% Senior Subordinated Notes, Series C (see Capital Resources)
partially offset by net principal repayments of $11.3 million on the bank
credit facility, the payment of $4.6 million of preferred stock dividends and
a cash outlay of $0.2 million for the partial redemption of the Company's 7
7/8% Convertible Subordinated Notes. As a result of these activities, cash and
cash equivalents decreased from $0.2 million at December 31, 1997 to $0.1
million at June 30, 1998. As of June 30, 1998, the Company had a working
capital deficit of $14.5 million, compared to a working capital deficit of
$15.2 million at the end of 1997. The balance of the working capital deficit
will be funded through operations and/or bank borrowings.
Net cash provided by operating activities, before working capital
adjustments, during 1997 aggregated $37.5 million. Funds used in investing
activities were comprised of capital expenditures of $53.1 million and
acquisition expenditures for the SPR properties of $111.1 million. Funds
provided by financing activities were comprised primarily of net principal
borrowings of $97.8 million under the Credit Facility and $27.5 million from
the sale of common stock, partially offset by the payment of $4.6 million of
preferred stock dividends. As a result of these activities, cash and cash
equivalents decreased from $4.1 million at December 31, 1996 to $0.2 million
as of December 31, 1997.
Capital Resources. The Credit Facility provides for a maximum $140.0 million
revolving credit loan and matures, with all amounts owed thereunder becoming
due and payable, on December 1, 2000. Availability under the Credit Facility
is subject to a borrowing base based upon, among other things, the proved oil
and gas reserves and other assets of the Borrowers (as defined). The borrowing
base is redetermined at least semiannually by the Agent, with the consent of
the other lenders, and may be redetermined more frequently at the election of
the lenders or the Borrowers. On April 14, 1998, the borrowing base was set at
$138.0 million and the threshold amount (the "Threshold Amount"), which is the
amount that would ordinarily be made available by the lenders to a similar
borrower under a borrowing base was set at $125.0 million. The excess of the
borrowing base over the Threshold Amount temporarily provides the Borrowers
with additional liquidity following the SPR
40
<PAGE>
Acquisition. As a result of the sale of the Waskom field on July 24, 1998,
effective on that date the borrowing base was reduced $8.0 million. The
proceeds from that sale of $17.4 million were used to reduce borrowings
outstanding under the Credit Facility. The next scheduled redetermination of
the borrowing base and the Threshold Amount, which is redetermined at the time
the borrowing base is redetermined, will be on November 1, 1998, and the
Credit Facility provides that the borrowing base will not exceed the Threshold
Amount after that date. There can be no assurance that the borrowing base and
the Threshold Amount will not be reduced in the future. At June 30, 1998,
$100.0 million of borrowings and $1.5 million of letters of credit were
outstanding under the Credit Facility. The Company's typical monthly cash flow
cycle is such that the Company usually receives a substantial portion of its
proceeds from operations near the end of each month. Accordingly, outstanding
balances under the Credit Facility may be higher on any given day during the
month than at the end of the month. See "Description of the Credit Facility".
At June 30, 1998, the Company had $316.4 million face amount of debt
outstanding, requiring $28.7 million in annual cash interest payments. The
Company's outstanding $2.625 Convertible Exchangeable Preferred Stock (the
"Preferred Stock") is cumulative, requiring dividends to accumulate at the
rate of $4.6 million annually, and carries liquidation preferences over the
Common Stock totaling $46.7 million at June 30, 1998, including dividend
arrearages. On April 14, 1998, the Company announced a dividend of $2.625 per
share of Preferred Stock (approximately $4.6 million), which was paid on April
30, 1998. The Company has not declared the quarterly dividends of $0.65625 for
February 1, 1998 and May 1, 1998, aggregating approximately $2.3 million.
Further dividends are restricted under the Credit Facility.
Included in the outstanding debt at June 30, 1998 was $30.0 million
principal amount of the Company's 10 3/8% Senior Subordinated Notes due 2006,
Series C ("Series C Notes") issued in May 1998 at a cash price of $1,015 per
$1,000 principal amount. The net proceeds received were used to reduce
outstanding borrowings under the Credit Facility. See Note 3--Long Term Debt
in the Notes to Consolidated Financial Statements contained in this Prospectus
for further discussion.
Capital Commitments. The Company's 1998 capital expenditure budget provides
for $31 million to be expended on development drilling primarily in north
Louisiana and $31 million to be expended on exploratory prospects primarily in
south Louisiana, the shallow waters of the Gulf of Mexico, Texas and New
Mexico. In the first six months of 1998, the Company participated in drilling
28 gross (12.90 net) wells, of which 23 gross (10.82 net) wells were completed
and 5 gross (2.08 net) wells were dry. As of the end of the quarter, the
Company was participating in the drilling/completing of 13 gross (6.48 net)
wells.
The Company has planned in 1998 to fund its debt service obligations,
capital expenditure requirements and working capital needs through cash flows
from operations and borrowings under the Credit Facility. If market conditions
permit, the Company will consider an equity offering. The Company's plans are
predicated on cash flow assumptions utilizing commodity prices in the range
realized in 1997. Material increases or decreases in natural gas prices, which
are highly volatile, will impact the Company's cash flows and the level of its
1998 capital program.
The Company does not anticipate that it will incur any significant
expenditures to address Year 2000 issues, nor do Year 2000 issues represent a
known material event or uncertainty to the Company. To the extent that the
Company may be adversely affected by the Year 2000 issues of its suppliers,
customers and other entities, the Company does not believe that it will be
more adversely affected than other companies in its industry with similar
operations.
41
<PAGE>
Inflation and Changing Prices. Oil and natural gas prices, as with most
commodities, are highly volatile, have fluctuated during recent years and
generally have not followed the same pattern as inflation. The following table
shows the changes in the average oil and gas prices received by the Company
during the periods indicated.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
OIL PRICE GAS PRICE
($/BBL) ($/MCF)
--------- ---------
<S> <C> <C>
YEAR ENDED:
December 31, 1997................................... $19.34 $2.27
December 31, 1996................................... 22.11 2.30
December 31, 1995................................... 17.37 1.71
</TABLE>
42
<PAGE>
BUSINESS AND PROPERTIES
THE COMPANY
Kelley Oil & Gas Corporation is engaged in the development, exploration,
acquisition and production of oil and natural gas, primarily in Louisiana and
the shallow waters of the Gulf of Mexico. The Company's activities have
historically been concentrated on lower-risk development drilling in north
Louisiana and higher-risk exploratory drilling in south Louisiana. As of
January 1, 1998, 73% of the Company's estimated proved reserves were located
in north Louisiana. Capitalizing on its development, exploration and
acquisition strategy, the Company has increased proved reserves 82% from 204.6
Bcfe at January 1, 1996 to 372.6 Bcfe at January 1, 1998 and production has
increased 132% from 19.7 Bcfe in 1995 to 45.8 Bcfe in 1997 on a pro forma
basis. Additionally, the Company has increased revenues and EBITDAX from $38.8
million and $20.9 million, respectively, in 1995 to $112.1 million and $88.5
million, respectively in 1997 on a pro forma basis.
At January 1, 1998, Kelley had proved reserves of 372.6 Bcfe with a present
value of estimated future net cash flows of $378.8 million. Approximately 95%
of the Company's reserves are natural gas and 73% are proved developed. As of
January 1, 1998, the Company held an interest in 241,550 gross (98,052 net)
developed acres and 622,641 gross (56,356 net) undeveloped acres and an
interest in 513 gross (249.6 net) producing wells. For 1996 and 1997, the
Company's capital spending on exploration and development activities totaled
$100.6 million, approximately 82% of which was spent on development
activities. The Company's exploration and development activities during this
period resulted in the addition of 138.4 Bcfe of proved reserves at an average
cost of $0.73 per Mcfe. For 1998, the Company has budgeted capital
expenditures of approximately $62.0 million, which is expected to be allocated
equally between development and exploration activities. The Company's capital
spending on exploration and development for the first half of 1998 totaled
$21.5 million.
Effective December 1, 1997, the Company consummated the SPR Acquisition for
$110.0 million. The assets acquired include interests in proved oil and
natural gas reserves primarily located in Louisiana, the shallow waters of the
Gulf of Mexico and east Texas and exploratory prospects in south Louisiana,
the shallow waters of the Gulf of Mexico, the Permian Basin of west Texas and
New Mexico. The SPR Properties increased the Company's proved reserves as of
January 1, 1998 by 65.6 Bcfe. On a pro forma basis, the SPR Acquisition would
have added $36.0 million to the Company's 1997 revenues and $30.2 million to
the Company's 1997 EBITDAX. The acquisition was financed with a combination of
additional borrowings under the Credit Facility and additional equity received
upon exercise of an option held by the Company's principal stockholder.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths will aid in
the successful implementation of its strategy.
Balanced Portfolio of Drilling Opportunities. The Company holds a balanced
portfolio of lower-risk development properties and higher-risk exploratory
prospects. The Company's development properties provide it with cash flows to
help support its operations and its capital expenditures budget, while the
Company believes its exploratory prospects offer the potential for larger
reserves and greater production. The Company expects that, at its current rate
of production and planned capital expenditures, it has a minimum two-year
inventory of development projects and exploration prospects on its existing
properties, and that through the continuing analysis of its existing seismic
databases the Company will identify additional development projects and
exploration prospects on its existing acreage.
Operational Efficiencies. Substantially all of Kelley's proved reserves and
a majority of its operating activities are currently concentrated in Louisiana
and in the shallow waters of the Gulf of
43
<PAGE>
Mexico. The Company believes that this geographic focus has enabled its
operating personnel to develop operating expertise by concentrating on areas
with similar characteristics and technical issues. Moreover, the concentration
of properties operated by Kelley, particularly in the Vacherie Salt Dome area
of north Louisiana, enables it to achieve cost and operational efficiencies.
In addition, Kelley maintains an average 41% working interest in its reserves.
Kelley is the operator of properties accounting for approximately 80% of its
production at December 31, 1997. As operator, Kelley possesses the ability to
better control its operating and overhead expenses, manage production
performance and regulate capital expenditures.
Long-Lived Proved Reserves. The Company's proved reserves in north Louisiana
(which constitute 73% of the Company's proved reserves) are long-lived and
support cash flows through their low lease operating expenses and low
development costs. The Company's reserves to production ratio in north
Louisiana is approximately 10:1. The Company believes the relatively long
lives, low costs and high production rates of its north Louisiana wells
provide a solid base from which to pursue its exploration strategy and its
reserve acquisition strategy.
High Operating Margins. Kelley's oil and natural gas reserves are located
close to pipeline transportation and key market locations, and, therefore,
generally command favorable well-head prices relative to reserves located away
from major markets and in areas where transportation costs tend to lower well-
head prices. In addition, production from Kelley's south Louisiana properties
generally receives higher prices because of its relatively high BTU content.
The Company's production expense for 1997 on a pro forma basis was $0.35 per
Mcfe resulting in a cash operating margin (excluding the effects of hedging)
of $2.12 per Mcfe. For the first six months of 1998 the cash operating margin
(excluding the effects of hedging) was $1.56. The decrease from 1997 is
primarily attributable to lower prices received in 1998 for the Company's oil
and gas production that has resulted from a price decline affecting the oil
and gas industry generally. Higher production expenses per Mcfe have also
contributed to the decrease.
Effective Use of Technology. Kelley applies advanced technology to lower the
risks and costs of exploration and development activities. The Company
constantly re-evaluates and refines its 3-D seismic databases to increase the
possibility of successful drilling and allow for better well placement. These
databases cover over 1,300 square miles, including all of its presently
identified exploration prospects. Moreover, Kelley has invested in computer-
aided exploration and development hardware and software and has an experienced
technical staff, including 11 engineers, five geologists and three
geophysicists, with extensive experience in the oil and natural gas industry.
Experienced and Proven Management Team. The Company's senior management
team, assembled since February 1996, has extensive experience in the oil and
natural gas industry and demonstrated acquisition capabilities. In addition,
the Company has adopted employee incentive programs designed to align the
interests of management and the investors.
BUSINESS STRATEGY
Kelley's strategy is to increase reserves, production and cash flows in a
cost-efficient manner, primarily through a program of balanced development and
exploration activities in its current areas of operation and through strategic
acquisitions of properties in the 48 contiguous United States and the Gulf of
Mexico.
Continue Development Activities. Kelley will continue development drilling
activities on its existing core properties in the Vacherie Salt Dome region of
north Louisiana, where the Company believes it has opportunities to increase
production and cash flow. In 1996 and 1997, the Company drilled or
participated in drilling 151 gross (68.4 net) development wells, of which 148
gross (66.6 net) were completed as producing wells, representing a 97% success
rate. The Company intends at present to continue dedicating a significant
share of its capital resources to developing its north Louisiana fields.
44
<PAGE>
Focus Exploration Activities. Kelley will continue to focus its exploration
activities on its existing properties in Terrebonne Parish and the SPR
Properties located in south Louisiana and the shallow waters of the Gulf of
Mexico. During 1996 and 1997 the Company became a participant in four joint
ventures with recognized industry partners in an effort to generate a greater
number of high potential prospects while reducing exploration risks. The
Company believes that this shared risk approach, combined with the use of
advanced geophysical techniques, increases drilling success and enables the
Company to participate in a diverse portfolio of prospects with significant
reserve potential. The Company has approximately 331,800 gross acres of
exploratory properties on which its has identified over 30 prospective
exploratory drill sites. The Company expects that, at its current rate of
capital expenditures, these sites provide a minimum two-year inventory of
exploration prospects. In 1997, the Company drilled or participated in
drilling 10 gross (4.0 net) exploratory wells, of which 9 gross (3.5 net) were
completed as producing wells.
Pursue Selective Acquisitions. Kelley focuses its acquisition strategy
primarily on oil and natural gas properties having development and exploration
potential to augment existing production and expand its reserve base. The
Company evaluates potential acquisitions based upon a number of factors,
including exploration and development potential, profit enhancement
opportunity, geographic concentration, working interest, size, operatorship
and various reserve and production attributes. The Company believes that its
senior management team's experience in evaluating and acquiring oil and
natural gas reserves will enable Kelley to more effectively execute its
acquisition strategy, grow its existing asset base and increase cash flows. In
implementing this strategy, the Company recently increased its proved reserves
and added significant exploration prospects to the Company's portfolio through
the SPR Acquisition.
COMPANY HISTORY
The Consolidation. The Company was formed in 1994 to consolidate the equity
ownership (the "Consolidation") of Kelley Oil & Gas Partners, Ltd. ("Kelley
Partners") and Kelley Oil Corporation ("Kelley Oil"). Before the Consolidation
in 1994, Kelley Partners and developmental drilling partnership subsidiaries
of Kelley Oil ("DDPs") jointly conducted drilling activities. Historically,
Kelley Oil (the managing general partner of Kelley Partners) participated
proportionately in these operations, with Kelley Partners retaining one-third
of its working interest in each prospect and assigning drilling rights for the
balance of its interest to a DDP. In the Consolidation, the Company acquired
Kelley Oil's interests in the remaining DDPs sponsored during 1994 and 1992
aggregating 92.2% and 84.3%, respectively. The Consolidation was completed on
February 7, 1995 upon approval by investors in Kelley Partners and Kelley Oil.
As a result of the Consolidation, Kelley Oil became a wholly-owned subsidiary
of the Company, and Kelley Partners became a 99.99%-owned subsidiary
partnership. Accordingly, historical financial and reserve information
presented in this document for periods before the Consolidation reflects
Kelley Oil's historical results on a stand-alone basis prior to the
Consolidation, with the results of the Company's combined operations recorded
thereafter. In 1996, Kelley Partners was merged into the Company.
Contour Transaction. In January 1996, the Company entered into financing and
related agreements with Contour, pursuant to which Contour purchased 48.0
million newly issued shares of Common Stock for $48.0 million on February 15,
1996, and an option (the "Contour Option") to purchase an additional 27.0
million shares of Common Stock for $27.0 million, which was exercised on
December 1, 1997 to finance a portion of the SPR Acquisition. In February
1996, in connection with the first stage of Contour's investment in the
Company, John F. Bookout, formerly President and Chief Executive Officer of
Shell Oil Company, was appointed Chairman, President and Chief Executive
Officer of the Company, and certain other experienced oil industry executives
were appointed to senior management positions within the Company (all such
transactions are referred to collectively as the "Contour Transaction").
45
<PAGE>
OPERATIONAL ACTIVITIES
The Company's core production is derived from four contiguous fields in the
Vacherie Salt Dome region of north Louisiana. The Company's remaining
production is generally from the shallow waters of the Gulf of Mexico, south
Louisiana and east Texas.
Development Activities. The Company continues development drilling
activities within its existing core properties in the Vacherie Salt Dome
region of north Louisiana, where at December 31, 1997, approximately 73% of
its proved reserves were located on 48,060 gross (22,075 net) acres. The
Company presently intends to continue dedicating a significant share of its
capital resources to these properties. The Company drilled or participated in
drilling 82 gross (35 net) development wells in 1997, all of which were
completed as producing wells. The Company also intends to continue the
development of the proved undeveloped portions of the newly-acquired SPR
Properties and south Louisiana properties, primarily in Terrebonne Parish.
Exploration Activities. The Company focuses its exploration activities on
its existing leaseholdings in Terrebonne and LaFourche Parishes, the shallow
waters of the Gulf of Mexico, and the Permian Basin, which the Company
believes have, with higher risk, the potential for larger reserve and
production increases as compared to development activity in north Louisiana.
The Company has rights to approximately 331,800 gross undeveloped acres of
exploratory properties principally in these regions on which it has identified
over 30 prospective exploratory well sites, that it believes is a minimum two-
year inventory of exploration prospects based on its current rate of planned
capital expenditures. However, the number, type and timing of these proposed
wells is subject to continued revision as a result of many factors, including
test and drilling results on these properties and others, the price of oil and
natural gas, availability of drilling rigs, availability of capital, weather
and general economic factors. See "Risk Factors".
The Company is utilizing current technologies to identify exploration
prospects and advanced geophysical techniques to continue to re-evaluate and
refine interpretations of its 3-D seismic database, which covers (i)
approximately 600 square miles, a major portion of its existing leaseholdings
in Terrebonne and LaFourche Parishes, in south Louisiana, (ii) approximately
50 square miles offshore Texas, and (iii) approximately 600 square miles of
its Permian Basin exploratory prospects. In 1998, the Company plans to
participate in 3-D seismic surveys covering approximately 135 square miles in
south Louisiana and east Texas.
In 1997, the Company drilled 10 gross (4.0 net) exploratory wells, of which
9 gross (3.5 net) were completed as producing wells. Included in these amounts
are 4 gross (1.0 net) exploratory wells that were drilled and completed as
producing wells on acreage acquired in the SPR Acquisition.
Acquisition of Oil and Gas Properties. Effective as of December 1, 1997, the
Company consummated the SPR Acquisition. The assets acquired include interests
in proved oil and natural gas reserves primarily located in Louisiana, the
shallow waters of the Gulf of Mexico and east Texas, as well as exploratory
leasehold acreage in those areas. The SPR Acquisition increased the Company's
proved reserves as of January 1, 1998 by 65.6 Bcfe. On a pro forma basis, the
SPR Acquisition would have added $36.0 million to the Company's 1997 revenues
and $30.2 million to the Company's 1997 EBITDAX. The Company financed this
acquisition with $27.0 million of proceeds received upon the exercise of the
Contour Option and a borrowing of $83.0 million under the Credit Facility.
Effective July 1, 1996, the Company purchased properties in four fields in
north Louisiana, including approximately 30 Bcfe of proved reserves, for $10.0
million. The Company financed this acquisition with borrowings under the
Credit Facility.
46
<PAGE>
DESCRIPTION OF PROPERTIES
The Company's properties are located principally in Louisiana, the shallow
waters of the Gulf of Mexico, Texas and New Mexico. As of January 1, 1998, the
Company owned interests in a total of 513 gross (249.6 net) producing wells,
of which 295 wells were operated by the Company, accounting for 80% of its
current production. As of that date, the Company had leaseholdings covering
241,550 gross (98,052 net) developed acres and 622,641 gross (56,356 net)
undeveloped acres. Approximately 95% of its proved oil and natural gas
reserves as of January 1, 1998, was natural gas.
SIGNIFICANT PROPERTIES
The Company's core natural gas properties in north Louisiana are located in
the Sailes, Sibley, West Bryceland and Ada fields of Webster and Bienville
Parishes, while its core properties in south Louisiana are concentrated in the
Orange Grove/Humphreys, Lirette, Lake Pagie and Ouiski Bayou fields in
Terrebonne Parish, and the Fire Island field in Vermilion Parish. Production
is primarily from the Hosston (north Louisiana) and Miocene (south Louisiana)
formations. The SPR Properties are located primarily in the shallow waters of
the Gulf of Mexico, south Louisiana, and Texas. The following table sets forth
certain information as of the dates indicated regarding the Company's
interests by major geographic region. See "Risk Factors--Uncertainties in
Estimating Reserves and Future Net Cash Flows."
PROVED PROPERTIES
<TABLE>
<CAPTION>
PROVED RESERVES AT JANUARY 1, 1998 PRODUCTION(/1/)
------------------------------------------ -------------------------
YEAR ENDED
PRESENT VALUE DECEMBER 31, 1997
OF ESTIMATED -------------------------
GAS FUTURE NET GAS
OIL GAS EQUIVALENT CASH FLOWS(/2/) OIL GAS EQUIVALENT
(MBBLS) (MMCF) (MMCFE) (IN THOUSANDS) (MBBLS) (MMCF) (MMCFE)
------- ------- ---------- --------------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
North Louisiana......... 620 269,320 273,040 $ 245,366 95 26,411 26,981
South Louisiana......... 425 18,216 20,766 29,463 58 1,543 1,891
Gulf of Mexico.......... 460 27,983 30,743 38,040 9 544 598
Other................... 1,448 39,348 48,036 65,942 64 1,704 2,088
----- ------- ------- --------- --- ------ ------
Totals.................. 2,953 354,867 372,585 $ 378,811 226 30,202 31,558
===== ======= ======= ========= === ====== ======
</TABLE>
- --------
(1) Production from the SPR Properties is included in these amounts since the
closing and effective date of the SPR Acquisition, December 1, 1997.
(2) The estimates were prepared in accordance with SEC regulations using
market or contract prices at the end of each reported period. Prices and
operating and development costs are held constant over the estimated life
of the reserves. A discount factor of 10% was used to reflect the timing
of future net cash flow. See "--Estimated Proved Reserves--Uncertainties
in Estimating Reserves and Future Net Cash Flows" and Note 11 to the
Consolidated Financial Statements.
Additional information regarding these regions is set forth below. Unless
otherwise noted, acreage and well information is provided as of December 31,
1997, and reserve information is provided as of January 1, 1998.
North Louisiana. The Company's operations in this region are 70% proved
developed, and its wells are typically drilled to a maximum depth of
approximately 10,500 feet. Operations in this region do not typically
experience geopressured formations or significant associated salt water
production. Recently, increases in estimated ultimate recoveries from north
Louisiana wells have been achieved from revised interpretations of geological
fault systems, revised fracture stimulation techniques and regulatory changes
that allow the commingling of production from multiple zones. The Company's
reserves to production ratio in north Louisiana is approximately 10:1. Its
lifting costs in this region are generally low (approximately $0.12 per Mcfe
in 1997) as a result of relatively low formation pressures
47
<PAGE>
and minimal liquid hydrocarbon and salt water production. In the past three
years, completed wells in north Louisiana had an average development cost of
$0.56 per Mcfe with gross average reserves per well of 3.1 Bcfe. At December
31, 1997, the Company operated an aggregate of 176 gross (95.4 net) wells in
this region and was drilling or completing 8 gross (4.5 net) wells in the
region, all of which were subsequently completed as producing wells. The
Company's average working interest in these properties is approximately 37%.
South Louisiana. The Company's operations in this region primarily are
focused on five fields in the Houma Embayment area and one field in nearby
Vermilion Parish. The Houma Embayment is composed of high-quality reservoir
rock, contributing to high production rates. Wells are typically drilled to a
depth of approximately 11,000 to 17,000 feet. The Company's south Louisiana
properties generally are located in close proximity to transportation and
market locations, and production therefrom generally receives higher prices
because of its relatively high BTU content. The Company believes these factors
partially offset the higher operating costs associated with higher formation
pressures, salt water disposal and inland water well locations associated with
the region. At December 31, 1997, the Company operated an aggregate of 15
gross (7.7 net) wells and was drilling 1 gross (0.5 net) well in this region
that was subsequently plugged and abandoned. The Company's average working
interest in these properties is approximately 43%.
Offshore. The Company's operations in this region are primarily focused in
the shallow waters of the Gulf of Mexico, offshore Texas, Louisiana and
Alabama. The Company estimates the current net production from these
properties to be approximately 24 Mmcfe per day. The present value of
estimated future net cash flows at December 31, 1997 (calculated in accordance
with SEC guidelines) in this region was $38.0 million, of which 100% are
developed. See Note 10 to the Consolidated Financial Statements. At December
31, 1997, the Company operated an aggregate of 33 gross (29.9 net) wells in
this region and had an interest in 50 gross (33.9 net) wells with an average
working interest of approximately 46%.
JOINT VENTURE PARTNERSHIPS
The Company participates in joint ventures with industry partners to
accelerate the exploration and evaluation of its properties and to mitigate
the risks associated with exploratory drilling projects.
In December 1996, the Company entered into a joint venture with Williams
Production, Gulf Coast Company ("Williams"), a unit of The Williams Companies,
Inc., relating to the Company's south Louisiana properties. Pursuant to the
terms and conditions of this joint venture, effective December 1, 1996,
Williams purchased a 50% interest in Kelley's 27,000 net acreage position in
the Houma Embayment, including 50% of Kelley's interest in 23 wells and
related facilities in the Orange Grove/Humphreys and Ouiski Bayou fields, for
a total purchase price of $20.5 million, a portion of which is committed under
the joint venture to drill up to eight exploration wells in those areas.
Together with Williams, the Company drilled 6 gross (3.0 net) wells in south
Louisiana in 1997, of which 5 gross (2.5 net) were completed and are producing
and 1 gross (0.5 net) resulted in a dry hole. Pursuant to the joint venture,
the Company and Williams are conducting an exploratory drilling program on
their south Louisiana properties.
Several of the SPR Properties are covered by joint ventures with third-party
interest holders, including Fina Oil and Chemical Company, a subsidiary of
FINA, Inc. ("Fina"), and Cobra Oil and Gas Corporation ("Cobra"). The Company
has succeeded to SPR's rights with respect to these ventures by virtue of the
SPR Acquisition. The Fina joint venture represents a joint exploration and
development agreement covering an area of mutual interest (the "AMI") of
approximately 400,000 acres in south Louisiana. The agreement provides for the
parties to obtain 3-D seismic coverage over all mutually agreeable prospective
lands within the AMI. To date, the Company and Fina have acquired 3-D seismic
data covering approximately 450 square miles within the AMI. The Cobra program
involves exploitation of approximately 68,000 acres in Texas, New Mexico,
Arkansas,
48
<PAGE>
Louisiana and Alabama. The Cobra program includes 3-D seismic data covering
approximately 975 square miles. In connection with the SPR Acquisition, the
Company entered into a joint venture with CMS/Nomeco and is currently
evaluating potential drilling locations.
ESTIMATED PROVED RESERVES
The following table sets forth the estimated quantities of proved and proved
developed reserves of crude oil (including condensate and natural gas liquids)
and natural gas owned by the Company for the years ended December 31, 1995,
1996 and 1997, which were prepared by H.J. Gruy & Associates, Inc. ("Gruy"),
independent petroleum engineers.
ESTIMATED PROVED RESERVES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
---------------- --------------- ---------------
OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
Beginning balance......... 1,236 93,612 1,387 196,273 1,466 297,634
Revisions of previous
estimates................ (1,324) (64,027) (89) (30,519) 106 21,831
Purchases of reserves in
place.................... 1,756 127,962 57 30,844 1,351 51,712
Extensions and
discoveries.............. 156 66,864 477 128,692 256 13,892
Sale of reserves in
place.................... (118) (10,388) (134) (4,190) -- --
Production................ (319) (17,750) (232) (23,466) (226) (30,202)
------ ------- ----- ------- ----- -------
Ending balance.......... 1,387 196,273 1,466 297,634 2,953 354,867
====== ======= ===== ======= ===== =======
PROVED DEVELOPED RESERVES:
Producing................. 669 63,488 608 113,831 1,856 180,307
Non-producing............. 528 47,799 369 59,634 576 77,493
------ ------- ----- ------- ----- -------
Total proved developed.. 1,197 111,287 977 173,465 2,432 257,800
====== ======= ===== ======= ===== =======
</TABLE>
The estimates were prepared in accordance with SEC regulations using market
or contract prices at the end of each reported period. Prices and operating
and development costs are held constant over the estimated life of the
reserves.
Proved developed reserves are reserves that can be expected to be recovered
from existing wells with existing equipment and operating methods. Proved
undeveloped reserves are proved reserves that are expected to be recovered
from new wells drilled to known reservoirs on undrilled acreage for which the
existence and recoverability of reserves can be estimated with reasonable
certainty, or from existing wells where a relatively major expenditure is
required for recompletion.
Uncertainties in Estimating Reserves and Future Net Cash Flows. There are
numerous uncertainties in estimating quantities of proved reserves believed to
have been discovered and in projecting future rates of production and the
timing of development expenditures, including many factors beyond the control
of the Company. The reserve data set forth in this Prospectus are only
estimates. Reserve estimates are inherently imprecise and may be expected to
change as additional information becomes available. Furthermore, estimates of
oil and natural gas reserves, of necessity, are projections based on
engineering data, and there are uncertainties inherent in the interpretation
of such data as well as the projection of future rates of production and the
timing of development expenditures. Reservoir engineering is a subjective
process of estimating underground accumulations of oil and natural gas that
cannot be measured exactly, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Accordingly, estimates of the economically
recoverable quantities of oil
49
<PAGE>
and natural gas 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 at different times may vary substantially. There also
can be no assurance that the reserves set forth herein will ultimately be
produced or that the proved undeveloped reserves set forth herein will be
developed within the periods anticipated. It is possible that variances from
the estimates will be material. In addition, the estimates of future net cash
flows from proved reserves of the Company and the present value thereof are
based upon certain assumptions about future production levels, prices and
costs that may not be correct when judged against actual subsequent
experience. The Company emphasizes with respect to the estimates prepared by
independent petroleum engineers that the discounted future net cash flows
should not be construed as representative of the fair market value of the
proved reserves owned by the Company since discounted future net cash flows
are based upon projected cash flows which do not provide for changes in oil
and natural gas prices from those in effect on the date indicated or for
escalation of expenses and capital costs subsequent to such date. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based. Actual results will differ, and are
likely to differ materially, from the results estimated. Accordingly,
investors in the Notes are cautioned not to place undue reliance on the
reserve data included in this Prospectus.
The Company has not filed any estimates of reserves with any federal
authority or agency during the past year other than estimates contained in
filings with the SEC.
PRODUCTION, PRICE AND COST HISTORY
The following table sets forth certain production data, average sales prices
and average production expenses attributable to the Company's properties for
1995, 1996 and 1997. Detailed additional information concerning the Company's
oil and natural gas production activities is contained in Note 11 to the
Consolidated Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- JUNE 30,
1995 1996 1997 1997 1998
------ ------ ------ ------ --------
PRO
FORMA
------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil and other liquid hydrocarbons
(Mbbls)................................ 319 232 226 473 224
Natural gas (Mmcf)...................... 17,750 23,466 30,202 42,931 19,503
Natural gas equivalent (Mmcfe).......... 19,664 24,858 31,558 45,769 20,847
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (per
Bbl)................................... $17.37 $22.11 $19.34 $19.39 $13.88
Natural gas (per Mcf, including effects
of hedging)............................ 1.71 2.30 2.27 2.32 2.11
Natural gas equivalent (per Mcfe,
including effects of hedging).......... 1.83 2.37 2.31 2.38 2.12
AVERAGE PRODUCTION EXPENSES PER MCFE...... 0.55 0.43 0.35 0.35 0.52
</TABLE>
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1997, the Company had leaseholdings comprising 241,550
gross (98,052 net) developed acres and 622,641 gross (56,356 net) undeveloped
acres, all located within the continental United States. The oil and gas
leases in which the Company has an interest are for varying primary terms and
many, particularly in south Louisiana, require the payment of delay rentals in
lieu of drilling operations. In north Louisiana, most of the Company's
leasehold interests are held by
50
<PAGE>
production; that is, so long as natural gas and oil are produced from the
properties covered thereby, the leases continue indefinitely. The leases may
be surrendered at any time by notice to the lessors, by the cessation of
production or by failure to make timely payment of delay rentals, if
applicable.
The following table sets forth the Company's ownership interests in its
leaseholds as of December 31, 1997.
<TABLE>
<CAPTION>
DEVELOPED(/1/) UNDEVELOPED(/2/)
-------------- -----------------
GROSS NET GROSS NET
ACRES ACRES ACRES ACRES
------- ------ -------- --------
<S> <C> <C> <C> <C>
Louisiana....................................... 89,975 40,428 304,615 33,012
Texas........................................... 81,444 30,788 138,962 4,909
Gulf of Mexico.................................. 25,007 5,947 3,575 758
Other........................................... 45,124 20,889 175,489 17,677
------- ------ -------- -------
Total......................................... 241,550 98,052 622,641 56,356
======= ====== ======== =======
</TABLE>
- --------
(1) Acres spaced or assignable to productive wells.
(2) Acres on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil and gas,
regardless of whether that acreage contains proved reserves.
As of January 1, 1998, the Company had working interests in 464 gross (225.2
net) productive gas wells and 49 gross (24.4 net) productive oil wells
(including producing wells and wells capable of production).
51
<PAGE>
EXPLORATION AND DEVELOPMENT
The following table sets forth the number of gross and net productive and
dry exploratory and development wells drilled by the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NORTH LOUISIANA:
Exploratory wells:
Oil................................ -- -- -- -- -- --
Natural gas........................ -- -- -- -- -- --
Dry................................ -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total............................ -- -- -- -- -- --
====== ====== ====== ====== ====== ======
Development wells:
Oil................................ 1 .05 1 .03 -- --
Natural gas........................ 22 9.26 65 31.63 82 34.96
Dry................................ -- -- 3 1.74 -- --
------ ------ ------ ------ ------ ------
Total............................ 23 9.31 69 33.40 82 34.96
====== ====== ====== ====== ====== ======
Total north Louisiana:
Producing.......................... 23 9.31 66 31.66 82 34.96
Dry................................ -- -- 3 1.74 -- --
------ ------ ------ ------ ------ ------
Total............................ 23 9.31 69 33.40 82 34.96
====== ====== ====== ====== ====== ======
SOUTH LOUISIANA AND OTHER:
Exploratory wells:
Oil................................ -- -- -- -- -- --
Natural gas........................ -- -- -- -- 9 3.50
Dry................................ 1 .95 -- -- 1 0.50
------ ------ ------ ------ ------ ------
Total............................ 1 .95 -- -- 10 4.00
====== ====== ====== ====== ====== ======
Development wells:
Oil................................ -- -- -- -- -- --
Natural gas........................ 4 3.78 -- -- -- --
Dry................................ 1 .95 -- -- -- --
------ ------ ------ ------ ------ ------
Total............................ 5 4.73 -- -- -- --
====== ====== ====== ====== ====== ======
Total south Louisiana and other:
Producing.......................... 4 3.78 -- -- 9 3.50
Dry................................ 2 1.90 -- -- 1 0.50
------ ------ ------ ------ ------ ------
Total............................ 6 5.68 -- -- 10 4.00
====== ====== ====== ====== ====== ======
</TABLE>
As of December 31, 1997, the Company had 8 gross (4.5 net) development wells
in progress, all in north Louisiana, and 1 gross (0.5 net) exploratory well in
progress in south Louisiana. Subsequent to year-end 1997, all of these wells
were completed as producing wells except the south Louisiana exploratory well
which was plugged and abandoned.
MARKETING OF NATURAL GAS AND CRUDE OIL
The Company does not refine or process any of the oil and natural gas it
produces. Substantially all of the Company's natural gas is sold under term
contracts, contracts providing for periodic price adjustments or in the spot
market. Its revenue streams are therefore sensitive to changes in current
market prices. The Company's sales of crude oil, condensate and natural gas
liquids generally are made at prices related to posted field prices.
In addition to marketing the Company's natural gas production, the Company
secures gas transportation arrangements, provides nomination and gas control
services, supervises gas
52
<PAGE>
aggregation operations and performs revenue receipt and disbursement services
as well as regulatory filing, recordkeeping, inspection, testing, monitoring
and marketing functions.
The Company believes that its activities are not currently constrained by a
lack of adequate transportation systems or system capacity and does not
foresee any material disruption in available transportation for its
production. However, there can be no assurance that the Company will not
encounter these constraints in the future. In that event, the Company would be
forced to seek alternate sources of transportation and may face increased
costs.
In 1997, two customers, Coral Energy Resources, L.P. and Sonat Marketing
Company, L.P., accounted for approximately 60% and 30%, respectively, of the
Company's total sales. Due to the nature of oil and natural gas markets, the
Company does not believe that the loss of either of these customers would have
a material adverse effect on the Company's financial condition or results of
operations.
HEDGING OF NATURAL GAS
The Company periodically uses forward sales contracts, natural gas price
swap agreements, natural gas basis swap agreements and options to reduce
exposure to downward price fluctuations on its natural gas production. The
Company does not engage in speculative transactions and generally does not
enter into hedging arrangements for more than 75% of its anticipated future
production. During 1997 and the first half of 1998, the Company used price and
basis swap agreements. Additional information concerning hedging activities of
the Company during 1997 and the first half of 1998 is set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Prospectus. See also "Risk Factors--
Risks of Hedging Transactions".
COMPETITION
The Company operates in a highly competitive environment with respect to
acquiring reserves, marketing oil and natural gas and securing trained
personnel. Many of the Company's competitors possess and employ financial and
personnel resources substantially greater than those available to it. Such
companies may be able to pay more for productive oil and natural gas
properties and to define, evaluate, bid for and purchase a greater number of
properties than the Company's financial or personnel resources permit. The
Company's ability to acquire additional reserves in the future will be
dependent upon its ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment. In addition,
there is substantial competition for capital available for investment in the
oil and natural gas industry. There can be no assurance that the Company will
be able to compete successfully in the future in acquiring reserves,
developing reserves, marketing hydrocarbons, attracting and retaining quality
personnel, and raising additional capital.
TITLE TO PROPERTIES
The Company's properties, in addition to being mortgaged to secure the
Credit Facility, are subject to royalty interests, liens incident to operating
agreements, liens for current taxes and other customary burdens, including
other mineral encumbrances and restrictions. The Company does not believe that
any mortgage, lien or other burden materially interferes with the use of such
properties in the operation of its business.
The Company believes that it has satisfactory title to or rights in all of
its producing properties. As is customary in the oil and natural gas industry,
minimal investigation of title is made at the time of acquisition of
undeveloped properties. Title investigation is made, and title opinions of
local
53
<PAGE>
counsel are generally obtained, before commencement of drilling operations or
at least in connection with the preparation of division orders when production
is obtained and allocation of the revenues therefrom.
EMPLOYEES
As of June 30, 1998, the Company had 79 employees. The Company's staff
includes employees experienced in acquisitions, geology, geophysics, petroleum
engineering, land acquisition and management, finance and accounting. None of
the Company's employees are represented by a union. The Company has not
experienced an interruption in its operations due to any labor dispute and
believes that its working relationships with its employees are satisfactory.
REGULATION
The Company's operations are subject to extensive and continually changing
regulation, as legislation affecting the oil and natural gas industry is under
constant review for amendment and expansion. Many departments and agencies,
both federal and state, are authorized by statute to issue and have issued
rules and regulations binding on the oil and natural gas industry and its
individual participants. The failure to comply with such rules and regulations
can result in substantial penalties. The regulatory burden on the oil and
natural gas industry increases the Company's cost of doing business and,
consequently, affects its profitability. However, the Company does not believe
that it is affected in a significantly different manner by these regulations
than are its competitors in the oil and natural gas industry. Because of the
numerous and complex federal and state statutes and regulations that may
affect the Company, directly or indirectly, the following discussion of
certain statutes and regulations should not be relied upon as an exhaustive
review of all matters affecting the Company's operations.
TRANSPORTATION AND PRODUCTION
Transportation and Sale of Natural Gas and Crude Oil. Sales of natural gas,
crude oil and condensate (collectively, the "Products") are made by the
Company at market prices not subject at this time to price controls. However,
there can be no assurance that such price controls will not be instituted in
the future. In addition, the price that the Company receives from the sale of
these Products is affected by the ability to transport and cost of
transporting the Products to market. Under applicable laws, the Federal Energy
Regulation Commission ("FERC") regulates both the construction of pipeline
facilities and the transportation of Products in interstate commerce. The
Company cannot predict when or if any further regulations might be imposed or
become effective or their effect, if any, on the Company's operations.
Regulation of Drilling and Production. Drilling and production operations of
the Company are subject to regulation under a wide range of state and federal
statutes, rules, orders and regulations. State and federal statutes and
regulations govern, among other matters, the amounts and types of substances
and materials that may be released into the environment, the discharge and
disposition of waste materials, the reclamation and abandonment of wells and
facility sites and remediation of contaminated sites, and require permits for
drilling operations, drilling bonds and reports concerning operations. The
Company's federal leases are administered by the Bureau of Land Management
("BLM") and the Minerals Management Service ("MMS"), which are administered,
along with the Bureau of Indian Affairs, by the federal Department of the
Interior. These leases contain relatively standard terms and require
compliance with detailed MMS and BLM regulations and orders, which are subject
to change. In addition to permits required by other federal agencies (such as
the Coast
54
<PAGE>
Guard, the Army Corps of Engineers and the Environmental Protection Agency),
lessees must obtain a permit from the MMS or BLM prior to commencement of
offshore or onshore drilling. Most states in which the Company owns and
operates properties have regulations governing conservation matters, including
provisions for the unitization or pooling of oil and natural gas properties,
the establishment of maximum rates of production from oil and natural gas
wells and the regulation of the spacing, plugging and abandonment of wells.
Many states also restrict production to the market demand for oil and natural
gas and several states have indicated interest in revising applicable
regulations. The effect of these regulations is to limit the amount of oil and
natural gas the Company can produce from its wells and to limit the number of
wells or the locations at which the Company can drill. Moreover, each state
generally imposes an ad valorem, production or severance tax with respect to
the production and sale of crude oil, natural gas and gas liquids within its
jurisdiction.
ENVIRONMENTAL REGULATIONS
General. The Company is subject to various federal environmental laws,
including the National Environmental Policy Act; the Clean Air Act of 1990, as
amended ("CAA"), Oil Pollution Act of 1990, as amended ("OPA"), Water
Pollution Control Act, as amended ("FWPCA"), the Resource Conservation and
Recovery Act, as amended ("RCRA"), the Toxic Substances Control Act, and the
Comprehensive Environmental Response, Compensation, and Liability Act, as
amended ("CERCLA"), various state and local environmental laws, and the
regulations adopted pursuant to such laws, governing the discharge of
materials into the environment or otherwise relating to the protection of the
environment or the restoration of natural resources. In particular, the
Company's drilling, development and production operations, its activities in
connection with storage and transportation of crude oil and other liquid
hydrocarbons and its use of facilities for treating, processing or otherwise
handling hydrocarbons and wastes therefrom are subject to stringent
environmental regulation, and violations are subject to reporting
requirements, civil penalties and criminal sanctions. As with the industry
generally, compliance with existing regulations increases the Company's
overall cost of business. Such areas affected include unit production expenses
primarily related to the control and limitation of air emissions and the
disposal of produced water, capital costs to drill exploration and development
wells resulting from expenses primarily related to the management and disposal
of drilling fluids and other oil and natural gas exploration wastes and
capital costs to construct, maintain and upgrade equipment and facilities and
plug and abandon inactive wells and clean up and backfill pits. There can be
no assurance that additional laws and regulations relating to the Company's
operations will not be imposed in the future or that any such laws and
regulations will not have a material adverse effect on the Company.
Environmental regulations historically have been subject to frequent change
by regulatory authorities, and the Company is unable to predict the ongoing
cost of compliance with these laws and regulations or the future impact of
such regulations on its operations. A discharge of hydrocarbons or hazardous
substances into the environment could subject the Company to substantial
expense, including both the cost to comply with applicable requirements
pertaining to the remediation of releases of hazardous substances into the
environment and claims by neighboring landowners and other third parties for
personal injury and property damage. The Company maintains insurance, which
may provide protection to some extent against some environmental liabilities,
but the coverage of such insurance and the amount of protection afforded
thereby cannot be predicted with respect to any particular possible
environmental liability and may not be adequate to protect the Company from
substantial expense.
Water. The OPA and regulations thereunder impose a variety of regulations on
"responsible parties" related to the prevention of oil spills and subject
responsible parties to strict, joint and potentially unlimited liability for
damages resulting from such spills in waters within the 200-mile exclusive
economic zone of the United States. A "responsible party" includes the owner
or operator
55
<PAGE>
of an onshore facility, vessel, or pipeline, or the lessee or permittee of the
area in which an offshore facility is located. The OPA assigns liability to
each responsible party for oil removal costs and a variety of public and
private damages. The OPA also may require the lessee or permittee of an
offshore area in which an oil or natural gas facility is located to establish
and maintain evidence of financial responsibility in the amount of $35.0
million to cover potential liabilities related to oil spills. Under certain
circumstances, this amount could be increased to up to $150.0 million. The
FWPCA imposes restrictions and strict controls regarding the discharge of
produced waters and other oil and natural gas wastes into navigable waters.
Permits must be obtained to discharge pollutants into 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, 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 impose liabilities in the case of a discharge of
petroleum or its derivatives, or other hazardous substances, into state
waters. In addition, the Environmental Protection Agency ("EPA") has
promulgated regulations that require many oil and natural gas production
operations to obtain permits to discharge storm water runoff.
Air. The CAA requires or will require most industrial operations in the
United States to incur capital expenditures in order to meet air emission
control standards developed by the EPA and state environmental agencies.
Although no assurances can be given, the Company believes implementation of
such amendments will not have a material adverse effect on its financial
condition or results of operations.
Solid Waste. RCRA is the principal federal statute governing the treatment,
storage and disposal of hazardous wastes. RCRA imposes stringent operating
requirements (and liability for failure to meet such requirements) on a person
who is either a "generator" or "transporter" of hazardous waste or an "owner"
or "operator" of a hazardous waste treatment, storage or disposal facility. At
present, RCRA includes a statutory exemption that allows oil and natural gas
exploration and production wastes to be classified as non-hazardous waste. A
similar exemption is contained in many of the state counterparts to RCRA. As a
result, the Company is not required to comply with a substantial portion of
RCRA's requirements because the Company's operations generate minimal
quantities of hazardous wastes. At various times in the past, proposals have
been made to rescind the exemption that excludes oil and gas exploration and
production wastes from regulation as hazardous waste under RCRA. Repeal or
modification of this exemption by administrative, legislative or judicial
process, or through changes in applicable state statutes, would increase the
volume of hazardous waste to be managed and disposed of by the Company.
Hazardous wastes are subject to more rigorous and costly disposal requirements
than are nonhazardous wastes. Such changes in the regulations may result in
additional capital expenditures or operating expenses by the Company.
CERCLA. CERCLA, also known as "Superfund", imposes joint and several
liability, without regard to fault or the legality of the original act, on
certain classes of persons that contributed to the release of a "hazardous
substance" into the environment. These persons include the "owner" or
"operator" of the site and companies that disposed or arranged for the
disposal of the hazardous substances found at the site. CERCLA also authorizes
the EPA and, in some instances, third parties to act in response to threats to
the public health or the environment and to seek to recover from the
responsible classes of persons the costs they incur. In the course of its
ordinary operations, the Company may generate waste that may fall within
CERCLA's definition of a "hazardous substance". As a result, the Company may
be found to be strictly, jointly and severally liable under CERCLA or under
analogous state laws for all or part of the costs required to clean up sites
at which such wastes have been disposed. The Company currently owns or leases,
and has in the past owned or leased, numerous properties that for many years
have been used for the exploration and production of oil and natural gas.
Although the Company has utilized operating and disposal practices that were
standard
56
<PAGE>
in the industry at the time, hydrocarbons or other wastes may have been
disposed of or released on or under the properties owned or leased by the
Company or on or under other locations where such wastes have been taken for
disposal. In addition, many of these properties have been operated by third
parties whose actions with respect to the treatment and disposal or release of
hydrocarbons or other wastes were not under the Company's control. These
properties and wastes disposed thereon may be subject to CERCLA, RCRA and
analogous state laws. Under such laws, the Company could be required to remove
or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators), to clean up contaminated property
(including contaminated groundwater) or to perform remedial plugging, capping
or backfilling operations to prevent future contamination.
57
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the current executive
officers and directors of the Company as of March 31, 1998. All directors are
elected for a term of one year and serve until their successors are duly
elected and qualified. All executive officers hold office until their
successors are duly appointed and qualified.
<TABLE>
<CAPTION>
OFFICER OR
DIRECTOR OF
THE COMPANY
NAME AGE POSITION SINCE
---- --- -------- -----------
<C> <C> <S> <C>
John F. Bookout................ 75 President, Chief Executive 1996
Officer and a Director
David C. Baggett............... 36 Senior Vice President and 1997
Chief Financial Officer
Dallas D. Laumbach............. 61 Senior Vice President-- 1996
Exploration and Production
Thomas E. Baker................ 67 General Counsel and 1996
Corporate Secretary
John J. Conklin, Jr............ 67 Director 1993
Ralph P. Davidson.............. 70 Director 1993
Adam P. Godfrey................ 36 Director 1998
William J. Murray.............. 83 Director 1984
Ogden M. Phipps................ 57 Director 1996
Ward W. Woods.................. 55 Director 1996
</TABLE>
John F. Bookout has served the Company as Chairman of the Board, President
and Chief Executive Officer since February 1996 upon completion of the Contour
Transaction. He had served as Chairman of the Board and President of Contour
since its inception in 1993. Before joining Contour as a founder, Mr. Bookout
served in positions of increasing responsibility for 38 years at Shell Oil
Company, starting in 1950 as a geologist and culminating as President, Chief
Executive Officer and a director from 1976 through June 1988. From 1988
through 1993, he served as a member of the Supervisory Board of Royal Dutch
Petroleum. He currently serves on the board of trustees of the United States
Counsel for International Business and various civic and educational bodies.
David C. Baggett was elected Senior Vice President and Chief Financial
Officer in March 1997. Prior to joining the Company, Mr. Baggett was a partner
with Deloitte & Touche LLP since June 1991, most recently as Partner-in-Charge
of the Houston energy and corporate finance practices.
Dallas D. Laumbach has served as Senior Vice President--Exploration and
Production of the Company since February 1996. He served as Senior Vice
President of Contour from December 1993 to February 1996. Before joining
Contour, Mr. Laumbach served in positions of increasing responsibility at
Shell Oil Company, concluding as Manager--Business Development within the
exploration and production segment.
Thomas E. Baker is an attorney and joined the Company in July 1996 as
General Counsel and Corporate Secretary. From 1991 through 1996, Mr. Baker was
engaged in a private consulting practice.
John J. Conklin, Jr. has served as a director of the Company since November
1993. Mr. Conklin has been a private investor since his retirement in 1989 as
a senior partner of Conklin, Cahill & Co., a member firm of the New York Stock
Exchange, where he was active for over 35 years. He has also served as a
member of the Board of Governors of the New York Stock Exchange, the Board of
Directors of the New York Futures Exchange and the National Market Advisory
Board.
58
<PAGE>
Ralph P. Davidson served as Chairman of the Board of the Company from
October 1995 through February 1996 and has served as a director of the Company
since November 1993. Mr. Davidson provides consulting services to nonprofit
organizations as President of Davidson Associates. From 1980 through 1987, he
was Chairman of the Board of Time, Inc., where he spent 21 years with Time
Magazine in various executive capacities. Mr. Davidson is a member of the
Board of Trustees of Phoenix House, the National Council for Adoption, the
Emeritus Foundation and The American University in Bulgaria.
Adam P. Godfrey has served as a director of the Company since March 19,
1998, and, since January 1, 1998, he has been the sole shareholder and
president of a corporation that serves as a manager of the limited liability
company that is the general partner of Bessemer Holdings, L.P. ("Bessemer")
and other affiliated investment partnerships including Bessemer and five of
the other affiliated investment partnerships that comprise the BH Group (the
"BH Group"). The BH Group owns a majority of the membership interests in
Contour. Mr. Godfrey is also the sole shareholder and president of a
corporation that is a general partner of Bessemer Partners & Co. ("BPC"), an
affiliate of Bessemer. From July 1993 to December 1997, Mr. Godfrey was a
principal with BPC, and a member of the general partner of Bessemer. From
August 1992 to July 1993, Mr. Godfrey was a principal with Bessemer Securities
Corporation ("BSC").
William J. Murray has served as a director of the Company since March 1984.
Mr. Murray has been an independent petroleum consultant for more than the past
five years. He served on the Texas Railroad Commission for 16 years, during
six of which he served as Chairman. Mr. Murray currently serves on a number of
industry committees, including as Chairman of the Industry Advisory Committee
on Natural Gas Ratable Take and Chairman of the Industry Voluntary Allocation
Committee.
Ogden M. Phipps has served as a director of the Company since February 1996.
He was Chairman of the Board of Bessemer Securities Corporation ("BSC") from
1982 through 1994 and of The Bessemer Group, Incorporated ("BGI") from 1991
through 1994. Mr. Phipps continues to serve as a director of BSC and BGI and a
Manager of Bessemer Securities LLC ("BSLLC"). BSC is the principal limited
partner of Bessemer Holdings, L.P. ("Bessemer"). BSC and BSLLC are principal
limited partners in another partnership in the BH Group. He also serves as a
director of several private companies and an officer and director of several
non-profit organizations.
Ward W. Woods has served as a director of the Company since February 1996.
Since 1989, he has been the sole shareholder and president of corporations
that are or have been a principal manager and/or managing general partner of
Bessemer and its predecessors. Mr. Woods is the sole shareholder of a
corporation that is a managing general partner of Bessemer Partners & Co. Mr.
Woods is President and Chief Executive Officer of Bessemer Securities LLC.
(BSLLC) formed in June of 1996, and of BSC, the principal limited partners of
Bessemer. Mr. Woods joined BSC in 1989. Mr. Woods is a Director of Boise
Cascade Corporation, Essex International, Inc. and several private companies.
BOARD AND COMMITTEES
The Board has established an Audit Committee, a Compensation Committee and a
Nominating Committee. The committees are composed as follows:
<TABLE>
<CAPTION>
AUDIT COMPENSATION NOMINATING
COMMITTEE COMMITTEE COMMITTEE
--------- ------------ ----------
<S> <C> <C>
Ralph P. Davidson--Chairman Ward W. Woods--Chairman Ogden M. Phipps--Chairman
John J. Conklin, Jr. John J. Conklin, Jr. William J. Murray
Adam P. Godfrey Ralph P. Davidson Ward W. Woods
Ogden M. Phipps
</TABLE>
59
<PAGE>
The Audit Committee is charged with various duties relating to the Company's
financial reporting obligations. These responsibilities include recommending
the appointment of independent auditors to the Board, reviewing the
compensation of the auditors, reviewing the scope and results of the annual
audit performed by the independent auditors, assuring that proper guidelines
are established for the dissemination of financial information, conferring
with the auditors to assure the adequate training and supervision of the
Company's accounting personnel, meeting periodically with the auditors, the
Board and senior management to ensure the adequacy of internal controls and
reporting functions and reviewing the Company's consolidated financial
statements.
The Compensation Committee has the authority and responsibility to review
the compensation policies of the Company, to administer and approve all
elements of compensation for elected corporate officers, to consider and
recommend to the Board succession plans for executive officers, and to grant
awards to key employees under the Company's incentive and performance plans.
The Nominating Committee was formed in 1996 to evaluate the size and
composition of the Board and establish guidelines for director qualifications.
Any recommendations by stockholders will be considered if received within 120
days prior to the anniversary date of the last annual meeting of stockholders.
The selection of all directors will be in accordance with established
guidelines.
COMPENSATION OF DIRECTORS
The Company's nonmanagement directors receive compensation of $3,750 on a
quarterly basis and $1,000 per committee meeting attended.
60
<PAGE>
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table sets forth the total remuneration paid during 1997, 1996
and 1995 to the Chief Executive Officer of the Company during 1997 and the
Company's other executive officers whose compensation exceeded $100,000 during
1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(/1/) COMPENSATION
NAME AND PRINCIPAL ----------------- ----------------- ALL OTHER
POSITION YEAR SALARY OPTION/SAR AWARDS COMPENSATION(/2/)
- ------------------ ---- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
John F. Bookout......... 1997 $800,000 $ -- $ 8,000
Chairman, President and
CEO 1996 700,000 -- 2,667
1995 -- -- --
Dallas D. Laumbach...... 1997 190,000 -- 9,500
Senior Vice President-- 1996 166,250 862,500 3,800
Exploration and Produc-
tion 1995 -- -- --
Thomas E. Baker......... 1997 175,000 98,000 9,500
General Counsel and
Corporate 1996 80,681 -- 3,500
Secretary 1995 -- -- --
David C. Baggett(/3/)... 1997 148,000 575,000 9,500
Senior Vice President
and 1996 -- -- --
Chief Financial Officer 1995 -- -- --
William C. Rankin(/3/).. 1997 37,500 -- 167,063
Former Senior Vice
President 1996 144,375 862,500 3,300
and Chief Financial Of-
ficer 1995 -- -- --
</TABLE>
- --------
(1) Perquisites and other benefits did not exceed 10% of any named officer's
total annual salary and bonus and therefore are excluded. Awards based on
1997 performance criteria were paid in 1998.
(2) Amounts for 1997 and 1996 include matching contributions by the Company to
the named executive officer's 401(k) account. Amounts for 1995 reflect the
portion of contributions to the ESOP attributable to the named executive
officers. Prior to 1996, the Company made annual contributions to the
ESOP, on behalf of all employees, in an amount equal to 15% of their cash
compensation up to a specified level. See "--Employee Benefit Plans--
Section 401(k) and Employee Stock Ownership Plan".
(3) In March 1997, Mr. Baggett was appointed Senior Vice President and Chief
Financial Officer after Mr. Rankin left the employment of the Company. Mr.
Rankin was paid $165,000 in severance payments in accordance with his
employment agreement.
STOCK OPTION PLANS
The Company maintains stock option plans (collectively, the "Stock Option
Plans") providing for the authority to grant options intended to be (i) not
qualified ("NQSOs") under section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), (ii) qualified ("QSOs") under section 422 of the Code or
(iii) either NQSOs or QSOs. Stock Option Plans covering the grant of QSOs only
were adopted in 1987 (the "1987 Plan"), 1991 (the "1991 Plan"), 1995 (the
"1995 Plan") and 1996 (the "1996 Plan"), covering the grants of options for
500,000 shares, 500,000 shares, 1.5 million shares and 1 million shares,
respectively, of Common Stock. In February 1996 a Stock Option Plan covering
the grant of NQSOs only (the "1996 NQSO Plan") was adopted in accordance with
the terms of the Contour Agreements and provides for the grant of options to
purchase a total of 2.5 million shares of Common Stock to senior executives
designated by Mr. Bookout.
In March 1997, the Board of Directors of the Company adopted, subject to
stockholder approval, the Company's 1997 Annual and Long-Term Incentive-
Performance Plan (the "1997 Plan"). The
61
<PAGE>
stockholders of the Company approved the 1997 Plan on May 29, 1997. The 1997
Plan amended the 1996 Plan in its entirety, with effect from January 1, 1997,
except as to the 10,000 outstanding grants of options. Awards granted under
the 1997 Plan may be (i) annual performance awards ("Annual Performance
Awards"); (ii) stock options designated as either NQSOs or QSOs; or (iii)
other forms of stock-based performance awards (collectively, (i), (ii) and
(iii) referred to as "Awards"). The total number of shares authorized for
issuance under the 1997 Plan is 4,200,000 shares.
The exercise price for NQSOs granted under the 1997 Plan and QSOs are fixed
either by the Compensation Committee of the Board or the Board at the fair
market value of the Common Stock at the time of the grant. Options granted
under the 1987, 1991 and 1995 Plans are exercisable during the term of the
optionee's employment and three years thereafter for up to ten years from the
date of grant. Options granted under the 1996 Plan, the 1996 NQSO Plan, and
the 1997 Plan are exercisable after vesting (at the annual rates of 100%, 33
1/3%, 25%, respectively) during the term of the optionee's employment and six
months thereafter for up to ten years from the date of grant. The exercise
price for options granted under the 1996 NQSO Plan was fixed in the plan. The
QSO Plans and 1996 NQSO Plan will terminate upon the earlier of (i) the date
on which all shares available for issuance have been issued upon the exercise
of options granted thereunder, or (ii) ten years from the date of adoption.
Under the 1997 Plan, no award may be granted after May 29, 2001.
Under the 1987 Plan, options were granted to purchase a total of 185,000
shares of common stock of Kelley Oil at $1.10 per share during 1988 and
315,000 shares at $2.00 per share during 1989. Under the 1991 Plan, options
were granted to purchase a total of 219,000 shares of Kelley Oil's common
stock at $7 5/8 per share during 1991, 15,000 shares at $7.00 per share during
1993, 266,000 shares of Common Stock at $2 3/8 per share during 1995 and
14,000 shares at $2 3/16 per share during 1997. The options granted under the
1991 Plan with an exercise price of $7 5/8 and $7.00 per share were repriced
in 1995, to the extent then outstanding, at $4 1/8 per share. Under the 1995
Plan, options to purchase a total of 1,500,000 shares of Common Stock were
granted during 1995 at exercise prices ranging from $1 3/4 to $2 3/8 per
share. Under the 1996 Plan, options were granted to purchase a total of 20,000
shares of Common Stock at $2 7/8 per share during 1996, and 25,000 shares of
Common Stock at $2 9/16 per share in February 1997. Under the 1996 NQSO Plan,
options were granted to purchase a total of 2,500,000 shares of Common Stock
at the exercise price of $1.00 per share. Under the 1997 Plan, NQSOs were
granted in 1997 to purchase a total of 442,500 shares of Common Stock at
prices ranging from $2 9/16 to $3 1/4 per share. In 1997, 1996 and 1995,
options were exercised for a total of 415,400 shares; 35,600 shares; and
225,000 shares, respectively, at prices ranging from $1.00 to $2 3/8 per share
during 1997. At December 31, 1997, options issued and outstanding to purchase
shares of Common Stock under the 1987, 1991, 1996, 1996 NQSO and 1997 Plans
were 111,000 shares; 450,205 shares; 1,394,295 shares; 10,000 shares;
2,212,500 shares; and 422,500 shares, respectively, or a total of 4,600,500
shares of Common Stock subject to options under all of the Plans.
Mr. Bookout does not participate in any of the Stock Option Plans or in the
1997 Plan.
62
<PAGE>
The following table provides information about options granted during 1997
to the Named Executive Officers. No other options were granted to the Named
Executive Officers during the year.
OPTION/SAR GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
NUMBER OF OPTIONS/SARS PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM
UNDERLYING EMPLOYEES (/1/)
OPTIONS/SARS IN FISCAL EXERCISE EXPIRATION -------------------
NAME GRANTED YEAR PRICE($/SH) DATE 5% ($) 10% ($)
---- ------------ ------------ ---------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
David C. Baggett........ 575,000 57.64 1.00 3/20/2007 1,684,463 3,002,363
Thomas E. Baker......... 98,000 9.82 2-9/16 5/29/2007 146,000 371,000
</TABLE>
- --------
(1) Potential realizable is based on an assumption that the stock price of the
Common Stock appreciates at the annual rates shown (compounded annually)
from the date of grant until the expiation of the option. These figures
were calculated based on requirements promulgated by the Securities and
Exchange Commission and are not intended to reflect the Company's actual
future stock price growth, which is dependant on future performance and
market conditions.
The following table sets forth information on stock options exercised in
1997, unexercised stock options held, and option values held by the Named
Executive Officers as of December 31, 1997.
AGGREGATED OPTION EXERCISES IN 1997
AND OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTONS AT
ACQUIRED OPTIONS AT YEAR END YEAR END (/1/)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David C. Baggett(/2/)... None N/A None 575,000 None $682,813
Thomas E. Baker......... None N/A None 98,000 None None
John F. Bookout......... None N/A None None None None
Dallas D. Laumbach...... None N/A 287,500 575,000 $341,406 $682,813
William C. Rankin(/2/).. 287,500 $483,615 None None None None
</TABLE>
- --------
(1) This value was calculated by subtracting the exercise price from the
closing price of the Common Stock listed on the Nasdaq National Market
System on December 31, 1997. The value reflects the increase in price and
not actual proceeds received.
(2) Mr. Rankin left the employment of the Company in March 1997. At such time,
287,500 options had vested. The remaining 575,000 options were forfeited
in accordance with the terms and conditions of the NSO Plan. Those 575,000
options were granted to David C. Baggett on March 20, 1997.
EMPLOYEE BENEFIT PLANS
Section 401(k) and Employee Stock Ownership Plan
In 1984 an employee stock ownership plan ("ESOP") was established for the
benefit of substantially all of the employees. Effective September 1, 1996,
the ESOP was converted into a Section 401(k) Plan (the "401(k) Plan"). All
employees are eligible to participate in the 401(k) Plan. The Company
previously contributed to the ESOP an annual amount equal to 15% of each
employee's compensation (up to a specified level) to enable the ESOP to
purchase qualifying securities for the accounts of employees. Qualifying
securities were allocated to employees' accounts in the ESOP in amounts that
were proportionate to the ESOP's repayment of borrowings incurred to purchase
those securities, all of which are currently allocated following repayment of
ESOP borrowings in 1995.
Employees become fully vested in their accounts in the 401(k) Plan after two
years of participation. Prior to converting the ESOP into a Section 401(k)
Plan, the ESOP held Preferred Stock
63
<PAGE>
which the Board redeemed in exchange for the same number of shares of Common
Stock. Effective with the conversion of the ESOP into a Section 401(k) Plan,
participants have the opportunity to invest their accounts in various mutual
funds and in Common Stock. The Company matches 100% of the employees'
contributions to the 401(k) Plan in an amount up to 6% of the employee's
salary, subject to limits required by the Code.
EMPLOYMENT AGREEMENTS
In connection with the Contour Transaction, the Company entered into three-
year employment agreements with John F. Bookout and Dallas D. Laumbach at base
salaries of $800,000 and $190,000, respectively. In March 1997, the Company
entered into a three-year employment agreement with David C. Baggett at a base
salary of $190,000. Each of the agreements provides for a lump sum severance
payment if the covered executive is terminated without cause, as defined in
the agreements. The severance payment would be equal to one year of
compensation based on the salary and bonus rate at the time of termination,
except that Mr. Bookout would be entitled to a payment covering the balance of
the three-year term, and Mr. Baggett would be entitled to a severance payment
equal to two years of compensation. Each of the agreements provides for
various other benefits and for indemnification of the covered executive under
certain conditions.
CHANGE OF CONTROL AND SEVERANCE AGREEMENTS
In November 1995, the Company entered into change of control agreements with
16 management and professional personnel, entitling them to severance benefits
in the event their employment with the Company is terminated under certain
circumstances following a change of control, as defined in the agreements. For
this purpose, the Contour Transaction constituted a change of control. The
severance benefits amount to salary continuation for 12 to 24 months, based on
the employee's highest compensation rate during the two years prior to
termination, depending on the individual. Pursuant to a severance agreement
with Mr. Rankin, the Company made payments to Mr. Rankin totaling $165,000 in
1997.
64
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of March 31, 1998, with
respect to the Common Stock and $2.625 Preferred owned beneficially, directly
or indirectly, by persons (other than the 401(k) Plan) known by the Company to
own beneficially more than five percent of any class of its capital stock,
each of the Company's directors, the Named Executive Officers and by all of
its current directors and executive officers as a group.
<TABLE>
<CAPTION>
COMMON PERCENT PREFERRED PERCENT
NAME OF BENEFICIAL OWNER STOCK OF CLASS STOCK OF CLASS
- ------------------------ ---------- -------- --------- --------
<S> <C> <C> <C> <C>
Bessemer Holdings, L.P. and Contour
Production Company L.L.C.(/1/)........ 75,000,000 59.7% -- --
David C. Baggett(/2/).................. 191,666 * -- --
Thomas E. Baker........................ -- -- -- --
John F. Bookout(/3/)................... -- -- -- --
John J. Conklin, Jr.................... 71,037 * -- --
Ralph P. Davidson(/4/)................. 154,862 * -- --
Adam P. Godfrey(/3/)................... -- -- -- --
Dallas D. Laumbach(/2/)................ 575,000 * -- --
William J. Murray(/5/)................. 81,805 * 2,000 *
Ogden M. Phipps(/3/)................... -- -- -- --
William C. Rankin(/6/)................. -- -- -- --
Ward W. Woods(/3/)..................... -- -- -- --
All current directors and executive of-
ficers as a group (10 persons)(/7/)... 1,074,370 * 2,000 *
</TABLE>
- --------
* Less than 1%
(1) Bessemer Holdings, L.P. ("Bessemer") owns a majority of the membership
interests in Contour. Contour's and Bessemer's address is 630 Fifth
Avenue, 39th Floor, New York, New York 10111. Based on a Statement on
Schedule 13-D filed with the SEC, Contour and Bessemer are each deemed to
beneficially own the shares of Common Stock held of record by Contour. JFB
Squared, Ltd. and Bevairohn, Ltd., partnerships controlled by John F.
Bookout, Chairman, President and Chief Executive Officer of the Company,
and three other investment partnerships having the same general partner as
Bessemer own the remaining interests in Contour and may be deemed to
beneficially own the Common Stock held by Contour. Contour has agreed,
subject to certain limitations, to vote for the election of Mr. Bookout as
a director of the Company.
(2) Represents shares of Common Stock subject to vested options under the NSO
Plan.
(3) Excludes 75.0 million shares of Common Stock held by Contour, in which
Messrs. Bookout, Godfrey, Phipps and Woods and partnerships controlled by
Mr. Bookout have an indirect interest and as to which each of Messrs.
Godfrey, Phipps and Woods have disclaimed beneficial ownership.
(4) Includes 122,253 shares of Common Stock held by Mr. Davidson's wife and
609 shares of Common Stock held by his daughter.
(5) Represents shares of $2.625 Preferred held in Mr. Murray's defined benefit
pension plan.
(6) Mr. Rankin left the Company in March 1997.
(7) See notes 2 through 5 above.
CHANGE OF CONTROL
On February 15, 1996, Contour acquired 48.0 million newly issued shares of
Common Stock from the Company for $48.0 million. On December 1, 1997, Contour
purchased an additional 27.0 million newly issued shares of Common Stock for
$27.0 million. As of December 31, 1997, Contour owned 75.0 million shares of
Common Stock, or 59.7% of the outstanding Common Stock, which represented
58.8% of the total voting power of the outstanding voting stock of the
Company. According to a Schedule 13D filed with the Securities and Exchange
Commission by Contour, the funds used by Contour in both cases were provided
by its members.
65
<PAGE>
CERTAIN TRANSACTIONS
Kelley Oil was the managing general partner of Kelley Partners prior to the
merger of Kelley Partners into the Company in March 1996 and is the managing
general partner of DDPs sponsored prior to the Consolidation to conduct
development drilling operations on selected properties of the Company. Kelley
Oil was reimbursed by Kelley Partners and the DDPs for all appropriate
administrative and overhead expenses incurred in the administration of these
partnerships aggregating approximately $1.6 million net of intercompany
eliminations in 1995. Kelley Oil was also reimbursed by these affiliated
programs for direct costs incurred and advanced in connection with their lease
acquisition, exploration and development activities aggregating approximately
$6.1 million in 1995.
Following the removal of David L. Kelley as Chairman, President and Chief
Executive Officer of the Company in October 1995, the Company entered into
consulting arrangements with Mr. Kelley at a monthly rate of $10,000 through
December 31, 1996. The Company also entered into a termination and settlement
agreement with Mr. Kelley, providing for (i) severance benefits to Mr. Kelley
aggregating $467,000 payable in monthly installments through December 31,
1996, (ii) transfer to Mr. Kelley of title to his corporate automobile with an
estimated value of $24,000, (iii) assumption of his unfunded subscriptions for
units in the 1992 DDP and the 1994 DDP in exchange for those units pursuant to
their respective partnership agreements, (iv) miscellaneous benefits with a
total estimated value of $75,000 and (v) an undertaking to pay Mr. Kelley an
amount equal to any federal income tax liability incurred by him as special
general partner of Kelley Partners and its operating partnership upon any
merger of Kelley Partners or its operating partnership into the Company, as a
result of which the Company paid Mr. Kelley $70,000 in connection with the
March 1996 merger of Kelley Partners into the Company.
During 1995, the Company entered into change of control agreements with 16
employees. See "Management--Change of Control and Severance Agreements".
Pursuant to the Contour Transaction, Contour purchased 48.0 million newly
issued shares of Common Stock on February 15, 1996, for $48.0 million and an
option to purchase an additional 27.0 million shares of Common Stock for $27.0
million, which option was exercised December 1, 1997 to fund a portion of the
purchase price of the SPR Acquisition. In connection with the Contour
Transaction, the Company granted certain registration rights to Contour with
respect to Common Stock held or acquired by Contour.
In connection with the Contour Transaction, the Company entered into an
agreement (the "Advisory Agreement") with Bessemer Partners & Co. ("BPCO"), an
affiliate of Bessemer, providing for the engagement of BPCO to provide the
Company with financial advisory services for a term expiring at the end of
1998. Under the Advisory Agreement, BPCO has assisted the Company in arranging
a new credit facility and negotiating the related agreements and is assisting
the Company in restructuring its current capital structure. For its services
under the Advisory Agreement, BPCO received an advisory fee of $2.0 million at
the closing of the Contour Transaction and $500,000 in each of December 1996
and 1997 and is entitled to receive $500,000 in December 1998. In addition,
BPCO is entitled to reimbursement of expenses incurred in connection with
rendering advisory services. The Company also has agreed to indemnify BPCO and
its affiliates against certain liabilities under the Advisory Agreement.
It is the policy of the Company to structure any transactions between the
Company and its officers, directors, principal stockholders or other
affiliates only on terms no less favorable to the Company than terms that
could be obtained on an arms-length basis from unrelated parties and only upon
approval by a majority of the Company's independent and disinterested
directors.
66
<PAGE>
DESCRIPTION OF THE CREDIT FACILITY
On December 1, 1997, in connection with the SPR Acquisition, the Company,
Kelley Oil and Kelley Operating (collectively, the "Borrowers") entered into
an Amended and Restated Credit Agreement with a group of financial
institutions and Chase Texas, as Agent. The Credit Facility provides for a
three-year, senior secured $140.0 million revolving credit facility.
Availability under the Credit Facility is subject to a borrowing base based
upon, among other things, the proved oil and gas reserves and other assets of
the Borrowers and the market prices for oil and natural gas. The borrowing
base is redetermined at least semiannually by the Agent, with the consent of
the other lenders, and may be redetermined more frequently at the election of
the lenders or the Borrowers. If the aggregate principal amount of outstanding
loans and letters of credit under the Credit Facility exceeds the then-current
borrowing base, the Company is required to repay 50% of such excess within 90
days and the remainder of such excess within 180 days unless such excess is
the result of the redetermination of the borrowing base following an asset
sale, in which case such excess must be repaid on the date of such
redetermination.
In connection with the Second Amendment to the Credit Agreement dated April
14, 1998, the borrowing base was set at $138.0 million and the Threshold
Amount, which is the amount that would ordinarily be made available by the
lenders to a similar borrower under a borrowing base, was set at $125.0
million. As a result of the sale of certain properties, effective July 24,
1998, the Threshold Amount was reduced by $8.0 million. The proceeds from the
sale were used to reduce outstanding borrowings under the Credit Facility. The
excess of the borrowing base over the Threshold Amount temporarily provides
the Company with additional liquidity following the SPR Acquisition. The
Second Amendment provides that the next scheduled redetermination of the
borrowing base and the Threshold Amount, which is redetermined at the time the
borrowing base is redetermined, will be on November 1, 1998 and that the
borrowing base will not exceed the Threshold Amount after that date. There can
be no assurance that the borrowing base will not be reduced in the future.
Borrowings under the Credit Facility bear interest, at the option of the
Borrowers, at either (i) LIBOR plus 1.0% to 1.75% (depending on the level of
utilization of the borrowing base) or (ii) the higher of (a) the federal funds
rate plus 0.5% to 0.75% and (b) the Agent's prime rate, plus 0.00% to 0.25%
(depending upon the utilization of the borrowing base). The Borrowers will
incur a quarterly commitment fee ranging from 0.30% to 0.5% per annum on the
average unused portion of the borrowing base, depending upon the level of
utilization.
The Credit Facility contains covenants which, among other things, limit the
ability of the Borrowers to incur debt, enter into lease transactions, incur
liens, pay dividends or similar payments, enter into hedging transactions,
merge with other entities and prepay indebtedness. In addition, the Company is
required to maintain certain financial ratios, including a minimum leverage
ratio and a minimum interest coverage ratio. The Credit Agreement contains
provisions that prohibit the modification of the Indenture in a manner adverse
to the lenders.
In addition to customary events of default, the Credit Agreement provides
that a reduction in Bessemer's or its affiliates' ownership of the Company's
common stock below 20% will be an event of default.
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
The Company has outstanding 7 7/8% Convertible Subordinated Notes due 1999
(the "7 7/8% Subordinated Notes") in the aggregate principal amount at
maturity of $34.1 million and 8 1/2% Convertible Subordinated Debentures due
April 1, 2000 (the "8 1/2% Subordinated Debentures") in the aggregate
principal amount of $26.9 million (together, the "Subordinated Debt"). Each
$1,000 face value amount of the 7 7/8% Subordinated Notes is convertible into
71.263 shares of the Company's Common Stock or 35.632 shares of the Company's
Common Stock and 7.435 shares of Preferred Stock. Each $1,000 face value
amount of the 8 1/2% Subordinated Debentures is convertible into 51.864 shares
of the Company's Common Stock or 25.932 shares of the Company's Common Stock
and 5.411 shares of Preferred Stock.
67
<PAGE>
DESCRIPTION OF THE NOTES
The Notes are to be issued as a separate series of notes under an Indenture,
dated as of May 29, 1998 (the "Indenture"), among the Company, Kelley Oil
Corporation, Kelley Operating Company, Ltd. and United States Trust Company of
New York, as trustee (the "Trustee"). Unless otherwise indicated, references
in this "Description of the Notes" section to "Notes" include the Outstanding
Notes, if any, that remain outstanding following consummation of the Exchange
Offer. The following summary, which describes certain provisions of the
Indenture and the Notes does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, the Indenture and the Notes,
including the definitions of certain terms therein and those terms made a part
of the Indenture by the Trust Indenture Act of 1939, as amended. Copies of the
Indenture and the Registration Agreement are available upon request from the
Company.
On October 29, 1996, the Company issued $125,000,000 aggregate principal
amount of 10 3/8% Senior Subordinated Notes pursuant to an Indenture dated as
of October 15, 1996 among the Company, as issuer, the Subsidiary Guarantors,
as guarantors, and United States Trust Company of New York, as Trustee (the
"Existing Indenture"). Those notes, designated Series A, were subsequently
exchanged for an equal principal amount of notes, designated Series B (the
"Existing Notes"), issued under the Existing Indenture and having an identical
interest rate, maturity and other terms as the Series A notes, which exchange
was made pursuant to an exchange offering registered with the Securities and
Exchange Commission. The Indenture has terms that are substantially equivalent
to the terms of the Existing Indenture. The Notes will have an identical
interest rate and maturity as, and will rank parri passu in right of payment
with, the Existing Notes.
GENERAL
The Notes offered hereby will be unsecured senior subordinated obligations
of the Company, limited to $30 million aggregate principal amount, and will
mature on October 15, 2006. The Notes will bear interest at the rate per annum
of 10 3/8% from the date of issuance of the Notes, payable semiannually to
Holders of record at the close of business on the April 1 or October 1
immediately preceding the interest payment date on April 15 and October 15 of
each year, commencing on the first such payment date following the issuance of
the Notes. Accrued and unpaid interest on the Outstanding Notes that are
exchanged for Notes will be payable on or before the first April 15 or October
15 following such exchange. Interest on overdue principal and (to the extent
permitted by law) on overdue installments of interest will accrue at 1% per
annum in excess of such rate. Interest on the Notes will be computed on the
basis of a 360-day year of twelve 30-day months.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The Indenture provides for the issuance of up to $50.0 million aggregate
principal amount of additional Notes having terms and conditions identical to
those of the Notes offered hereby (the "Additional Notes"), subject to
compliance with the covenants contained in the Indenture. Any Additional Notes
will be part of the same issue as the Notes offered hereby and will vote on
all matters with the Notes offered hereby. Unless the context otherwise
requires, for purposes of this "Description of the Notes," references to the
Notes include Additional Notes.
68
<PAGE>
OPTIONAL REDEMPTION
Except as set forth in the following paragraph the Notes will not be
redeemable at the option of the Company prior to October 15, 2001. Thereafter,
the Notes will be redeemable, at the Company's option, in whole or in part, at
any time or from time to time, upon not less than 30 nor more than 60 days'
prior notice mailed by first-class mail to each Holder's registered address,
at the following redemption prices (expressed in percentages of principal
amount), plus accrued interest to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
commencing on October 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2001................................... 105.188%
2002................................... 102.594
2003 and thereafter.................... 100.000
</TABLE>
In addition, at any time and from time to time prior to October 15, 1999,
the Company may redeem in the aggregate up to 35% of the original principal
amount of the Notes with the proceeds of one or more Equity Offerings
following which there is a Public Market, at a redemption price (expressed as
a percentage of principal amount) of 110.375% plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that either at least $18.0 million aggregate principal
amount of the Notes must remain outstanding after each such redemption or such
redemption must retire the Notes in their entirety.
Notwithstanding the preceding two paragraphs, the Company will not be
permitted to redeem the Existing Notes unless, substantially concurrently with
such redemption, the Company redeems an aggregate principal amount of Notes
(rounded to the nearest integral multiple of $1,000) equal to the product of:
(1) a fraction, the numerator of which is the aggregate principal amount of
Existing Notes to be so redeemed and the denominator of which is the aggregate
principal amount of Existing Notes outstanding immediately prior to such
proposed redemption and (2) the aggregate principal amount of Notes
outstanding immediately prior to such proposed redemption. Similarly, the
Company will not be permitted to redeem the Notes unless, substantially
concurrently with such redemption, the Company redeems an aggregate principal
amount of Existing Notes (rounded to the nearest integral multiple of $1,000)
equal to the product of: (1) a fraction, the numerator of which is the
aggregate principal amount of Notes to be so redeemed and the denominator of
which is the aggregate principal amount of Notes outstanding immediately prior
to such proposed redemption and (2) the aggregate principal amount of Existing
Notes outstanding immediately prior to such proposed redemption.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall 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.
SINKING FUND
There will be no sinking fund payments for the Notes.
69
<PAGE>
SUBSIDIARY GUARANTIES
Kelley Operating, Kelley Oil and each other Restricted Subsidiary of the
Company (other than the Programs) that has total net assets as of the end of
the most recent fiscal year (as set forth on the balance sheet of such
Restricted Subsidiary prepared in accordance with GAAP) equal to or greater
than the greater of $2.5 million and one percent (1%) of Adjusted Consolidated
Net Tangible Assets as of such date, has issued a Subsidiary Guaranty of the
Notes as described herein. Each Subsidiary Guarantor, as primary obligor and
not merely as surety, will irrevocably and unconditionally guarantee on a
senior subordinated basis the performance and the punctual payment when due,
whether at Stated Maturity, by acceleration, by redemption or otherwise, of
all the obligations of the Company under the Indenture and the Notes (all such
obligations guaranteed by the Subsidiary Guarantors being herein called the
"Guaranteed Obligations" and each such Subsidiary Guaranty being herein called
a "Subsidiary Guaranty"). Each Subsidiary Guaranty is limited in amount to an
amount not to exceed the maximum amount that can, after giving effect to all
other contingent and fixed liabilities of the applicable Subsidiary Guarantor,
be guaranteed by such Subsidiary Guarantor without rendering such Subsidiary
Guaranty voidable under applicable law relating to fraudulent transfer or
fraudulent conveyance or similar laws affecting the rights of creditors
generally. Each Subsidiary Guarantor has agreed to pay, in addition to the
amount stated above, any and all expenses (including reasonable counsel fees
and expenses) incurred by the Trustee and the Holders in enforcing any rights
under the Subsidiary Guaranty with respect to such Subsidiary Guarantor.
Each Subsidiary Guaranty is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
(b) be binding upon the relevant Subsidiary Guarantor and (c) enure to the
benefit of and be enforceable by the Trustee, the Holders and their
successors, transferees and assigns.
Pursuant to the Indenture, any Subsidiary Guarantor may consolidate with,
merge with or into, or transfer all or substantially all its assets to any
other Person to the same extent the Company may consolidate with, merge with
or into, or transfer all or substantially all its assets to, any other Person;
provided, however, that if such Person is not the Company or a Subsidiary
Guarantor, such Subsidiary Guarantor's obligations under the Indenture and its
Subsidiary Guaranty must be expressly assumed by such other Person. However,
upon the sale or disposition (by merger or otherwise) of any Subsidiary
Guarantor to an entity (other than to the Company or a Subsidiary Guarantor)
permitted by the Indenture, such Subsidiary Guarantor will be released and
relieved from all its obligations under its Subsidiary Guaranty. See "--
Certain Covenants--Merger and Consolidation".
RANKING
The indebtedness evidenced by the Notes and any Subsidiary Guaranty will be
unsecured, and will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment of all existing and future Senior Indebtedness
of the Company or Senior Indebtedness of the applicable Subsidiary Guarantor,
as the case may be, including the Company's and such Subsidiary Guarantor's
obligations under the Credit Agreement. As of June 30, 1998, the Company had
approximately $101.1 million of Senior Indebtedness outstanding, $100.6
million of which represented Secured Indebtedness.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes and only Indebtedness of a Subsidiary Guarantor that is
Senior Indebtedness of such Subsidiary Guarantor will rank senior to such
Subsidiary Guarantor's Subsidiary Guaranty, in each case in accordance with
the provisions of the Indenture. The Notes and the Subsidiary Guaranties will
rank pari passu with all other Senior Subordinated Indebtedness of the Company
(including the Existing Notes) or Senior Subordinated Indebtedness of the
relevant Subsidiary Guarantor (including the
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Existing Subsidiary Guaranties), as the case may be. As of June 30, 1998, the
Company had approximately $120.9 million of Senior Subordinated Indebtedness
outstanding, excluding the Notes. The Company has agreed in the Indenture that
it will not Incur, directly or indirectly, and it will not permit any
Subsidiary Guarantor to Incur, directly or indirectly, any Indebtedness that
is subordinate or junior in ranking in right of payment to its Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or
is expressly subordinated in right of payment to Senior Subordinated
Indebtedness. Unsecured Indebtedness is not deemed to be subordinated or
junior to Secured Indebtedness merely because it is unsecured.
Substantially all the operations of the Company are currently conducted
through its subsidiaries. Claims of creditors of such subsidiaries, including
trade creditors, secured creditors and creditors holding guarantees issued by
such subsidiaries, and claims of preferred stockholders (if any) of such
subsidiaries, generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes, even though such obligations may not
constitute Senior Indebtedness. The Notes and each Subsidiary Guaranty,
therefore, will be effectively subordinated to creditors (including trade
creditors) and preferred stockholders (if any) of subsidiaries of the Company
(other than the relevant Subsidiary Guarantor). As of June 30, 1998, the
Company's subsidiaries (other than the Subsidiary Guarantors) had no
liabilities to any Person other than the Company and its subsidiaries, other
than their guaranties of the Credit Facility. Although the Indenture limits
the incurrence of Indebtedness and the issuance of preferred stock of certain
of the Company's subsidiaries, such limitation is subject to a number of
significant qualifications; moreover, the Indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness under the Indenture. See "--Certain Covenants--
Limitation on Sale or Issuance of Capital Stock of Restricted Subsidiaries".
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any
Notes (collectively, "pay the Notes") if (i) any Designated Senior
Indebtedness is not paid when due or (ii) any other default on Designated
Senior Indebtedness occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms unless, in either
case, the default has been cured or waived and any such acceleration has been
rescinded or such Designated Senior Indebtedness has been paid in full.
However, the Company may pay the Notes without regard to the foregoing if the
Company and the Trustee receive written notice approving such payment from the
Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
second preceding sentence) with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company
may not pay the Notes for a period (a "Payment Blockage Period") commencing
upon the receipt by the Trustee (with a copy to the Company) of written notice
(a "Blockage Notice") of such default from the Representative of the holders
of such Designated Senior Indebtedness specifying an election to effect a
Payment Blockage Period and ending 179 days thereafter (or earlier if such
Payment Blockage Period is terminated (i) by written notice to the Trustee and
the Company from the Person or Persons who gave such Blockage Notice, (ii)
because the default giving rise to such Blockage Notice is no longer
continuing or (iii) because such Designated Senior Indebtedness has been
repaid in full). Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior Indebtedness
or the Representative of such holders have accelerated the maturity of such
Designated Senior
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Indebtedness, the Company must resume payments on the Notes after the end of
such Payment Blockage Period. The Notes shall not be subject to more than one
Payment Blockage Period in any consecutive 360-day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar
proceeding relating to the Company or its property, the holders of Senior
Indebtedness will be entitled to receive payment in full of such Senior
Indebtedness before the Noteholders are entitled to receive any payment, and
until the Senior Indebtedness is paid in full, any payment or distribution to
which Noteholders would be entitled but for the subordination provisions of
the Indenture will be made to holders of such Senior Indebtedness as their
interests may appear. If a distribution is made to Noteholders that, due to
the subordination provisions, should not have been made to them, such
Noteholders are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration.
The obligations of a Subsidiary Guarantor under its Subsidiary Guaranty, as
they relate to the principal of and interest on the Notes, are unsecured
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty will be
subordinated in right of payment to the rights of holders of Senior
Indebtedness of such Subsidiary Guarantor. The terms of the subordination
provisions described above with respect to the Company's obligations under the
Notes apply equally to a Subsidiary Guarantor and the obligations of such
Subsidiary Guarantor under its Subsidiary Guaranty, as they relate to the
principal of and interest on the Notes.
By reason of the subordination provisions contained in the Indenture, in the
event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders, and creditors of
the Company who are not holders of Senior Indebtedness may recover less,
ratably, than holders of Senior Indebtedness and may recover more, ratably,
than the Noteholders.
Notwithstanding the foregoing, payment from the money or the proceeds of
U.S. Government Obligations held in any defeasance trust described under
"Defeasance" below will not be contractually subordinated in right of payment
to any Senior Indebtedness or subject to the restrictions described herein.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in the Oil and Gas Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary or (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary; provided, however, that
any such Restricted Subsidiary described in clauses (ii) or (iii) above is
primarily engaged in the Oil and Gas Business.
"Adjusted Consolidated Assets" means at any time the total amount of assets
of the Company and its consolidated Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), after deducting
therefrom all current liabilities of the Company and its consolidated
Restricted Subsidiaries (excluding intercompany items), all as set forth on
the
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consolidated balance sheet of the Company and its consolidated Restricted
Subsidiaries as of the end of the most recent fiscal quarter ended at least 45
days prior to the date of determination.
"Adjusted Consolidated Net Tangible Assets" or "CNTA" means (without
duplication), as of the date of determination, (a) the sum of (i) discounted
future net revenues from proved oil and gas reserves of the Company and its
Restricted Subsidiaries calculated in accordance with SEC guidelines before
any state or federal income taxes, as estimated in a reserve report prepared
as of the end of the Company's most recently completed fiscal year, which
reserve report is prepared or reviewed by independent petroleum engineers, as
increased by, as of the date of determination, the discounted future net
revenues of (A) estimated proved oil and gas reserves of the Company and its
Restricted Subsidiaries attributable to any material acquisition consummated
since the date of such year-end reserve report, and (B) estimated oil and gas
reserves of the Company and its Restricted Subsidiaries attributable to
material extensions, discoveries and other additions and upward determinations
of estimates of proved oil and gas reserves due to exploration, development or
exploitation, production or other activities conducted or otherwise occurring
since the date of such year-end reserve report which would, in the case of
determinations made pursuant to clauses (A) and (B), in accordance with
standard industry practice, result in such additions or revisions, in each
case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such year-end reserve report), and decreased by, as of the date of
determination, the discounted future net revenues of (C) estimated proved oil
and gas reserves of the Company and its Restricted Subsidiaries produced or
disposed of since the date of such year-end reserve report and (D) reductions
in the estimated oil and gas reserves of the Company and its Restricted
Subsidiaries since the date of such year-end reserve report attributable to
material downward determinations of estimates of proved oil and gas reserves
due to exploration, development or exploitation, production or other
activities conducted or otherwise occurring since the date of such year-end
reserve report which would, in the case of determinations made pursuant to
clauses (C) and (D), in accordance with standard industry practice, result in
such determinations, in each case calculated in accordance with SEC guidelines
(utilizing the prices utilized in such year-end reserve report); provided
that, in the case of each of the determinations made pursuant to clauses (A)
through (D), such increases and decreases shall be as estimated by the
Company's engineers, except that if as a result of such acquisitions,
dispositions, discoveries, extensions or revisions, there is a Material Change
which is an increase, then such increases and decreases in the discounted
future net revenue shall be confirmed in writing by an independent petroleum
engineer, (ii) the capitalized costs that are attributable to oil and gas
properties of the Company and its Restricted Subsidiaries to which no proved
oil and gas reserves are attributed, based on the Company's books and records
as of a date no earlier than the date of the Company's latest annual or
quarterly financial statements, (iii) the Net Working Capital on a date no
earlier than the date of the Company's latest annual or quarterly financial
statements and (iv) the greater of (I) the net book value on a date no earlier
than the date of the Company's latest annual or quarterly financial statements
and (II) the appraised value, as estimated by independent appraisers, of other
tangible assets of the Company and its Restricted Subsidiaries as of a date no
earlier than the date of the Company's latest audited financial statements
(provided that the Company shall not be required to obtain such an appraisal
of such assets if no such appraisal has been performed), minus (b) the sum of
(i) minority interests, (ii) any gas balancing liabilities of the Company and
its Restricted Subsidiaries reflected in the Company's latest audited
financial statements, (iii) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the same prices utilized in the
Company's year-end reserve report), attributable to reserves subject to
participation interests, overriding royalty interests or other interests of
third parties, pursuant to participation, partnership, vendor financing or
other agreements then in effect, or which otherwise are required to be
delivered to third parties, (iv) the discounted future net revenues,
calculated in accordance with SEC guidelines (utilizing the same prices
utilized in the Company's year-end reserve report), attributable to reserves
that are required to be delivered to third parties to fully satisfy the
obligations of the Company and its Restricted Subsidiaries with respect to
Volumetric Production Payments on the schedules specified with respect thereto
and (v) the discounted future net revenues, calculated in accordance with SEC
guidelines,
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attributable to reserves subject to Dollar-Denominated Production Payments
that, based on the estimates of production included in determining the
discounted future net revenues specified in the immediately preceding clause
(a)(i) (utilizing the same prices utilized in the Company's year-end reserve
report), would be necessary to satisfy fully the obligations of the Company
and its Restricted Subsidiaries with respect to Dollar-Denominated Production
Payments on the schedules specified with respect thereto.
"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 the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the provisions described under "--Certain
Covenants--Limitation on Restricted Payments", "--Certain Covenants--
Limitations on Sales of Assets and Subsidiary Stock" and "--Certain
Covenants--Limitation on Affiliate Transactions" only, "Affiliate" shall also
mean any beneficial owner of Capital Stock representing 5% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the
Company or of rights or warrants to purchase such Capital Stock (whether or
not currently exercisable) and any Person who would be an Affiliate of any
such beneficial owner pursuant to the first sentence hereof. Shareholders and
Affiliates of Bessemer Securities Corporation ("BSC") that would not be
Affiliates of the Company other than by reason of being shareholders or
Affiliates of BSC and that neither in fact participate in the management of
any of BSC, Bessemer, Holdings or the Company, nor are controlled by BSC,
Bessemer, Holdings, the Company, or any of their respective Affiliates who in
fact participate in the management of any of BSC, Bessemer, Holdings or the
Company, shall not be deemed to be "Affiliates" of the Company.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of
this definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary.
Notwithstanding the foregoing, none of the following shall be deemed to be an
Asset Disposition: (1) a disposition by a Restricted Subsidiary to the Company
or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (2)
for purposes of the covenant described under "--Certain Covenants--Limitation
on Sales of Assets and Subsidiary Stock" only, a disposition that constitutes
a Restricted Payment permitted by the covenant described under "--Certain
Covenants--Limitation on Restricted Payments"), (3) the sale or transfer
(whether or not in the ordinary course of business) of oil and gas properties
or direct or indirect interests in real property; provided, however, that at
the time of such sale or transfer such properties do not have associated with
them any proved reserves, (4) the abandonment, farm-out, lease or sublease of
developed or undeveloped oil and gas properties in the ordinary course of
business, (5) the trade or exchange by the Company or any Restricted
Subsidiary of any oil and gas property owned or held by the Company or such
Restricted Subsidiary for any oil and gas property owned or held by another
Person or (6) the sale or transfer of hydrocarbons or other mineral products
or surplus or obsolete equipment in the ordinary course of business.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in the Sale/Leaseback Transaction, compounded annually) of the total
obligations of the lessee for rental payments during
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the remaining term of the lease included in such Sale/Leaseback Transaction
(including any period for which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Banks" has the meaning specified in the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday (as defined in
the Indenture).
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that for purposes of this clause (i) such person shall be
deemed to have "beneficial ownership" of all shares that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 35% 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 and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause (i),
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 in this clause (i)), directly or
indirectly, of 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 power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation);
(ii) during any period of two consecutive years from and after the
Original Issue Date, 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
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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; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period
that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such period and the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period, (2) if the Company or any Restricted
Subsidiary has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of such period or if any Indebtedness is to
be repaid, repurchased, defeased or otherwise discharged on the date of the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio, EBITDA and Consolidated Interest Expense for such period shall be
calculated on a pro forma basis as if such discharge had occurred on the first
day of such period and as if the Company or such Restricted Subsidiary has not
earned the interest income actually earned during such period in respect of
cash or Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness, (3) if since the beginning of such
period the Company or any Restricted Subsidiary shall have made any Asset
Disposition (other than an Asset Disposition involving assets having a fair
market value of less than the greater of one percent (1%) of Adjusted
Consolidated Net Tangible Assets as of the end of the Company's then most
recently completed fiscal year and $2.0 million), then EBITDA for such period
shall be reduced by an amount equal to EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to EBITDA (if negative), directly
attributable thereto for such period and Consolidated Interest Expense for
such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Company and its continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (or, if the Capital
Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale), (4)
if since the beginning of such period the Company or any Restricted Subsidiary
(by merger or otherwise) shall have made an Investment in any Restricted
Subsidiary (or any person which becomes a Restricted Subsidiary) or an
acquisition (including by way of lease) of assets, including any acquisition
of assets occurring in connection with a transaction requiring a calculation
to be made hereunder, EBITDA and Consolidated Interest Expense for such period
shall
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be calculated after giving pro forma effect thereto (including the Incurrence
of any Indebtedness) as if such Investment or acquisition occurred on the
first day of such period and (5) if since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition, any Investment or acquisition
of assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by the Company or a Restricted Subsidiary during such period,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Asset Disposition, Investment
or acquisition occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting Officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of such Indebtedness shall be calculated as if the rate
in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in
excess of 12 months).
"Consolidated Current Liabilities" as of the date of determination means the
aggregate amount of liabilities of the Company and its consolidated Restricted
Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), on a consolidated basis, after
eliminating (i) all intercompany items between the Company and any Restricted
Subsidiary and (ii) all current maturities of long-term Indebtedness, all as
determined in accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication,
(i) interest expense attributable to capital leases and imputed interest with
respect to Attributable Debt, (ii) capitalized interest, (iii) non-cash
interest expenses, (iv) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing, (v) net
costs (including amortization of fees and upfront payments) associated with
interest rate caps and other interest rate and currency options that, at the
time entered into, resulted in the Company and its Restricted Subsidiaries
being net payees as to future payouts under such caps or options, and interest
rate and currency swaps and forwards for which the Company or any of its
Restricted Subsidiaries has paid a premium, (vi) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, to the extent that, by the terms of the Preferred
Stock, failure to pay such dividends would result in a bankruptcy of the
issuer thereof and (vii) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary or secured by a Lien on assets of the Company or any
Restricted Subsidiary to the extent such Indebtedness constitutes
Indebtedness of the Company or any Restricted Subsidiary (whether or not such
Guarantee or Lien is called upon); provided, however, "Consolidated Interest
Expense" shall not include any (w) amortization of costs relating to debt
issuances (including the amortization of debt discount) other than the
amortization of debt discount related to the issuance of securities with an
original issue price of not more than 90% of the principal thereof, (x)
amortization of debt discount to the extent it relates to revaluations of
financial instruments recognized in connection with the Consolidation, (y)
Consolidated Interest Expense with respect to any Indebtedness Incurred
pursuant to clause (b)(8) of the covenant described under "--Certain
Covenants--Limitation on Indebtedness" and (z) noncash interest expense
Incurred in connection with interest rate caps and other interest rate and
currency
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options that, at the time entered into, resulted in the Company and its
Restricted Subsidiaries being either neutral or net payors as to future
payouts under such caps or options.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person (other than the Company) if such Person is not a Restricted Subsidiary,
except that (A) subject to the exclusion contained in clause (iv) below, the
Company's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution paid to a Restricted Subsidiary, to
the limitations contained in clause (iii) below) and (B) the Company's equity
in a net loss of any such Person for such period shall be included in
determining such Consolidated Net Income; (ii) any net income (or loss) of any
Person acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any
net income of any Restricted Subsidiary if such Restricted Subsidiary is
subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the exclusion contained
in clause (iv) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to the Company or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the Company's equity in a net
loss of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (iv) any gain or loss realized upon
the sale or other disposition of any assets of the Company or its consolidated
Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which
is not sold or otherwise disposed of in the ordinary course of business and
any gain or loss realized upon the sale or other disposition of any Capital
Stock of any Person; (v) extraordinary gains or losses; and (vi) the
cumulative effect of a change in accounting principles. Notwithstanding the
foregoing, for the purposes of the covenant described under "Certain
Covenants--Limitation on Restricted Payments" only, there shall be excluded
from Consolidated Net Income any dividends, repayments of loans or advances or
other transfers of assets from Unrestricted Subsidiaries to the Company or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(E) thereof.
"Consolidated Net Tangible Assets", as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet
of the Company and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving effect to
purchase accounting and after deducting therefrom Consolidated Current
Liabilities and, to the extent otherwise included, the amounts of: (i)
minority interests in consolidated Subsidiaries held by Persons other than the
Company or a Restricted Subsidiary; (ii) excess of cost over fair value of
assets of businesses acquired, as determined in good faith by the Board of
Directors; (iii) any revaluation or other write-up in book value of assets
subsequent to the Issue Date as a result of a change in the method of
valuation in accordance with GAAP consistently applied; (iv) unamortized debt
discount and expenses and other unamortized deferred charges, goodwill,
patents, trademarks, service marks, trade names, copyrights, licenses,
organization or developmental expenses and other intangible items; (v)
treasury stock; (vi) cash set apart and held in a sinking or other analogous
fund established for the purpose of redemption or other retirement of Capital
Stock to the extent such obligation is not reflected in Consolidated Current
Liabilities; and (vii) Investments in and assets of Unrestricted Subsidiaries.
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"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of
any action for the purpose of which the determination is being made, as (i)
the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit
and (B) any amounts attributable to Disqualified Stock.
"Credit Agreement" means that certain Credit Agreement, dated as of February
14, 1996, by and among the Company and Texas Commerce Bank National
Association (or any successor thereto or replacement thereof), as agent and as
a lender, and certain other institutions, as lenders, including any related
notes, guarantees, collateral documents, instruments and agreements executed
in connection therewith, and in each case as amended, restated, modified,
renewed, refunded, replaced or refinanced, in whole or in part, from time to
time, including the Amended and Restated Credit Agreement, dated as of
December 1, 1997, by and among the Company, Kelley Oil and Kelley Operating,
as borrowers, certain other Subsidiaries of the Company, as guarantors, Texas
Commerce Bank National Association, as agent and a lender, and certain other
institutions, as lenders.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities (including the Credit Agreement) or
commercial paper facilities with banks or other institutional lenders
providing for revolving credit loans, term loans, production payments,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all the obligations of the
Company or any Restricted Subsidiary under any Credit Facility and (ii) any
other Senior Indebtedness of the Company 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
$25.0 million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock to
the extent 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, it (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness
or Disqualified Stock or (iii) is redeemable, in whole or in part, at the
option of the holder thereof, in each case described in the immediately
preceding clauses (i), (ii) or (iii), on or prior to the Stated Maturity of
the Notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes shall not constitute Disqualified Stock if the
"asset sale" or "change of control" provisions applicable to such Capital
Stock are not more favorable to the holders of such Capital Stock than the
provisions described under "--Certain Covenants--Limitation on
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Sales of Assets and Subsidiary Stock" and "--Certain Covenants--Change of
Control"; provided further, however, that the Company's Convertible
Exchangeable Preferred Stock outstanding on the Original Issue Date shall not
be deemed Disqualified Stock.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) provision for taxes based on
income or profits, (b) depletion and depreciation expense, (c) amortization
expense, (d) exploration costs and (e) all other non-cash charges (excluding
any such non-cash charge to the extent that it represents an accrual of or
reserve for cash charges in any future period or amortization of a prepaid
cash expense that was paid in a prior period except such amounts as the
Company determines in good faith are nonrecurring), and less, to the extent
included in calculating such Consolidated Net Income and in excess of any
costs or expenses attributable thereto and deducted in calculating such
Consolidated Net Income, the sum of (x) the amount of deferred revenues that
are amortized during such period and are attributable to reserves that are
subject to Volumetric Production Payments and (y) amounts recorded in
accordance with GAAP as repayments of principal and interest pursuant to
Dollar-Denominated Production Payments. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation
and amortization and other non-cash charges of, a Subsidiary of the Company
shall be added to Consolidated Net Income to compute EBITDA only to the extent
(and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such 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 such Subsidiary or its stockholders.
"Equity Offering" means a primary offering, whether public or private, of
shares of common stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indenture" means the Indenture, dated as of October 15, 1996,
among the Company, as Issuer, certain of its subsidiaries, as Subsidiary
Guarantors, and the United States Trust Company of New York, as Trustee.
"Existing Notes" means the Securities issued under the Existing Indenture
and outstanding on the Issue Date.
"Existing Subsidiary Guarantee" means any Subsidiary Guarantee under the
Existing Indenture, whether in effect on the Issue Date or thereafter
Incurred.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Original Issue Date, including those set forth
in (i) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
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"Guarantee" means, without duplication, any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any Indebtedness
of any Person and any obligation, direct or indirect, contingent or otherwise,
of such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness of such Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning. The term
"Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Oil and Gas Hedging Contract, Interest Rate Agreement or
Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by
such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. The accretion of
principal of a non-interest bearing or other discount security shall not be
deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person and all Attributable Debt in
respect of Sale/Leaseback Transactions entered into by such Person; (iii) all
obligations of such Person issued or assumed as the deferred purchase price of
property (which purchase price is due more than six months after the date of
taking delivery of title to such property), including all obligations of such
Person for the deferred purchase price of property under any title retention
agreement (but excluding trade accounts payable arising in the ordinary course
of business); (iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit securing
obligations (other than obligations described in (i) through (iii) above)
entered into in the ordinary course of business of such Person to the extent
such letters of credit are not drawn upon or, if and to the extent drawn upon,
such drawing is reimbursed no later than the tenth Business Day following
receipt by such Person of a demand for reimbursement following payment on the
letter of credit); (v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person the liquidation
preference with respect to, any Preferred Stock (but excluding, in each case,
any accrued dividends); (vi) all obligations of such Person relating to any
Production Payment or in respect of production imbalances (but excluding
production imbalances arising in the ordinary course of business); (vii) all
obligations of the type referred to in clauses (i) through (vi) of other
Persons and all dividends of other Persons for the payment of which, in either
case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guarantee
(including, with respect to any Production Payment, any warranties or
guarantees of production or payment by such Person with respect to such
Production Payment but excluding other contractual obligations of such Person
with respect to such Production Payment); (viii) all obligations of the type
referred to in clauses (i) through (vii) of other Persons secured by any Lien
on any property or asset of such first-mentioned Person (whether or not such
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obligation is assumed by such first-mentioned Person), the amount of such
obligation being deemed to be the lesser of the value of such property or
assets or the amount of the obligation so secured and (ix) to the extent not
otherwise included in this definition, Hedging Obligations of such Person. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and
the maximum liability, upon the occurrence of the contingency giving rise to
the obligation, of any contingent obligations at such date.
It is understood that none of the following shall constitute Indebtedness:
(i) indebtedness arising from agreements providing for indemnification or
adjustment of purchase price or from guarantees securing any obligations of
the Company or any of its Subsidiaries pursuant to such agreements, incurred
or assumed in connection with the disposition of any business, assets or
Subsidiary of the Company, other than guarantees or similar credit support by
the Company or any of its Subsidiaries of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or Subsidiary for the
purpose of financing such acquisition; (ii) any trade payables and other
accrued current liabilities incurred in the ordinary course of business as the
deferred purchase price of property; (iii) obligations arising from guarantees
to suppliers, lessors, licensees, contractors, franchisees or customers
incurred in the ordinary course of business; (iv) obligations (other than
express Guarantees of indebtedness for borrowed money) in respect of
Indebtedness of other Persons arising in connection with (A) the sale or
discount of accounts receivable, (B) trade acceptances and (C) endorsements of
instruments for deposit in the ordinary course of business; (v) obligations in
respect of performance bonds provided by the Company or its Subsidiaries in
the ordinary course of business and refinancings thereof; (vi) obligations
arising from the honoring by a bank or other financial institution of a check,
draft or similar instrument drawn against insufficient funds in the ordinary
course of business, provided, however, that such obligation is extinguished
within two business days of its incurrence; and (vii) obligations in respect
of any obligations under workers' compensation laws and similar legislation.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers or joint interest partners or drilling partnerships
sponsored by the Company or any Restricted Subsidiary in the ordinary course
of business that are recorded as accounts receivable on the balance sheet of
the lender) or other extensions of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by such Person. For
purposes of the definition of "Unrestricted Subsidiary", the definition of
"Restricted Payment" and the covenant described under "--Certain Covenants--
Limitation on Restricted Payments", (i) "Investment" shall include the portion
(proportionate to the Company's equity interest in such Subsidiary) of the
fair market value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of
such Subsidiary at the time of such redesignation; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors.
"Issue Date" means May 29, 1998, the date on which the Outstanding Notes
were originally issued.
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"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Limited Recourse Indebtedness" means, with respect to any Production
Payments, Indebtedness, the terms of which limit the liability of the Company
and its Restricted Subsidiaries solely to the hydrocarbons covered by such
Production Payments; provided, however, that no default with respect to such
Indebtedness would permit any holder of any other Indebtedness of the Company
or any Restricted Subsidiary to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its stated
maturity.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 15% during a fiscal quarter
in the discounted future net revenues from proved oil and gas reserves of the
Company and its Restricted Subsidiaries, calculated in accordance with clause
(a)(i) of the definition of Adjusted Consolidated Net Tangible Assets;
provided, however, that the following will be excluded from the calculation of
Material Change: (i) any acquisitions during the fiscal quarter of oil and gas
reserves that have been estimated by independent petroleum engineers and with
respect to which a report or reports of such engineers exist and (ii) any
disposition of properties existing at the beginning of such fiscal quarter
that have been disposed of in compliance with the covenant described under "--
Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock".
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees (including financial and other advisory
fees) and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with
the terms of any Lien upon or other security agreement of any kind with
respect to such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be repaid
out of the proceeds from such Asset Disposition, (iii) all distributions and
other payments required to be made to minority interest holders in
Subsidiaries or joint ventures as a result of such Asset Disposition and (iv)
the deduction of appropriate amounts provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the property or
other assets disposed in such Asset Disposition and retained by the Company or
any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Present Value" means, with respect to any proved hydrocarbon reserves,
the discounted future net revenues associated with such reserves, determined
in accordance with the rules and regulations (including interpretations
thereof) of the SEC in effect on the Original Issue Date.
"Net Working Capital" means (a) all current assets of the Company and its
Restricted Subsidiaries minus (b) all current liabilities of the Company and
its Restricted Subsidiaries, except current liabilities included in
Indebtedness, determined in accordance with GAAP.
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"Oil and Gas Business" means the business of the exploration for, and
exploitation, development, acquisition, production, processing (but not
refining), marketing, storage and transportation of, hydrocarbons, and other
related energy and natural resource businesses (including oil and gas services
businesses related to the foregoing).
"Oil and Gas Hedging Contract" means any oil and gas purchase or hedging
agreement, and other agreement or arrangement, in each case, that is designed
to provide protection against oil and gas price fluctuations.
"Original Issue Date" means October 29, 1996, being the date on which the
Company's 10 3/8% Senior Subordinated Notes, Series A, were originally issued.
"Permitted Business Investment" means any Investment made in the ordinary
course of, and of a nature that is or shall have become customary in, the Oil
and Gas Business as a means of actively exploiting, exploring for, acquiring,
developing, producing, processing, gathering, marketing or transporting oil
and gas through agreements, transactions, interests or arrangements which
permit one to share risks or costs, comply with regulatory requirements
regarding local ownership or satisfy other objectives customarily achieved
through the conduct of Oil and Gas Business jointly with third parties,
including (i) ownership interests in oil and gas properties, processing
facilities, gathering systems or ancillary real property interests and (ii)
Investments in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, unitization agreements, pooling
agreements, joint bidding agreements, service contracts, joint venture
agreements, partnership agreements (whether general or limited), subscription
agreements, stock purchase agreements and other similar agreements with third
parties.
"Permitted Holders" means (i) the members of Contour Production Company
L.L.C., a Delaware limited liability company ("Contour"), as of the Original
Issue Date (the "Contour Group"), (ii) Contour, so long as Contour is
controlled (as defined in the definition of "Affiliate" above), directly or
indirectly, by the Contour Group, (iii) officers, principals, employees,
direct or indirect owners or Affiliates of Persons described in clauses (i) or
(ii), (iv) Persons who beneficially own Voting Stock of the Company on the
Original Issue Date and (v) officers or employees of the Company or any of its
Subsidiaries as of the Original Issue Date.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Restricted Subsidiary is an Oil and Gas
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is an Oil and Gas
Business; (iii) Temporary Cash Investments; (iv) receivables owing to the
Company or any Restricted Subsidiary if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary
deems reasonable under the circumstances; (v) payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (vi) loans or advances to employees made
in the ordinary course of business; (vii) stock, obligations or securities
received in settlement of debts created in the ordinary course of business and
owing to the Company or any Restricted Subsidiary or in satisfaction of
judgments; (viii) any Person to the extent such Investment represents the non-
cash portion of the consideration received for an Asset Disposition as
permitted pursuant to the covenant described under "--Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock" and (ix) Permitted
Business Investments.
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"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under worker's compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government
bonds to secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or import duties or for the payment
of rent, in each case Incurred in the ordinary course of business; (b) Liens
imposed by law, such as carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings or other Liens arising out of judgments or awards against such
Person with respect to which such Person shall then be proceeding with an
appeal or other proceedings for review; (c) Liens for property taxes not yet
subject to penalties for non-payment or which are being contested in good
faith and by appropriate proceedings; (d) Liens in favor of issuers of surety
bonds or letters of credit issued pursuant to the request of and for the
account of such Person in the ordinary course of its business; provided,
however, that such letters of credit do not constitute Indebtedness; (e) minor
survey exceptions, minor encumbrances, easements or reservations of, or rights
of others for, licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions as
to the use of real property or Liens incidental to the conduct of the business
of such Person or to the ownership of its properties which were not Incurred
in connection with Indebtedness and which do not in the aggregate materially
impair their use in the operation of the business of such Person; (f) Liens
securing Indebtedness Incurred to finance the construction, purchase or lease
of, or repairs, improvements or additions to, property of such Person
(including Liens securing Indebtedness of the pollution control or revenue
bond type); provided, however, that the Lien may not extend to any other
property owned by such Person or any of its Subsidiaries at the time the Lien
is Incurred, and the Indebtedness secured by the Lien may not be Incurred more
than 180 days after the later of the acquisition, completion of construction,
repair, improvement, addition or commencement of full operation of the
property subject to the Lien; (g) Liens to secure Indebtedness permitted under
the provisions described in clause (b)(1) or (b)(8) under "--Certain
Covenants--Limitation on Indebtedness"; provided, however, that any such Lien
securing Indebtedness described in such clause (b)(8) shall be limited to the
hydrocarbons related thereto and any gathering systems utilized in gathering
and transporting such hydrocarbons; (h) Liens existing on the Original Issue
Date or created since the Original Issue Date and existing on the Issue Date
and otherwise permitted under the Existing Indenture; (i) Liens on property or
shares of Capital Stock of another Person at the time such other Person
becomes a Subsidiary of such Person; provided, however, that such Liens are
not created, incurred or assumed in connection with, or in contemplation of,
such other Person becoming such a Subsidiary; provided further, however, that
such Lien may not extend to any other property owned by such Person or any of
its Subsidiaries; (j) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of a
merger or consolidation with or into such Person or a Subsidiary of such
Person; provided, however, that such Liens are not created, incurred or
assumed in connection with, or in contemplation of, such acquisition; provided
further, however, that the Liens may not extend to any other property owned by
such Person or any of its Subsidiaries; (k) Liens securing Indebtedness or
other obligations of a Subsidiary of such Person owing to such Person or a
wholly owned Subsidiary of such Person (or, in the case of the Company, to a
Wholly Owned Subsidiary); (l) Liens securing Hedging Obligations so long as
such Hedging Obligations relate to Indebtedness that is, and is permitted to
be under the Indenture, secured by a Lien on the same property securing such
Hedging Obligations; (m) Liens arising in the ordinary course of business in
favor of the United States, any state thereof, any foreign country or any
department, agency, instrumentality or political subdivision of any such
jurisdiction, to secure partial, progress, advance or other payments pursuant
to any contract or statute; (n) Liens to secure any Refinancing (or successive
Refinancing) as a whole, or in part, of any Indebtedness secured by any Lien
referred to in the foregoing clauses (f), (h), (i) and (j); provided, however,
that (x) such new Lien shall be limited to all or part of the same property
that secured the original Lien (plus
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improvements to or on such property) and (y) the Indebtedness secured by such
Lien at such time is not increased to any amount greater than the sum of (A)
the outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clause (f), (h), (i) or (j) at the time the
original Lien became a Permitted Lien and (B) an amount necessary to pay any
fees and expenses, including premiums, related to such Refinancing; (o) Liens
on, related to, properties to secure all or part of the costs incurred in the
ordinary course of business of exploration, drilling, development or operation
thereof; (p) Liens on pipeline or pipeline facilities which arise out of
operation of law; (q) Liens reserved in oil and gas mineral leases for bonus
or rental payments and for compliance with the terms of such leases; and (r)
Liens arising under partnership agreements, oil and gas leases, farm-out
agreements, division orders, contracts for the sale, purchase, exchange,
transportation or processing (but not the refining) of oil, gas or other
hydrocarbons, unitization and pooling declarations and agreements, development
agreements, operating agreements, area of mutual interest agreements, and
other similar agreements which are customary in the Oil and Gas Business.
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clause (f), (i) or (j) above to the extent (A) such Lien applies
to any Additional Assets or Permitted Business Investment acquired directly or
indirectly from Net Available Cash pursuant to clause (a)(i)(B) or paragraph
(c) of the covenant described under "--Certain Covenants--Limitation on Sales
of Assets and Subsidiary Stock" and (B) the fair value of such Additional
Assets or Permitted Business Investment is less than the sum of (x) the amount
of Indebtedness secured by such Lien plus (y) the amount of Net Available Cash
so invested in such Additional Assets or Permitted Business Investment.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Programs" means Kelley Partners 1992 Development Drilling Program, a Texas
limited partnership, and Kelley Partners 1994 Development Drilling Program, a
Texas limited partnership, together with Kelley Partners 1992 Development
Drilling Joint Venture, a Texas general partnership, Kelley Partners 1994
Development Drilling Joint Venture, a Texas general partnership, and each of
their respective successors.
"Public Market" means any time when at least 15% of the total issued and
outstanding common stock of the Company has been distributed by means of an
effective registration statement under the Securities Act or sales pursuant to
Rule 144 under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness (including an
Incurrence pursuant to clause (ii) of the first or third paragraph of the
covenant described under "--Certain Covenants--Merger and Consolidation").
"Refinanced" and "Refinancing" shall have correlative meanings.
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"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness and Indebtedness that is deemed to be
Incurred at the time of a merger or consolidation pursuant to clause (ii) of
the first or third paragraph of the covenant described under "--Certain
Covenants--Merger and Consolidation", provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or
if Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary (other than a Subsidiary Guarantor) that Refinances Indebtedness of
the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the declaration or
payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than (x) dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock), (y) dividends or distributions payable solely to the Company or a
Restricted Subsidiary, and (z) pro rata dividends or other distributions made
by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders
(or owners of an equivalent interest in the case of a Subsidiary that is an
entity other than a corporation)), (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company held
by any Person or of any Capital Stock of a Restricted Subsidiary held by any
Affiliate of the Company (other than a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock), (iii) the purchase,
repurchase, redemption, defeasance or other acquisition or retirement for
value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment of any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition)
or (iv) the making of any Investment in any Person (other than a Permitted
Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means with respect to any Person (i) Indebtedness of
such Person, and all obligations of such Person under any Credit Facilities,
whether outstanding on the Original Issue Date or thereafter Incurred and (ii)
accrued and unpaid interest (including interest accruing on or after
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the filing of any petition in bankruptcy or for reorganization relating such
Person to the extent post-filing interest is allowed in such proceeding) in
respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable
unless, with respect to obligations described in the immediately preceding
clause (i) or (ii), in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such
obligations are subordinate in right of payment to the Notes or the applicable
Subsidiary Guaranty, as the case may be; provided, however, that Senior
Indebtedness shall not include (1) any obligation of such Person to any
Subsidiary of such Person, (2) any liability for Federal, state, local or
other taxes owed or owing by such Person, (3) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including guarantees thereof or instruments evidencing such liabilities), (4)
any Indebtedness of such Person (and any accrued and unpaid interest in
respect thereof) which is subordinate or junior in any respect to any other
Indebtedness or other obligation of such Person or (5) that portion of any
Indebtedness which at the time of Incurrence is Incurred in violation of the
Indenture (other than, in the case of the Company or any of its Restricted
Subsidiaries, Indebtedness under any Credit Facility that is Incurred on the
basis of a representation by the Company to the applicable lenders that such
Person is permitted to Incur such Indebtedness under the Indenture).
"Senior Subordinated Indebtedness" means (i) with respect to the Company,
the Existing Notes, the Notes and any other Indebtedness of the Company that
specifically provides that such Indebtedness is to rank pari passu with the
Notes in right of payment and is not subordinated by its terms in right of
payment to any Indebtedness or other obligation of the Company which is not
Senior Indebtedness and (ii) with respect to a Subsidiary Guarantor, the
Subsidiary Guaranty of such Subsidiary Guarantor, the Existing Subsidiary
Guarantee of such Subsidiary Guarantor and any other Indebtedness of such
Subsidiary Guarantor that specifically provides that such Indebtedness is to
rank pari passu with such Subsidiary Guaranty in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of such Subsidiary Guarantor which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to
that effect.
"Subsidiary" means, in respect of any Person, 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 interests (including
partnership interests) entitled (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, (ii) such Person and one or more Subsidiaries of such Person or
(iii) one or more Subsidiaries of such Person.
"Subsidiary Guarantors" means Kelley Operating, Kelley Oil and each other
Restricted Subsidiary of the Company (other than the Programs) that (i) has
total net assets as of the end of the most recent fiscal year (as set forth on
the balance sheet of such Subsidiary prepared in accordance with GAAP)
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equal to or greater than the greater of $2.5 million and one percent (1%) of
Adjusted Consolidated Net Tangible Assets as of such date and (ii) delivers a
Subsidiary Guaranty.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes, which Guarantee will be
subordinated to Senior Indebtedness of such Subsidiary Guarantor on
substantially the same terms as the Notes are subordinated to Senior
Indebtedness of the Company. Any such Subsidiary Guaranty (i) will be
substantially in the form prescribed by the Indenture, (ii) will be limited in
amount to an amount not to exceed the maximum amount that can be guaranteed by
the applicable Subsidiary Guarantor without rendering such Subsidiary
Guaranty, as it relates to such Subsidiary Guarantor, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of
creditors generally and (iii) will provide that, upon the sale or other
disposition (including by way of consolidation or merger) of a Subsidiary
Guarantor or the sale or disposition of all or substantially all the assets of
a Subsidiary Guarantor permitted by the Indenture, such Subsidiary Guarantor
shall be released from all its obligations under its Subsidiary Guaranty.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50.0 million (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 180 days after the date of acquisition, issued by a Person (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-2" (or higher) according to Moody's Investors Service, Inc. or
"A-2" (or higher) according to Standard and Poor's Ratings Group, and (v)
investments in securities with maturities of six months or less from the date
of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings
Group or "A" by Moody's Investors Service, Inc.
"Total Assets" of the Company means the total consolidated assets of the
Company and its Restricted Subsidiaries, as shown on the most recent balance
sheet of the Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien
on any property of, the Company or any other Subsidiary of the Company that is
not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total assets of $1,000
or less or (B) if such Subsidiary has assets greater than $1,000, such
designation would be permitted under the covenant described under "--Certain
Covenants--Limitation on Restricted Payments". The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that
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immediately after giving effect to such designation (x) the Company could
Incur $1.00 of additional Indebtedness under paragraph (a) of the covenant
described under "--Certain Covenants--Limitation on Indebtedness" and (y) no
Default shall have occurred and be continuing. Any such designation by the
Board of Directors shall be evidenced by the Company to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the issuer's option.
"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 a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding
and normally entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by
other Persons to the extent such shares are required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary) is owned
by the Company or one or more Wholly Owned Subsidiaries.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, Incur, directly or indirectly, any
Indebtedness; provided, however, that the Company or a Subsidiary Guarantor
may Incur Indebtedness if, on the date of such Incurrence and after giving
effect thereto, the Consolidated Coverage Ratio equals or exceeds (i) 2.0
to 1.0, if such Indebtedness is Incurred on or prior to September 30, 1999,
(ii) 2.25 to 1.0, if such Indebtedness is Incurred after September 30, 1999
and on or prior to September 30, 2001, and (iii) 2.5 to 1.0 if such
Indebtedness is Incurred after September 30, 2001.
(b) Notwithstanding the foregoing paragraph (a), the Company and any
Restricted Subsidiary may Incur the following Indebtedness:
(1) Indebtedness of the Company Incurred pursuant to any Credit
Facility, so long as the aggregate principal amount of all
Indebtedness outstanding under all Credit Facilities does not,
at any one time, exceed the aggregate amount of borrowing
availability as of such date under all Credit Facilities that
determine availability on the basis of a borrowing base or other
asset-based calculation; provided, however, that in no event
shall the aggregate principal amount of Indebtedness Incurred
pursuant to this clause (1) outstanding at any one time exceed
$250.0 million; provided further, however, that if the Company
or a Subsidiary Guarantor Incurs any Indebtedness pursuant to
this clause (1) that would cause the total principal amount of
Indebtedness outstanding under this clause (1) to exceed an
amount equal to $150.0 million (less the aggregate amount of all
Net Available Cash of Asset Dispositions applied to reduce
Senior Indebtedness pursuant to clause (a)(i)(A) of the covenant
described under the caption "--Limitation on Sales of
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Assets and Subsidiary Stock"), the Consolidated Coverage Ratio on
the date of such Incurrence must be at least 2.0 to 1.0;
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly
Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any
subsequent transfer of such Indebtedness (other than to the
Company or another Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by
the issuer thereof;
(3) The Notes and the Subsidiary Guaranties and the Existing Notes
and Existing Subsidiary Guarantees;
(4) Indebtedness outstanding on the Original Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant)
and Indebtedness Incurred prior to the Issue Date that was
permitted under Section 4.03(a), 4.03(b)(5), 4.03(b)(6),
4.03(b)(7) or 4.03(b)(13) of the Existing Indenture;
(5) Indebtedness or Preferred Stock of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than
Indebtedness or Preferred Stock Incurred in connection with, or to
provide all or any portion of the funds or credit support utilized
to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company); provided, however,
that on the date of such acquisition and after giving effect
thereto, the Consolidated Coverage Ratio equals or exceeds (i) 1.8
to 1.0, if such Indebtedness is Incurred on or prior to September
30, 1999,
(ii) 2.05 to 1.0, if such Indebtedness is Incurred after September
30, 1999 and on or prior to September 30, 2001, and (iii) 2.3 to
1.0, if such Indebtedness is Incurred after September 30, 2001.
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3), (4), (5)
above, this clause (6) or clause (7) or (13) below; provided,
however, that to the extent such Refinancing Indebtedness directly
or indirectly Refinances Indebtedness or Preferred Stock of a
Restricted Subsidiary described in clause (5), such Refinancing
Indebtedness shall be Incurred only by such Restricted Subsidiary
or the Company;
(7) Indebtedness of the Company or a Restricted Subsidiary
represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case Incurred for the purpose
of financing all or any part of the purchase price or cost of
construction or improvement of property used in an Oil and Gas
Business and in each case Incurred no later than 365 days after
the date of such acquisition or the date of completion of such
construction or improvement; provided, however, that the principal
amount of any Indebtedness Incurred pursuant to this clause (7) in
any single calendar year shall not exceed $15.0 million;
(8) Indebtedness with respect to Production Payments; provided,
however, that any such Indebtedness shall be Limited Recourse
Indebtedness; provided further, however, that the Net Present
Value of the reserves related to such Production Payments shall
not exceed 30% of the Total Assets of the Company at the time of
Incurrence;
(9) Indebtedness consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company
and its Restricted
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Subsidiaries pursuant to the Indenture or, prior to the Issue
Date, pursuant to the Existing Indenture;
(10) Indebtedness under Oil and Gas Hedging Contracts and Currency
Agreements 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;
(11) Indebtedness in respect of letters of credit issued for the
benefit of the Company or any of its Restricted Subsidiaries to
the extent they are issued in connection with the ordinary course
of business of the Company and its Restricted Subsidiaries,
Incurred in an aggregate principal amount which, when taken
together with the principal amount of all other Indebtedness
Incurred pursuant to this clause (11) and then outstanding, does
not exceed $15.0 million;
(12) Indebtedness of the Company or a Restricted Subsidiary Incurred
to finance capital expenditures (or Refinancings thereof) in an
aggregate principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to
this clause (12) and then outstanding, does not exceed $10.0
million;
(13) Indebtedness of the Company or a Restricted Subsidiary Incurred
for the purpose of financing all or any part of the cost of
acquiring oil and gas reserves, another Person (other than a
Person that was, immediately prior to such acquisition, a
Subsidiary of the Company) engaged in the Oil and Gas Business or
all or substantially all the assets of such a Person; provided,
however, that on the date of such Incurrence and after giving
effect thereto, the Consolidated Coverage Ratio equals or exceeds
(i) 1.8 to 1.0, if such Indebtedness is Incurred on or prior to
September 30, 1999, (ii) 2.05 to 1.0, if such Indebtedness is
Incurred after September 30, 1999 and on or prior to September 30,
2001, and (iii) 2.3 to 1.0 if such Indebtedness is Incurred after
September 30, 2001; and
(14) Indebtedness in an aggregate principal amount which, together
with the principal amount of all other Indebtedness of the Company
and its Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by clauses (1)
through (13) above or paragraph (a)) does not exceed the greater
of 6% of Adjusted Consolidated Net Tangible Assets as of the end
of the most recent fiscal year ending at least 90 days prior to
the date of such Incurrence and $15.0 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds
thereof are used, directly or indirectly, to Refinance any Subordinated
Obligations unless such Indebtedness shall be subordinated to the Notes to
at least the same extent as such Subordinated Obligations; provided,
however, that this paragraph (c) shall not prohibit the Company from
refinancing at maturity any of its Subordinated Obligations outstanding on
the Issue Date; provided, further, however, that this paragraph (c) shall
not prohibit the Refinancing of the Company's 7 7/8% Convertible
Subordinated Notes due 1999.
(d) For purposes of determining compliance with the foregoing covenant,
(i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above, the Company, in its
sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described above.
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(e) Notwithstanding paragraphs (a) and (b) above, the Company shall not,
and the Company shall not permit any Subsidiary Guarantor to, Incur (i) any
Indebtedness if such Indebtedness is subordinate or junior in ranking in
any respect to any Senior Indebtedness of such Person, unless such
Indebtedness is Senior Subordinated Indebtedness of such Person or is
expressly subordinated in right of payment to Senior Subordinated
Indebtedness of such Person or (ii) any Secured Indebtedness that is not
Senior Indebtedness of such Person unless contemporaneously therewith
effective provision is made to secure the Notes or the relevant Subsidiary
Guaranty equally and ratably with such Secured Indebtedness for so long as
such Secured Indebtedness is secured by a Lien.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described
under "--Limitation on Indebtedness"; or (3) the aggregate amount of such
Restricted Payment and all other Restricted Payments since the Original Issue
Date would exceed the sum of: (A) 50% of the Consolidated Net Income accrued
during the period (treated as one accounting period) from the beginning of the
fiscal quarter immediately following the fiscal quarter during which the
Existing Notes were originally issued to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted Payment
(or, in case such Consolidated Net Income shall be a deficit, minus 100% of
such deficit); (B) the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Original Issue Date (other than an issuance or sale to a
Subsidiary of the Company and other than an issuance or sale to an employee
stock ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); (C) the aggregate Net Cash
Proceeds received by the Company from the issue or sale subsequent to the
Original Issue Date of its Capital Stock (other than Disqualified Stock) to an
employee stock ownership plan; provided, however, that if such employee stock
ownership plan incurs any Indebtedness with respect thereto, such aggregate
amount shall be limited to an amount equal to any increase in the Consolidated
Net Worth of the Company resulting from principal repayments made by such
employee stock ownership plan with respect to such Indebtedness; (D) the
amount by which Indebtedness of the Company is reduced on the Company's
balance sheet upon the conversion or exchange (other than by a Subsidiary of
the Company) subsequent to the Original Issue Date, of any Indebtedness of the
Company convertible or exchangeable for Capital Stock (other than Disqualified
Stock) of the Company (less the amount of any cash, or the fair value of any
other property, distributed by the Company upon such conversion or exchange);
and (E) an amount equal to the sum of (i) the net reduction in Investments in
Unrestricted Subsidiaries resulting from dividends, repayments of loans or
advances or other transfers of assets, in each case to the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the
fair market value of the net assets of an Unrestricted Subsidiary at the time
such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided,
however, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and
treated as a Restricted Payment) by the Company or any Restricted Subsidiary
in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified
Stock and other than Capital Stock issued or sold to a Subsidiary of the
Company or an employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their employees);
provided, however, that (A) such purchase or redemption shall be excluded in
the calculation of the amount of Restricted Payments and (B) the Net Cash
Proceeds
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from such sale shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above (but only to the extent that such Net Cash
Proceeds were used to purchase or redeem such Capital Stock as provided in
this clause (i)); (ii) any purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to the
covenant described under "--Limitation on Indebtedness"; provided, however,
that such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments; (iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; provided, however, that at the time of payment of
such dividend, no other Default shall have occurred and be continuing (or
result therefrom); provided further, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments; (iv) the
repurchase of shares of, or options to purchase shares of, common stock of the
Company or any of its Subsidiaries from employees, former employees, directors
or former directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including employment
agreements) or plans (or amendments thereto) approved by the Board of
Directors under which such individuals purchase or sell or are granted the
option to purchase or sell, shares of such common stock; provided, however,
that the aggregate amount of such repurchases shall not exceed $1.0 million in
any calendar year and $6.0 million in the aggregate during the period from and
after the Original Issue Date; provided further, however, that such
repurchases shall be excluded in the calculation of the amount of Restricted
Payments; (v) amounts paid to holders of the Company's Convertible
Exchangeable Preferred Stock to the extent such amounts do not exceed the
amount of dividends in arrears through and including November 1, 1996 in
respect of such Convertible Exchangeable Preferred Stock; provided, however,
that at the time of payment of such amounts, no Default shall have occurred
and be continuing (or result therefrom); provided further, however, that the
amount of such amounts shall be excluded in the calculation of the amount of
Restricted Payments; (vi) dividends paid from time to time in respect of the
Company's Convertible Exchangeable Preferred Stock (other than amounts
permitted by clause (v) above); provided, however, that at the time of payment
of such dividends, no Default shall have occurred and be continuing (or result
therefrom); provided further, however, that the amount of such dividends shall
be included in the calculation of the amount of Restricted Payments; or (vii)
other Restricted Payments in an aggregate amount not to exceed $10.0 million
since the Original Issue Date; provided, however, that such Restricted Payment
shall be excluded in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness owed to the Company or a Restricted Subsidiary,
(b) to make any loans or advances to the Company or a Restricted Subsidiary or
(c) to transfer any of its property or assets to the Company or a Restricted
Subsidiary, except: (i) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Original Issue Date; (ii) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement relating to any Indebtedness Incurred by such Restricted
Subsidiary on or prior to the date on which such Restricted Subsidiary was
acquired by the Company (other than Indebtedness Incurred as consideration in,
or to provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by the Company) and outstanding on such date; (iii) any encumbrance
or restriction pursuant to an agreement effecting a Refinancing of
Indebtedness Incurred pursuant to an agreement referred to in clause (i) or
(ii) of this covenant or this clause (iii) or contained in any amendment to an
agreement
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referred to in clause (i) or (ii) of this covenant or this clause (iii);
provided, however, that the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing agreement or amendment
are no less favorable to the Noteholders than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in such agreements; (iv)
any such encumbrance or restriction consisting of customary nonassignment
provisions in leases governing leasehold interests to the extent such
provisions restrict the transfer of the lease or the property leased
thereunder; (v) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages; and (vi) any
restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing
of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) In the event and to
the extent that the Net Available Cash received by the Company or any
Restricted Subsidiary from one or more Asset Dispositions occurring on or
after the Original Issue Date in any period of 12 consecutive months exceeds
10% of Adjusted Consolidated Assets as of the beginning of such 12-month
period, then the Company shall (i) within 180 days (in the case of (A) below)
or 360 days (in the case of (B) below) after the date such Net Available Cash
so received exceeds such 10% of Adjusted Consolidated Assets (A) apply an
amount equal to such excess Net Available Cash to repay Senior Indebtedness or
Indebtedness of a Restricted Subsidiary, in each case owing to a Person other
than the Company or any Affiliate of the Company or (B) invest an equal
amount, or the amount not so applied pursuant to clause (A), in Additional
Assets or a Permitted Business Investment, (ii) within 120 days of the
expiration of the period described in clause (i) (B) above, apply such excess
Net Available Cash, or the amount not applied pursuant to clause (i), to fund
the purchase price of Existing Notes tendered in response to an Excess
Proceeds Offer (as defined in the Existing Indenture) for the Existing Notes
or (iii) apply such excess Net Available Cash (to the extent not applied
pursuant to clause (i) or (ii)) as provided in the following paragraphs of the
covenant described hereunder. The amount of such excess Net Available Cash
required to be applied during the applicable period and not applied as so
required by the end of such period shall constitute "Excess Proceeds".
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as
defined below) totals at least $10.0 million, the Company must, not later than
the fifteenth Business Day of such month, make an offer (an "Excess Proceeds
Offer") to purchase from the Holders on a pro rata basis an aggregate
principal amount of Notes equal to the Excess Proceeds (rounded down to the
nearest multiple of $1,000) on such date, at a purchase price equal to 100% of
the principal amount of such Notes, plus, in each case, accrued interest (if
any) to the date of purchase (the "Excess Proceeds Payment").
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
thereunder in the event that such Excess Proceeds are received by the Company
under the covenant described hereunder and the Company is required to
repurchase Notes as described above. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
(b) In the event of the transfer of substantially all (but not all) the
property and assets of the Company as an entirety to a Person in a transaction
permitted by the covenant described under "--Merger and Consolidation", the
Successor Company (as defined therein) shall be deemed to have sold the
properties and assets of the Company not so transferred for purposes of the
covenant described hereunder, and shall comply with the provisions of the
covenant described hereunder with respect to such deemed sale as if it were an
Asset Disposition and the Successor Company shall be
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deemed to have received Net Available Cash in an amount equal to the fair
market value (as determined in good faith by the Board of Directors) of the
properties and assets not so transferred or sold.
(c) In the event of an Asset Disposition by the Company or any Restricted
Subsidiary that consists of a sale of hydrocarbons and results in Production
Payments, the Company or such Restricted Subsidiary shall apply an amount
equal to the Net Available Cash received by the Company or such Restricted
Subsidiary to (i) reduce Senior Indebtedness of the Company or Indebtedness of
a Restricted Subsidiary, in each case owing to a Person other than the Company
or any Affiliate of the Company, within 180 days after the date such Net
Available Cash is so received, or (ii) invest in Additional Assets or a
Permitted Business Investment within 360 days after the date such Net
Available Cash is so received.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $1.0 million, is set forth in
writing and has been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction or (3) if
such Affiliate Transaction involves an amount in excess of $10.0 million, has
been determined by a nationally recognized investment banking firm to be fair,
from a financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
sale of hydrocarbons or other mineral products or the entering into or
performance of Oil and Gas Hedging Contracts, gas gathering, transportation or
processing contracts or oil or natural gas marketing or exchange contracts, in
each case, in the ordinary course of business, so long as the terms of any
such transaction are approved by a majority of the members of the Board of
Directors who are disinterested with respect to such transaction as being the
most favorable of at least (x) two bids, quotes or proposals, at least one of
which is from a Person that is not an Affiliate of the Company (in the event
that the Company determines in good faith that it is able to obtain only two
bids, quotes or proposals with respect to such transaction) or (y) three bids,
quotes or proposals, at least two of which are from Persons that are not
Affiliates of the Company (in all other circumstances), (ii) the sale to an
Affiliate of the Company of Capital Stock of the Company that does not
constitute Disqualified Stock, (iii) transactions contemplated by any
employment agreement or other compensation plan or arrangement entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with industry practice, (iv) transactions between or
among the Company and its Restricted Subsidiaries, (v) Restricted Payments and
Permitted Investments that are permitted by the provisions of the Indenture
described above under the caption "--Limitation on Restricted Payments", (vi)
the transactions described in the Company's Offering Memorandum, dated
October 25, 1996, relating to the initial issuance of notes under the Existing
Indenture, under the caption "Certain Transactions" and (vii) loans or
advances to employees in the ordinary course of business and approved by the
Company's Board of Directors in an aggregate principal amount not to exceed
$1.0 million outstanding at any one time.
Change of Control. (a) Upon the occurrence of a Change of Control, each
Holder shall have the right to require that the Company repurchase such
Holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of Holders of record on the relevant record
date to receive interest on the relevant interest payment date), in accordance
with the terms contemplated in paragraph (b) below.
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(b) Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of Holders of record on the relevant
record date to receive interest on the relevant interest payment date); (2)
the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income, cash flow
and capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by
the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes purchased.
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Notes pursuant to
this covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings. Restrictions on the ability of the Company to incur additional
Indebtedness are contained in the covenants described under "--Limitation on
Indebtedness", "--Limitation on Liens" and "--Limitation on Sale/Leaseback
Transactions". Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the Notes then outstanding.
Except for the limitations contained in such covenants, however, the Indenture
will not contain any covenants or provisions that may afford holders of the
Notes protection in the event of a highly leveraged transaction.
The Credit Agreement prohibits the Company from purchasing any Notes and
also provides that the occurrence of certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when the Company is 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 Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute a
default under the Credit Agreement. In such circumstances, the subordination
provisions in the Indenture would likely restrict payment to the Holders of
Notes.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if
the Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
holders of Notes following the occurrence of a Change of Control may be
limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
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The provisions under the Indenture relating to the Company's obligation to
make an offer to repurchase the Notes as a result of a Change of Control may
be waived or modified with the written consent of the holders of a majority in
principal amount of the Notes.
The Company will not be required to make an offer to purchase the Notes as a
result of a Change of Control if a third party (i) makes such offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture relating to the Company's obligations to make such an
offer and (ii) purchases all Notes validly tendered and not withdrawn under
such an offer.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any shares of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or
other disposition, the Company and its Restricted Subsidiaries would own less
than 20% of the Voting Stock of such Restricted Subsidiary and have no greater
economic interest in such Restricted Subsidiary, (iii) if, immediately after
giving effect to such issuance, sale or other disposition, the Company and its
Restricted Subsidiaries would own greater than 80% of the Voting Stock of such
Restricted Subsidiary and have no lesser economic interest in such Restricted
Subsidiary or (iv) to the extent such shares represent directors' qualifying
shares or shares required by applicable law to be held by a Person other than
the Company or Restricted Subsidiary.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital
Stock of a Restricted Subsidiary), whether owned at the Issue Date or
thereafter acquired, to secure any Indebtedness that is not Senior
Indebtedness of the Company or such Restricted Subsidiary, other than
Permitted Liens, without effectively providing that the Notes or the
applicable Subsidiary Guaranty shall be secured equally and ratably with (or
prior to) the obligations so secured for so long as such obligations are so
secured.
Limitation on Sale/Leaseback Transactions. The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an amount
equal to the Attributable Debt with respect to such Sale/Leaseback Transaction
pursuant to the covenant described under "--Limitation on Indebtedness" and
(B) create a Lien on such property securing such Attributable Debt without
equally and ratably securing the Notes or the applicable Subsidiary Guaranty
pursuant to the covenant described under "--Limitation on Liens", (ii) the net
proceeds received by the Company or any Restricted Subsidiary in connection
with such Sale/Leaseback Transaction are at least equal to the fair value (as
determined by the Board of Directors) of such property and (iii) the Company
applies the proceeds of such transaction in compliance with the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock".
Future Guarantors. Promptly after the end of the first fiscal year in which
any Restricted Subsidiary (other than the Programs), at the end of such fiscal
year, has total net assets (as set forth on the balance sheet of such
Subsidiary prepared in accordance with GAAP) equal to or greater than the
greater of $2.5 million and one percent (1%) of Adjusted Consolidated Net
Tangible Assets, the Company shall cause such Restricted Subsidiary to issue a
Subsidiary Guaranty for the benefit of the holders of the Notes.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor
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Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture; (ii) immediately after giving effect to such
transaction (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Subsidiary as a result of such transaction as having
been Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing, (iii)
immediately after giving effect to such transaction, the Successor Company
would be able to Incur an additional $1.00 of Indebtedness pursuant to
paragraph (a) or, if applicable, paragraph (b)(13), of the covenant described
under "--Limitation on Indebtedness", (iv) immediately after giving effect to
such transaction, the Successor Company shall have Adjusted Consolidated Net
Tangible Assets in an amount that is not less than the Adjusted Consolidated
Net Tangible Assets of the Company immediately prior to such transaction; and
(v) the Company shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Indenture;
provided, however, that clauses (iii) and (iv) shall not be applicable to any
such transaction solely between the Company and any Restricted Subsidiary.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease of all or substantially all its assets shall not
be released from the obligation to pay the principal of and interest on the
Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or series
of transactions, all or substantially all its assets to any Person unless: (i)
the resulting, surviving or transferee Person shall expressly assume by a
guaranty agreement, in a form acceptable to the Trustee, all the obligations
of such Subsidiary Guarantor, if any, under its Subsidiary Guaranty; (ii)
immediately after giving effect to such transaction or transactions on a pro
forma basis (and, treating any Indebtedness which becomes an obligation of the
resulting, surviving or transferee Person as a result of such transaction as
having been issued by such Person at the time of such transaction), no Default
shall have occurred and be continuing; and (iii) the Company delivers to the
Trustee an Officer's Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such guaranty agreement, if any,
complies with the Indenture. Notwithstanding the foregoing, upon certain
consolidations, mergers, conveyances, transfers and leases, the Subsidiary
Guarantor and its successor or transferee shall be released from all of such
Subsidiary Guarantor's obligations under its Subsidiary Guaranty as described
in the definition of "Guarantee".
SEC Reports. Notwithstanding that the Company may not at any time be subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall file with the SEC and provide the Trustee and Noteholders with
such annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act (excluding however
information with respect to benefit plans and long-term compensation
arrangements) and applicable to a U.S. corporation subject to such Sections,
such information, documents and other reports to be so filed and provided at
the times specified for the filing of such information, documents and reports
under such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by the Company to comply with its obligations
under "--Certain Covenants
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- --Merger and Consolidation" above, (iv) the failure by the Company to comply
for 30 days after notice with any of its obligations in the covenants
described above under "--Certain Covenants--Limitation on Indebtedness", "--
Limitation on Restricted Payments", "--Limitation on Restrictions on
Distributions from Restricted Subsidiaries", "--Limitation on Sales of Assets
and Subsidiary Stock" (other than a failure to purchase Notes), "--Limitation
on Affiliate Transactions", "--Change of Control" (other than a failure to
purchase Notes), "--Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries", "--Limitation on Liens", "--Limitation on
Sale/Leaseback Transactions", "--Future Guarantors" or "--SEC Reports", (v)
the failure by the Company to comply for 60 days after notice with its other
agreements contained in the Indenture, (vi) Indebtedness of the Company or any
Significant Subsidiary (other than Limited Recourse Indebtedness) is not paid
within any applicable grace period after final maturity or is accelerated by
the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $10.0 million (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the "bankruptcy
provisions"), (viii) any judgment or decree for the payment of money in excess
of $10.0 million is rendered against the Company or a Significant Subsidiary,
remains outstanding for a period of 60 days following such judgment and is not
discharged, waived or stayed within 10 days after notice (the "judgment
default provision") or (ix) a Subsidiary Guaranty ceases to be in full force
and effect (other than in accordance with the terms of such Subsidiary
Guaranty) or a Subsidiary Guarantor denies or disaffirms its obligations under
its Subsidiary Guaranty if such default continues for a period of 10 days
after notice thereof to the Company. However, a default under clauses (iv),
(v) and (viii) will not constitute an Event of Default until the Trustee or
the holders of 25% in principal amount of the outstanding Notes notify the
Company of the default and the Company does not cure such default within the
time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes
unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right
to receive payment of principal, premium (if any) or interest when due, no
holder of a Note may pursue any remedy with respect to the Indenture or the
Notes unless (i) such holder has previously given the Trustee notice that an
Event of Default is continuing, (ii) holders of at least 25% in principal
amount of the outstanding Notes have requested the Trustee to pursue the
remedy, (iii) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee has not
complied with such request within 60 days after the receipt thereof and the
offer of security or indemnity and (v) the holders of a majority in principal
amount of the outstanding Notes have not given the Trustee a direction
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or of exercising any
trust or power conferred on the Trustee. The Trustee, however, may refuse to
follow any direction that conflicts with law or the Indenture or that the
Trustee determines is unduly
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prejudicial to the rights of any other holder of a Note or that would involve
the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is not opposed to the interest of the holders of the
Notes. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether
the signers thereof know of any Default that occurred during such fiscal year.
The Company also is required to deliver to the Trustee, within 30 days after
the occurrence thereof, written notice of any event which would constitute
certain Defaults, their status and what action the Company is taking or
proposes to take in respect thereto.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Notes) and any past default or noncompliance with any provisions may also
be waived with the consent of the holders of a majority in principal amount of
the Notes then outstanding. However, without the consent of each holder of an
outstanding Note affected thereby, no amendment may, among other things, (i)
reduce the amount of Notes whose holders must consent to an amendment, (ii)
reduce the rate of or extend the time for payment of interest on any Note,
(iii) reduce the principal of or extend the Stated Maturity of any Note, (iv)
reduce the premium payable upon the redemption of any Note or change the time
at which any Note may be redeemed as described under "--Optional Redemption",
(v) make any Note payable in money other than that stated in the Note, (vi)
impair the right of any holder of the Notes to receive payment of principal of
and interest on such holder's Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to such
holder's Notes, (vii) make any change in the amendment provisions which
require each holder's consent or in the waiver provisions, (viii) make any
change to the subordination provisions of the Indenture that would adversely
affect the Noteholders or (ix) make any change in any Subsidiary Guaranty that
could adversely affect such holder.
Without notice to or the consent of any holder of the Notes, the Company and
Trustee may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to make any change to the
subordination provisions that would limit or terminate the benefits available
to any holder of Senior Indebtedness (or its Representative) to add guarantees
with respect to the Notes, to secure the Notes, to add to the covenants of the
Company for the benefit of the holders of the Notes or to surrender any right
or power conferred upon the Company, to make any change that does not
adversely affect the rights of any holder of the Notes or to comply with any
requirement of the SEC in connection with the qualification of the Indenture
under the Trust Indenture Act. However, no amendment may be made to the
subordination provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or their Representative) consents to such change.
The consent of the holders of the Notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
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After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of
transfer. The Company may require payment of a sum sufficient to cover any
tax, assessment or other governmental charge payable in connection with
certain transfers and exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost
or stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the
covenants described under "--Certain Covenants" (other than the covenant
described under "--Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "--Defaults"
above and the limitations contained in clauses (iii) and (iv) under "--Certain
Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iv), (vi), (vii) (with
respect only to Significant Subsidiaries) or (viii) under "--Defaults" above
or because of the failure of the Company to comply with clause (iii) or (iv)
under the first of paragraph of "--Certain Covenants--Merger and
Consolidation" above. If the Company exercises its legal defeasance option or
its covenant defeasance option each Subsidiary Guarantor, if any, will be
released from all its obligations with respect to its Subsidiary Guaranty.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an Opinion of Counsel
to the effect that holders of the Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal
Revenue Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the
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Trustee, subject to certain exceptions. The Indenture provides that if an
Event of Default occurs (and is not 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 shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense and then only to the extent required by the terms
of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
BOOK-ENTRY; DELIVERY AND FORM
The Notes initially will be represented by one permanent global Note in
definitive, fully registered form without interest coupons (the "Global Note")
and will be deposited with the Trustee as custodian for, and registered in the
name of, a nominee of DTC.
Ownership of beneficial interests in the Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the
Global Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture and, if applicable, those of a participant through which the Note is
held.
Payments of the principal of, and interest on, the Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the Global Note as shown on the records
of DTC or its nominee. The Company also expects that payments by participants
to owners of beneficial interests in the Global Note held through such
participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or
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more participants to whose account the DTC interests in the Global Note is
credited and only in respect of such portion of the aggregate principal amount
of an Note as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the Notes, DTC will
exchange the applicable Global Note for Certificated Notes, which it will
distribute to its participants.
DTC has informed the Company that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates and certain other organizations. Indirect access to
the DTC system is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of
DTC, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the Trustee will have any responsibility for the performance by
DTC or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
The Indenture requires that payments in respect of Notes (including
principal, premium and interest) be made by wire transfer of immediately
available funds to the account specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Note and a successor depositary is not appointed by the Company
within 90 days, or if there is an Event of Default under the Notes, the
Company will issue Certificated Notes in exchange for the Global Note.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal United States federal income tax
consequences of the purchase, ownership and disposition of the Notes to
initial purchasers of Outstanding Notes who are United States Holders (as
defined below) and the principal United States federal income and estate tax
consequences of the purchase, ownership and disposition of the Notes to
initial purchasers of Outstanding Notes who are Foreign Holders (as defined
below). This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations
promulgated thereunder, and administrative and judicial interpretations
thereof, all as in effect on the date hereof and all of which are subject to
change, possibly with retroactive effect, or different interpretations. This
discussion does not address the tax consequences to subsequent purchasers of
Notes and is limited to initial purchasers of Outstanding Notes who hold the
Notes as capital assets, within the meaning of section 1221 of the Code. This
discussion also does not address the tax consequences to Foreign Holders that
are subject to United States federal income tax on a net basis on income
realized with respect to a Note because such income is effectively connected
with the conduct of a U.S. trade or business. Such Foreign Holders are
generally taxed in a similar manner to United States Holders, but certain
special rules do apply. Moreover, this discussion is for general information
only and does not address all of the tax consequences that may be relevant to
particular initial purchasers of Outstanding Notes in light of their personal
circumstances or to certain types of initial purchasers (such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities or persons who have hedged the risk of owning a Note) or the effect
of any applicable state, local or foreign tax laws.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of a Note
that is, for United States federal income tax purposes, (a) a citizen or
resident of the United States (including certain former citizens and certain
former long-term residents), (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any
political subdivision thereof, (c) an estate the income of which is subject to
United States federal income taxation regardless of source or (d) a trust if a
U.S. court is able to exercise primary supervision over the administration of
the trust and one or more U.S. persons have authority to control all
substantial decisions of the trust.
Payment of Interest on Notes. Interest paid or payable on a Note will be
taxable to a United States Holder as ordinary interest income, generally at
the time it is received or accrued, in accordance with such holder's regular
method of accounting for United States federal income tax purposes.
Amortizable Bond Premium. A United States Holder that purchased an
Outstanding Note for an amount in excess of the principal amount is considered
to have purchased the Outstanding Note at a "premium," equal to such excess
and may elect to amortize the premium over the remaining term of the Note on a
constant yield method. However, if the Outstanding Note was purchased at a
time when the Outstanding Note could be optionally redeemed by the Company for
an amount that is in excess of its principal amount, special rules may apply
that could result in a deferral of the amortization of bond premium until
later in the term of the Note. The amount amortized in any year is treated as
a reduction of the United States Holder's interest income from the Note. The
election to amortize premium on a constant yield method, once made, applies to
all taxable debt obligations held or subsequently acquired by the electing
United States Holder on or after the first day of the first
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taxable year to which the election applies and may not be revoked without the
consent of the Internal Revenue Service (the "IRS"). A United States Holder
that elects to amortize bond premium must reduce its adjusted tax basis in the
Note by the premium amortized. Bond premium on a Note held by a United States
Holder that does not make such election will decrease the gain or increase the
loss otherwise recognized on disposition of the Note.
Sale, Exchange or Retirement of the Notes. The exchange of an Outstanding
Note by a United States Holder for a Note pursuant to the Exchange Offer
should not constitute a taxable exchange for United States federal income tax
purposes. Accordingly, there should be no United States federal income tax
consequences to holders who exchange Outstanding Notes for Notes pursuant to
the Exchange Offer, and any such holder should have the same adjusted tax
basis and holding period in the Notes as it had in the Outstanding Notes
immediately before the exchange.
Upon the sale, exchange, redemption, retirement at maturity or other
disposition of a Note, a United States Holder generally will recognize taxable
gain or loss equal to the difference between the sum of cash plus the fair
market value of all other property received on such disposition (except to the
extent such cash or property is attributable to accrued interest not
previously included in income, which amount will be taxable as ordinary
income) and such United States Holder's adjusted tax basis in the Note. A
United States Holder's adjusted tax basis in a Note generally will equal the
cost of the Note to such United States Holder, less amortized bond premium and
any principal payments received by such United States Holder.
Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if, at the
time of such disposition, the United States Holder's holding period for the
Note is more than one year. The deduction of capital losses is subject to
certain limitations. United States Holders of Notes should consult tax
advisors regarding the treatment of capital gains and losses.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements may apply to certain payments ("reportable
payments") of principal, premium, if any, and interest on a Note, and to
proceeds of the sale or redemption of a Note before maturity. The Company, its
agent, a broker, the Trustee or any paying agent, as the case may be, will be
required to withhold from any reportable payment that is subject to backup
withholding a tax equal to 31% of such payment if, among other things, a
United States Holder fails to furnish his taxpayer identification number
(social security or employer identification number), certify that such number
is correct, certify that such holder is not subject to backup withholding or
otherwise comply with the applicable requirements of the backup withholding
rules. Certain United States Holders, including all corporations, are not
subject to backup withholding and information reporting requirements. Any
amounts withheld under the backup withholding rules from a reportable payment
to a United States Holder will be allowed as a credit against such United
States Holder's United States federal income tax and may entitle the holder to
a refund, provided that the required information is furnished to the IRS.
The amount of any reportable payments, including interest, made to the
record United States Holders of Notes (other than to holders which are exempt
recipients) and the amount of tax withheld, if any, with respect to such
payments will be reported to such United States Holders and to the IRS for
each calendar year.
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
As used herein, the term "Foreign Holder" means a holder of a Note that is,
for United States federal income tax purposes, not a United States Holder, as
defined above.
Payment of Interest on Notes. In general, payments of interest received by a
Foreign Holder will not be subject to a United States federal withholding tax,
provided that (i)(a) the Foreign Holder does
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not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote, (b) the Foreign
Holder is not a controlled foreign corporation that is related to the Company
actually or constructively through stock ownership, (c) the Foreign Holder is
not a bank receiving interest described in Section 881(c)(3)(A) of the Code,
and (d) either (I) the beneficial owner of the Note, under penalties of
perjury, provides the Company or its agent with such beneficial owner's name
and address and certifies on IRS Form W-8 (or a suitable substitute form) that
it is not a United States Holder or (II) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "financial institution") holds the
Note and provides a statement to the Company or its agent under penalties of
perjury in which it certifies that such an IRS Form W-8 (or a suitable
substitute) has been received by it from the beneficial owner of the Notes or
qualifying intermediary and furnishes the Company or its agent a copy thereof
or (ii) the Foreign Holder is entitled to the benefits of an income tax treaty
under which interest on the Notes is exempt from United States withholding tax
and the Foreign Holder or such Foreign Holder's agent provides a properly
executed IRS Form 1001 claiming the exemption. Payments of interest not exempt
from United States federal withholding tax as described above will be subject
to such withholding tax at the rate of 30% (subject to reduction under an
applicable income tax treaty).
Sale, Exchange or Retirement of the Notes. The exchange of an Outstanding
Note by a Foreign Holder for a Note pursuant to the Exchange Offer should not
constitute a taxable exchange for United States federal income tax purposes.
Accordingly, there should be no United States federal income tax consequences
to Foreign Holders who exchange Outstanding Notes for Notes pursuant to the
Exchange Offer, and any such holder should have the same adjusted tax basis
and holding period in the Notes as it had in the Outstanding Notes immediately
before the exchange.
A Foreign Holder generally will not be subject to United States federal
income tax (and generally no tax will be withheld) with respect to gain
realized on the sale, exchange, redemption, retirement at maturity or other
disposition of a Note unless the Foreign Holder is an individual who is
present in the United States for a period or periods aggregating 183 or more
days in the taxable year of the disposition and, generally, either has a "tax
home" or an "office or other fixed place of business" in the United States.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements do not apply to payments of interest made
by the Company or a paying agent to Foreign Holders if the certification
described above under "--United States Federal Income Taxation of Foreign
Holders--Payment of Interest on Notes" is received, provided that the payor
does not have actual knowledge that the holder is a United States Holder. If
any payments of principal and interest are made to the beneficial owner of a
Note by or through the foreign office of a foreign custodian, foreign nominee
or other foreign agent of such beneficial owner, or if the foreign office of a
foreign "broker" (as defined in applicable Treasury regulations) pays the
proceeds of the sale of a Note or a coupon to the seller thereof, backup
withholding and information reporting will not apply. Information reporting
requirements (but not backup withholding) will apply, however, to a payment by
a foreign office of a broker that is (i) a United States person, (ii) a
foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States, or (iii)
a "controlled foreign corporation" (generally, a foreign corporation
controlled by certain United States shareholders) with respect to the United
States, unless the broker has documentary evidence in its records that the
holder is a Foreign Holder and certain other conditions are met or the holder
otherwise establishes an exemption. Payment by a United States office of a
broker is subject to both backup withholding at a rate of 31% and information
reporting unless the holder certifies under penalties of perjury that it is a
Foreign Holder or otherwise establishes an exemption.
Recently issued Treasury regulations modify certain of the certification
requirements described above. These modifications will become generally
effective for interest payments made beginning
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January 1, 2000. The Company or its paying agent may request new withholding
exemption forms from holders in order to qualify for continued exemption from
withholding under the Treasury regulations when they become effective. For
example, under these recently issued Treasury regulations, a Foreign Holder
will be required to provide a Form W-8 (or substitute form) to the withholding
agent on which such holder provides its name, address and taxpayer
identification number and states, under penalty of perjury, that the interest
paid on a Note and the gain on the sale, exchange or other disposition of a
Note is not effectively connected with such holder's United States trade or
business in order to obtain an exemption from withholding tax on payments made
beginning January 1, 2000.
Federal Estate Taxes. Subject to applicable estate tax treaty provisions,
Notes held at the time of death (or Notes transferred before death but subject
to certain retained rights or powers) by an individual who at the time of
death is a Foreign Holder will not be included in such Foreign Holder's gross
estate for United States federal estate tax purposes provided that the
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
or hold the Notes in connection with a U.S. trade or business.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Notes for its own account pursuant to the
Exchange Offer (a "Participating Broker-Dealer") must acknowledge that it will
deliver a prospectus in connection with any resale of those Notes. The
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Notes received in
exchange for Outstanding Notes where the Outstanding Notes were acquired by
the broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that for a period of 90 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any resale. In
addition, until , 1998, all dealers effecting transactions in the
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Notes by
broker-dealers. 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,
through the writing of options on the Notes or a combination of methods of
resale, at market prices prevailing at the time of resale, at prices related
to those prevailing market prices or negotiated prices. Any such resale may be
made directly to the purchaser or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any other
broker-dealer or the purchasers of any Notes. Any broker-dealer that resells
the 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
Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of Notes and any commissions
or concessions received by those persons 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.
For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests those documents in the
Letter of Transmittal. The Company has agreed to pay certain expenses incident
to the Exchange Offer (including the expenses of one counsel for the Holders
of the Notes), other than commissions or concession of any brokers or dealers,
and will indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
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By acceptance of this Exchange Offer, each broker-dealer that receives Notes
for its own account pursuant to the Exchange Offer agrees that, on receipt of
notice from the Company of the happening of any event which makes any
statement in the Prospectus untrue in any material respect or which request
the making of any changes in the Prospectus in order to make the statements
therein not misleading (which notice the Company agrees to deliver promptly to
the broker-dealer), the broker-dealer will suspend use of the Prospectus until
the Company has amended or supplemented the Prospectus to correct the
misstatement or omission and has furnished copies of the amended or
supplemental Prospectus to the broker-dealer. If the Company shall give any
such notice to suspend the use of the Prospectus, it shall extend the 90-day
period referred to above by the number of days during the period from and
including the date of the giving of the notice to and including when broker-
dealers shall have received copies of the supplemented or amended Prospectus
necessary to permit resales of the Notes.
LEGAL MATTERS
Certain matters with respect to the legality of the Notes are being passed
upon for the Company by Fulbright & Jaworski L.L.P.
EXPERTS
In connection with the Contour Transaction, the Company dismissed Ernst &
Young LLP ("E&Y") as its principal accountant, effective February 15, 1996. On
the same date, the Company engaged Deloitte & Touche LLP ("D&T") as its
principal accountant to audit its financial statements. The change in
accountants was approved by the audit committee of the Company's board of
directors, contingent upon the closing of the Contour Transaction. Neither of
E&Y's reports on the Company's financial statements for the years ended
December 31, 1994 and 1993 contained an adverse opinion or disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principles. During the last two years and the interim period prior
to the change in accountants, (i) the Company had no disagreements with E&Y on
any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, (ii) E&Y did not advise the Company
of any "reportable event" as defined in Regulation S-K under the Securities
Exchange Act of 1934 and (iii) the Company did not consult with D&T on any
accounting, auditing, financial reporting or any other matters.
The consolidated financial statements of Kelley Oil & Gas Corporation as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 and the statements of revenues and direct operating expenses
of the SPR Producing Properties for each of the two years in the period ended
December 31, 1996 and the eleven months ended November 30, 1997 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports thereon appearing herein, and are
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The estimated reserve evaluations and related calculations of H. J. Gruy &
Associates, Inc., independent petroleum engineers, have been included herein
in reliance upon the authority of such firm as an expert in petroleum
engineering.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to
the securities offered by this Prospectus. Certain of the information
contained in the Registration Statement is omitted from this Prospectus, and
reference is hereby made to the Registration Statement and exhibits and
schedules relating thereto for further information with respect to the Company
and the securities offered by this Prospectus. The Company is subject to
certain periodic reporting and other informational requirements of the
Exchange Act, and, in accordance therewith, will file certain reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information are available for inspection at, and copies
of these materials may be obtained on payment of the fees prescribed therefor
by the rules and regulations of the Commission from the Commission at its
principal offices located at Judiciary Plaza, 450 Fifth Street, Room 1024,
Washington, D.C. 20549, and at the Regional Offices of the Commission located
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and at 7 World Trade Center, Suite 1300, New York, New
York 10048. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it is required to furnish the information required to be
filed with the Commission to the Trustee and the holders of the Outstanding
Notes and the Notes. The Company has agreed that, notwithstanding that it may
not remain subject to the periodic reporting requirements of the Exchange Act,
it will nonetheless continue to furnish information that would be required by
Section 13 of the Exchange Act to be filed by the Company (excluding
information with respect to benefit plans and long-term compensation
arrangements) to the Trustee and the holders of the Outstanding Notes or Notes
as if it were subject to those periodic reporting requirements.
In addition, the Company has agreed that for so long as any of the Notes are
outstanding and are "restricted securities" within the meaning of Rule
144(a)(3) under the Securities Act, it will 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 until such time as the Company has either exchanged the Outstanding Notes
for the Notes or until such time as the holders thereof have disposed of the
Outstanding Notes pursuant to an effective registration statement filed by the
Company.
INCORPORATION OF CERTAIN DOCUMENTS
All documents filed by the Company pursuant to the Exchange Act, after the
date of this Prospectus and before the termination of the Registration
Statement of which this Prospectus is a part with respect to registration of
the Notes, shall be deemed to be incorporated by reference in this Prospectus
and be 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
in this Prospectus shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained in this
Prospectus, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference, modifies or replaces such statement.
The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus has been delivered, on
written or oral request of that person, a copy of any or all of the documents
incorporated by reference herein, other than exhibits to those documents,
unless those exhibits are specifically incorporated by reference into the
information that this Prospectus incorporates. Written or oral requests for
copies of these materials should be directed to: Kelley Oil & Gas Corporation,
601 Jefferson, Suite 1100 Houston, Texas 77002, Attention: Investor Relations,
telephone (713) 652-5200.
110
<PAGE>
GLOSSARY
BBL. One stock tank barrel, or 42 U.S. Gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
BCF. One billion cubic feet of natural gas.
BCFE. One billion cubic feet of natural gas equivalent (see Mcfe for
equivalency).
"BEHIND PIPE" Hydrocarbons in a potentially producing horizon penetrated by
a wellbore, the production of which has been postponed pending the production
of hydrocarbons from another formation penetrated by the wellbore. These
hydrocarbons are classified as proved but non-producing reserves.
3-D SEISMIC. (Three-Dimensional Seismic) Seismic reflections from the
subsurface used to map strata in three dimensions.
"DEVELOPMENT COSTS" The costs incurred in preparing proved reserves for
production, i.e., costs incurred to obtain access to proved reserves and to
provide facilities for extracting, treating, gathering, and storing oil and
gas, but not including exploration costs.
"DEVELOPMENT WELL" A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
"ESTIMATED FUTURE CASH FLOWS" are the estimated net cash flows expected to
be derived upon production and sale from proved oil and gas reserves at a date
indicated. Estimated future net cash flows are computed after giving effect to
estimated future development and production costs at a date indicated and
assuming the continuation of existing economic conditions. The calculation
does not take into account the effect of various cash outlays, including
general and administrative costs and interest expense, and does not give
effect to estimated future income taxes.
"EXPLORATION COSTS" Costs incurred in exploring property. Exploration
involves identifying areas that may warrant examination and examining specific
areas, including drilling exploratory wells.
"GROSS ACRES" The total number of acres in which a working interest is
owned.
"GROSS WELLS" The total number of wells in which a working interest is
owned.
"LEASE OPERATING EXPENSES" The expenses of lifting oil and gas from a
producing formation to the surface, and the transportation and marketing
thereof, constituting part of the current operating expenses of a working
interest, and also including labor, superintendence, supplies, repairs,
maintenance, allocated overhead costs, ad valorem taxes and other expenses
incidental to production, but not including severance taxes or capital costs.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MCF. One thousand cubic feet of natural gas.
MCFE. One thousand cubic feet of natural gas equivalent (converting one
barrel of oil to six Mcf of natural gas based on commonly accepted rough
equivalency of energy content).
MMBBLS. One million barrels of crude oil or other liquid hydrocarbons.
MMBTU. One million British Thermal Units.
MMCF. One million cubic feet of natural gas.
111
<PAGE>
MMCFE. One million cubic feet of natural gas equivalent (see Mcfe for
equivalency).
"NET ACRES" The sum of acres determined by adding the products of gross
acres in which there is an interest multiplied by the fractional working
interests of Kelley therein.
"NET WELLS" The sum of the fractional working interests owned by Kelley in
gross wells.
NYMEX. New York Mercantile Exchange.
"PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES" An estimate of the present
value of the estimated future net revenues is calculated by discounting
estimated future net revenues at an annual rate of 10%, in accordance with SEC
practice, to determine their "present value". The present value is shown to
indicate the effect of time on the value of the revenue stream and should not
be construed as being the fair market value of the properties. Estimates of
future net cash revenues are made using oil and natural gas prices and costs
at the date indicated and held constant for the life of the reserves.
"PRODUCING WELL" or "PRODUCTIVE WELL" A well that is producing oil or
natural gas or that is capable of producing commercial quantities without
further capital expenditure.
"PRODUCTION EXPENSES" Lease operating expenses plus severance taxes.
"PROVED DEVELOPED RESERVES" Proved developed reserves are those quantities
of crude oil, natural gas and natural gas liquids that, upon analysis of
geological and engineering data, can be expected with reasonable certainty to
be recoverable in the future from known oil and natural gas reservoirs under
existing economic and operating conditions. This classification includes
those: (a) which are expected to be recovered from currently open and
producing zones under continuation of existing equipment and operating methods
(proved developed producing reserves); and (b) which consist of (i) reserves
from wells that have been completed and tested but are not yet producing due
to lack of market or minor completion problems that reasonably can be expected
to be corrected, and (ii) reserves currently behind pipe in existing wells
which reasonably can be expected to be productive due to both the well log
characteristics and analogous production in the immediate vicinity of the well
(proved developed nonproducing reserves).
"PROVED RESERVES" Proved reserves are those estimated quantities of crude
oil, natural gas and other hydrocarbon liquids which, by analysis of
geological and engineering data, can be estimated with reasonable certainty to
be commercially recoverable in future years from known reservoirs and under
current economic conditions, operating methods and government regulations.
"PROVED UNDEVELOPED RESERVES" Proved undeveloped reserves are reserves that
are expected to be recovered from (a) new wells on undrilled acreage, (b)
deepening existing wells to a different reservoir or (c) where a relatively
large expenditure is required to (i) recomplete an existing well or (ii)
install production or transportation facilities for primary or improved
recovery projects.
"RESERVES TO PRODUCTION RATIO" Calculated by dividing the total proved
reserves as of a specific date by production for the twelve-month period
immediately preceding such date. This term is sometimes referred to as
"average reserve life" (in years) or "estimated reserve life" (in years) by
industry participants or followers.
"WORKING INTEREST" The interest in an oil and gas property (normally a
leasehold interest) that gives the owner the right to drill, produce and
conduct oil and gas operations on the property and to a share of production,
subject to all royalties, overriding royalties and other burdens and to all
costs of exploration, development and operations and all risks in connection
therewith.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets--December 31, 1996 and 1997 and unaudited
June 30, 1998........................................................... F-3
Consolidated Statements of Income (Loss)--For the years ended December
31, 1995, 1996 and 1997 and unaudited for the six months ended June 30,
1997 and 1998........................................................... F-4
Consolidated Statements of Cash Flows--For the years ended December 31,
1995, 1996 and 1997 and unaudited for the six months ended June 30, 1997
and 1998................................................................ F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit)--For
the years ended December 31, 1995, 1996 and 1997 and unaudited for the
six months ended June 30, 1998.......................................... F-6
Notes to Consolidated Financial Statements............................... F-7
FINANCIAL STATEMENTS OF SPR PRODUCING PROPERTIES
Independent Auditors' Report............................................. F-32
Statements of Revenues and Direct Operating Expenses--For each of the two
years in the period ended December 31, 1996 and the eleven months ended
November 30, 1997....................................................... F-33
Notes to Statements of Revenues and Direct Operating Expenses............ F-34
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Kelley Oil & Gas Corporation
We have audited the accompanying consolidated balance sheets of Kelley Oil &
Gas Corporation and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of income (loss), cash flows, and changes in
stockholders' equity (deficit) for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Corporation'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, such consolidated financial statements present fairly, in
all material respects, the financial position of Kelley Oil & Gas Corporation
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1995 the
Corporation changed its method of accounting for the impairment of long-lived
assets to conform with Statement of Financial Accounting Standards No. 121.
DELOITTE & TOUCHE LLP
Houston, Texas
March 6, 1998
F-2
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents.................. $ 4,070 $ 162 $ 97
Accounts receivable........................ 22,519 24,566 22,419
Accounts receivable--drilling programs..... 1,533 718 634
Prepaid expenses and other current assets.. 1,347 1,412 1,698
--------- --------- ---------
Total current assets..................... 29,469 26,858 24,848
--------- --------- ---------
Oil and gas properties, successful efforts
method:
Unproved properties, net................. 12,521 49,854 49,706
Properties subject to amortization....... 338,794 463,263 485,464
Pipelines and other transportation assets,
at cost................................... 4,689 4,690 1,582
Furniture, fixtures and equipment.......... 1,700 2,969 3,218
--------- --------- ---------
357,704 520,776 539,970
Less: Accumulated depreciation, depletion
and amortization.......................... (199,236) (227,163) (245,241)
--------- --------- ---------
Total property and equipment, net........ 158,468 293,613 294,729
--------- --------- ---------
Other non-current assets, net.............. 1,290 2,131 1,684
--------- --------- ---------
Total assets............................. $ 189,227 $ 322,602 $ 321,261
========= ========= =========
LIABILITIES:
Accounts payable and accrued expenses...... $ 31,093 $ 41,474 $ 38,915
Accounts payable--drilling programs........ 4,416 566 401
--------- --------- ---------
Total current liabilities................ 35,509 42,040 39,316
--------- --------- ---------
Long term debt............................. 184,253 286,183 306,366
--------- --------- ---------
Total liabilities........................ 219,762 328,223 345,682
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value,
20,000,000 shares authorized at December
31, 1996 and 1997 and June 30, 1998;
1,745,500, 1,745,443 and 1,745,443 shares
issued and outstanding at December 31,
1996 and 1997 and June 30, 1998,
respectively (liquidation value $48,219,
$48,977 and $46,686, respectively)........ 2,618 2,618 2,618
Common stock, $.01 par value, 200,000,000
shares authorized at December 31, 1996 and
1997 and June 30, 1998; 98,293,457,
125,709,093 and 125,749,593 shares issued
and outstanding at December 31, 1996 and
1997 and June 30, 1998, respectively...... 983 1,257 1,258
Additional paid-in capital................. 273,096 300,367 300,404
Accumulated deficit........................ (307,232) (309,863) (328,701)
--------- --------- ---------
Total stockholders' deficit.............. (30,535) (5,621) (24,421)
--------- --------- ---------
Total liabilities and stockholders'
deficit................................. $ 189,227 $ 322,602 $ 321,261
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -----------------
1995 1996 1997 1997 1998
--------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas revenues...... $ 36,998 $ 60,854 $ 75,864 $35,125 $ 44,209
Interest and other
income................... 1,763 1,429 274 234 66
--------- -------- -------- ------- --------
Total revenues.......... 38,761 62,283 76,138 35,359 44,275
--------- -------- -------- ------- --------
COSTS AND EXPENSES:
Production expenses....... 10,835 10,709 10,955 4,931 10,744
Exploration expenses...... 23,387 5,438 5,433 1,882 6,669
General and administrative
expenses................. 7,030 8,953 6,875 3,987 3,617
Interest and other debt
expenses................. 21,956 24,401 25,071 12,039 16,315
Restructuring expenses.... 1,115 4,276 -- -- --
Depreciation, depletion
and amortization......... 35,591 20,440 25,853 12,065 21,186
Impairment of oil and gas
properties............... 150,138 -- -- -- --
--------- -------- -------- ------- --------
Total expenses.......... 250,052 74,217 74,187 34,904 58,531
--------- -------- -------- ------- --------
Income (loss) before income
taxes and extraordinary
item....................... (211,291) (11,934) 1,951 455 (14,256)
Income taxes................ -- -- -- -- --
--------- -------- -------- ------- --------
Net income (loss) before
extraordinary item......... (211,291) (11,934) 1,951 455 (14,256)
Extraordinary item.......... -- (17,030) -- -- --
--------- -------- -------- ------- --------
Net income (loss)........... (211,291) (28,964) 1,951 455 (14,256)
Less: cumulative preferred
stock dividends............ (6,607) (4,582) (4,582) (2,291) (2,291)
--------- -------- -------- ------- --------
Net loss applicable to
common stock............... $(217,898) $(33,546) $ (2,631) $(1,836) $(16,547)
========= ======== ======== ======= ========
Loss per common share before
extraordinary item......... $ (5.31) $ (.18) $ (.03) $ (.02) $ (.13)
========= ======== ======== ======= ========
Loss per common share....... $ (5.31) $ (.37) $ (.03) $ (.02) $ (.13)
========= ======== ======== ======= ========
Average common shares
outstanding................ 41,032 90,113 100,757 98,316 125,725
========= ======== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ------------------
1995 1996 1997 1997 1998
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........ $(211,291) $ (28,964) $ 1,951 $ 455 $(14,256)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating
activities:
Depreciation, depletion
and amortization...... 35,591 20,440 25,853 12,065 21,186
Impairment of oil and
gas properties........ 150,138 -- -- -- --
Gain on sale of
properties............ (777) (176) -- -- --
Exploration expenses... 23,387 5,438 5,433 1,882 6,669
Accretion and
amortization of other
debt expenses......... 3,602 5,170 4,297 2,128 2,612
Restructuring
expenses.............. 1,115 4,276 -- -- --
Extraordinary loss..... -- 17,030 -- -- --
Changes in operating
assets and liabilities:
Decrease (increase) in
accounts receivable
and other current
assets................ 9,457 (9,054) (1,297) 6,031 1,945
Decrease (increase) in
other non-current
assets................ 3,075 (1,945) (1,203) (330) (150)
Increase (decrease) in
accounts payable and
accrued expenses...... (16,103) (2,953) 4,570 (5,868) (2,724)
--------- --------- --------- -------- --------
Net cash provided by
(used in) operating
activities.............. (1,806) 9,262 39,604 16,363 15,282
--------- --------- --------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures..... (52,240) (47,601) (53,140) (23,974) (28,971)
Acquisition of oil and
gas properties.......... -- (11,594) (111,135) -- --
Cash received in
consolidation........... 1,596 -- -- -- --
Proceeds from sale of
properties.............. 7,420 5,803 -- -- --
--------- --------- --------- -------- --------
Net cash used in
investing activities.... (43,224) (53,392) (164,275) (23,974) (28,971)
--------- --------- --------- -------- --------
FINANCING ACTIVITIES:
Proceeds from long term
borrowings.............. 37,100 50,000 180,500 42,000 79,100
Principal payments on
long term borrowings.... (100,000) (58,500) (82,700) (34,000) (90,400)
Proceeds from sale of
notes, net.............. 95,302 120,938 -- -- 29,696
Debenture conversion
costs................... -- (1,100) -- -- --
Proceeds from sale of
common stock, net....... 16,319 43,998 27,545 203 38
Retirement of senior
notes................... -- (113,488) -- -- --
Redemption of
subordinated notes...... -- -- -- -- (228)
Dividends on preferred
stock................... (6,607) -- (4,582) (4,582) (4,582)
--------- --------- --------- -------- --------
Net cash provided by
financing activities.... 42,114 41,848 120,763 3,621 13,624
--------- --------- --------- -------- --------
Decrease in cash and cash
equivalents............. (2,916) (2,282) (3,908) (3,990) (65)
Cash and cash
equivalents, beginning
of period............... 9,268 6,352 4,070 4,070 162
--------- --------- --------- -------- --------
Cash and cash
equivalents, end of
period.................. $ 6,352 $ 4,070 $ 162 $ 80 $ 97
========= ========= ========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
--------- ------ ---------- -----------
<S> <C> <C> <C> <C>
Stockholders' equity at January 1,
1995................................. $ 7,743 $ 177 $ 98,647 $ (60,366)
Additional paid in capital from
issuance of preferred and common
stock in consolidation............... -- -- 108,632 --
Issuance of 650 shares of preferred
stock, $1.50 par value, in
consolidation........................ 975 -- -- --
Issuance of 20,622 shares of common
stock in consolidation............... -- 206 -- --
Issuance of 4,000 shares of common
stock in private placement........... -- 40 15,960 --
Conversion of 1,508 shares of
preferred stock into 1,508 shares of
common stock......................... (2,262) 15 2,247 --
Issuance of 225 shares of common stock
pursuant to employee incentive stock
options.............................. -- 2 318 --
Syndication costs..................... -- -- -- (4)
Preferred stock dividends............. -- -- -- (6,607)
Net loss.............................. -- -- -- (211,291)
------- ------ -------- ---------
BALANCE AT DECEMBER 31, 1995........ 6,456 440 225,804 (278,268)
------- ------ -------- ---------
Issuance of 48,000 shares of common
stock in Contour Transaction......... -- 480 47,520 --
Conversion of 697 shares of preferred
stock into 4,355 shares of common
stock................................ (1,045) 44 1,001 --
Conversion of 1,862 shares of
preferred stock into 1,862 shares of
common stock......................... (2,793) 19 2,774 --
Issuance of 36 shares of common stock
pursuant to employee incentive stock
options.............................. -- -- 62 --
Syndication costs..................... -- -- (4,065) --
Net loss.............................. -- -- -- (28,964)
------- ------ -------- ---------
BALANCE AT DECEMBER 31, 1996........ 2,618 983 273,096 (307,232)
------- ------ -------- ---------
Issuance of 27,000 shares of common
stock in Contour Transaction......... -- 270 26,730 --
Issuance of 415 shares of common stock
pursuant to employee incentive stock
options.............................. -- 4 541 --
Preferred stock dividends............. -- -- -- (4,582)
Net income............................ -- -- -- 1,951
------- ------ -------- ---------
BALANCE AT DECEMBER 31, 1997........ 2,618 1,257 300,367 (309,863)
------- ------ -------- ---------
Issuance of 40,500 shares of common
stock pursuant to employee incentive
stock options........................ -- 1 37 --
Preferred stock dividends............. -- -- -- (4,582)
Net loss.............................. -- -- -- (14,256)
------- ------ -------- ---------
BALANCE AT JUNE 30, 1998
(unaudited)........................ $ 2,618 $1,258 $300,404 $(328,701)
======= ====== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Kelley Oil & Gas Corporation was incorporated in Delaware in
September 1994 for the purpose of effecting a consolidation (the
"Consolidation") of the equity interests in Kelley Oil Corporation, a Delaware
corporation ("Kelley Oil"), and Kelley Oil & Gas Partners, Ltd., a Texas
limited partnership ("Kelley Partners") of which Kelley Oil was the managing
general partner. The Consolidation was completed on February 7, 1995 upon
approval by investors in Kelley Oil and Kelley Partners. As a result of the
Consolidation, Kelley Oil became a wholly-owned subsidiary of the Company, and
Kelley Partners became a 99.99% owned subsidiary partnership. The Company's
operations, conducted through Kelley Oil and its subsidiaries, include the
development, exploration and acquisition of oil and gas properties and the
purchase and sale of natural gas. In March 1996, Kelley Partners was merged
into the Company (the "Partnership Merger"). Kelley Oil & Gas Corporation, its
corporate subsidiaries and proportionate partnership interests are referred to
herein as the "Company."
Accounting Treatment of the Consolidation. At the time of the Consolidation,
the Company's capital stock received by Kelley Oil's stockholders represented
a majority of the total voting power of the combined capital stock issued by
the Company in the Consolidation. Accordingly, the Consolidation was treated
as a purchase by the Company. As a result, the Company's consolidated
financial statements for 1995 reflect Kelley Oil's historical results through
the date of the Consolidation, with results of combined operations recorded
thereafter.
Principles of Consolidation. The consolidated financial statements include
the accounts of (i) the Company, (ii) its corporate subsidiaries, all of which
are wholly-owned, and (iii) the Company's indirect 100% owned partnership,
Kelley Operating Company, Ltd. ("Kelley Operating"), and (iv) its
proportionate interest in development drilling programs sponsored by Kelley
Oil to conduct drilling operations on properties of Kelley Operating ("1992
DDP" and "1994 DDP") (collectively the "DDPs"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased
to be cash equivalents. Cash payments attributable to interest on all
indebtedness aggregated $14.2 million, $19.2 million and $19.6 million for the
years ended December 31, 1995, 1996 and 1997, respectively.
Financial Instruments. The Company's financial instruments consist of cash
and cash equivalents, receivables, payables and long term debt. As of December
31, 1997, the estimated fair value of the Company's long term debt was $304.0
million. The fair value of such financial instruments has been estimated based
on quoted market prices and the Black-Scholes pricing model. The carrying
amount of the Company's other financial instruments approximates fair value.
Oil and Gas Properties. All of the Company's interests in its oil and gas
properties are located in the United States and are accounted for using the
successful efforts method. Under the successful efforts method, the costs of
successful wells, development dry holes and leases containing productive
reserves are capitalized and amortized on a unit-of-production basis over the
life of the related reserves. Estimated future abandonment and site
restoration costs, net of anticipated salvage values, are amortized on a unit-
of-production basis over the life of the related reserves. Exploratory
drilling costs are initially capitalized pending determination of proved
reserves but are charged to expense if no proved reserves are found. Other
exploration costs, including geological and geophysical expenses, leasehold
expiration costs and delay rentals, are expensed as incurred.
F-7
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
Unproved leasehold costs are capitalized and are not amortized pending an
evaluation of the exploration results. Unproved properties are periodically
assessed for impairment in value, with any impairment charged to expense.
Property Impairment under SFAS 121. In the fourth quarter of 1995, the
Company implemented the Financial Accounting Standards Board's Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). Under SFAS 121, certain assets are
required to be reviewed periodically for impairment whenever circumstances
indicate their carrying amount exceeds their fair value and may not be
recoverable. As a result of its continuing operating losses and a decline in
its proved reserves at January 1, 1996 from year-earlier pro forma levels, the
Company performed an assessment of the carrying value of its oil and gas
properties indicating an impairment should be recognized as of year end. Under
this analysis, the fair value for the Company's proved oil and gas properties
was estimated using escalated pricing and present value discount factors
reflecting risk assessments. The fair value of the Company's unproved
properties was predicated on current acreage cost estimates. Based on this
analysis, the Company recognized noncash impairment charges against the
carrying values of its proved and unproved oil and gas properties under SFAS
121 aggregating $83.4 million and $66.7 million, respectively, at December 31,
1995.
Other Property and Equipment. The costs of pipelines and other
transportation assets are depreciated using the straight-line method over the
estimated useful lives of the related assets. Furniture, fixtures and
equipment are recorded at cost and depreciated using the straight-line method
over the estimated useful lives of three to five years. Maintenance and
repairs are charged to expense as incurred.
Other Non-Current Assets. Other non-current assets consist primarily of debt
issue costs, net of accumulated amortization. These costs are amortized over
the anticipated term of the related debt.
Hedging Activities. See Note 9 for a discussion of the Company's accounting
policies related to hedging activities.
Oil and Gas Revenues. The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold is not significantly different from the Company's
production entitlement. Revenues from gas marketing, net of cost of gas sold,
are included in oil and gas revenues and amounted to $1.0 million, $1.8
million and $2.8 million for the years ended December 31, 1995, 1996 and 1997,
respectively.
Earnings per Share. In 1997, the Company implemented the Financial
Accounting Standards Board Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS") and is effective for
financial statements issued for periods ending after December 15, 1997. This
statement requires restatement for all prior-period EPS data presented. The
loss per common share before extraordinary item and loss per common share as
shown on the Consolidated Statements of Income (Loss) reflects net income
(loss) before extraordinary item and net income (loss), respectively, less
cumulative preferred stock dividends, whether or not declared, divided by the
weighted average number of common shares outstanding during the respective
years. The extraordinary loss per common share for the year ended 1996 was
$0.19. In calculating diluted income (loss) per share, common shares issuable
under stock options and upon conversion of convertible subordinated debentures
and convertible preferred stock are added to the weighted average common
shares outstanding when dilutive. For the years ended December 31, 1995, 1996
and 1997, all potentially
F-8
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
dilutive securities are anti-dilutive and therefore are not included in the
EPS calculations. At December 31, 1997, potentially dilutive securities which
could impact EPS in the future include stock options granted to employees to
purchase 4.6 million common shares, the Company's 7 7/8% Convertible
Subordinated Notes and 8 1/2% Convertible Subordinated Debentures which can be
converted into 2.5 million and 1.4 million common shares, respectively, and
the Company's $2.625 Convertible Preferred Stock ("Preferred Stock") which can
be can be converted into 6.1 million common shares. For the six months ended
June 30, 1997 and 1998, all potentially dilutive securities are anti-dilutive
and therefore are not included in the EPS calculations. As of June 30, 1998,
potentially dilutive securities which could impact EPS in the future include
stock options granted to employees to purchase 5.3 million common shares, the
Company's 7 7/8% Convertible Subordinated Notes and 8 1/2% Convertible
Subordinated Debentures which can be converted into 2.4 million and 1.4
million common shares, respectively, and the Preferred Stock which can be
converted into 6.1 million common shares.
Stock Based Compensation. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"), effective for the
Company on January 1, 1996. SFAS 123 permits, but does not require, a fair
value based method of accounting for employee stock option plans, resulting in
compensation expense being recognized in the results of operations when stock
options are granted. The Company plans to continue the use of its current
intrinsic value based method of accounting for stock option plans where no
compensation expense is recognized.
Comprehensive Income. In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
reporting and displaying comprehensive income and its components. SFAS 130 is
effective for periods beginning after December 15, 1997. As of June 30, 1998,
there are no adjustments ("Other Comprehensive Income") to net income in
deriving comprehensive income.
Risks and Uncertainties. The preparation of 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
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Changes in Presentation. Certain financial statement items in 1995 and 1996
have been reclassified to conform to the 1997 presentation.
Interim Presentation (Unaudited). The accompanying consolidated interim
financial statements and disclosures have been prepared by the Company in
accordance with generally accepted accounting principles and reflect all
adjustments (consisting solely of normal recurring adjustments) necessary for
a fair presentation in all material respects of the results for the interim
periods. The results of operations for the six months ended June 30, 1998 are
not necessarily indicative of results to be expected for the full year.
Certain financial statement items in the interim 1997 period have been
reclassified to conform to the interim 1998 presentation.
NOTE 2--ACQUISITION OF OIL AND GAS PROPERTIES
SPR Acquisition. On December 1, 1997, the Company purchased from SCANA
Petroleum Resources, Inc. ("SPR") substantially all of SPR's assets, including
its oil and gas properties,
F-9
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
exploratory leasehold interests and associated obligations, in exchange for
approximately $110 million ("SPR Acquisition"), subject to adjustment as
provided by the Purchase and Sale Agreement between the Company and SPR. The
acquisition was accounted for using the purchase method of accounting, and
accordingly, the purchase price has been preliminarily allocated to the assets
acquired based on estimated fair values at the date of acquisition. The
operating results of the assets acquired from SPR have been included in the
Company's Statements of Income (Loss) since December 1, 1997. The pro forma
information shown below assumes that the acquisition occurred at the beginning
of each period presented. Adjustments have been made to reflect changes in the
Company's results from the revenues and direct operating expenses of the
producing properties acquired from SPR, additional interest expense to finance
the acquisition, depreciation, depletion and amortization based on assigned
fair values to the assets acquired and general and administrative expenses
incurred from hiring additional employees. The unaudited pro forma financial
data are not necessarily indicative of financial results that would have
occurred had the SPR Acquisition occurred on January 1, 1996, and should not
be viewed as indicative of operations in future periods.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
---------------------------------
YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------ ENDED
1996 1997 JUNE 30, 1997
-------- -------- -------------
<S> <C> <C> <C>
Revenues..................................... $112,936 $112,142 $57,659
Income (loss) before extraordinary item...... (12,484) 1,315 530
Net income (loss)............................ (29,514) 1,315 530
Loss per common share........................ (0.29) (0.03) (0.01)
</TABLE>
NOTE 3--LONG TERM DEBT
Long Term Debt. The Company's long term debt is comprised of the following:
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Bank credit facilities....................................... $ 13,500 $111,300
13 1/2% Senior Notes......................................... 435 435
10 3/8% Senior Subordinated Notes............................ 119,923 120,615
7 7/8% Convertible Subordinated Notes........................ 27,486 29,710
8 1/2% Convertible Subordinated Debentures................... 22,909 24,123
-------- --------
184,253 286,183
Less current maturities.................................... -- --
-------- --------
$184,253 $286,183
======== ========
</TABLE>
Bank Credit Facilities. The Company replaced its prior credit facility with
a new credit facility effective as of December 12, 1996 (the "Credit
Facility") that was subsequently amended and restated in connection with the
SPR Acquisition effective December 1, 1997. The borrowers under the Credit
Facility are the Company, Kelley Oil and Kelley Operating, with Concorde Gas
Marketing, Inc. (a wholly-owned subsidiary of the Company) and the Company's
subsidiary partnerships as guarantors.
F-10
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
The Credit Facility provides for a maximum $140.0 million revolving credit
loan and matures, with all amounts owed thereunder becoming due and payable,
on December 1, 2000. Borrowings under the Credit Facility are subject to a
borrowing base to be determined semi-annually by the lenders (based in part on
the proved oil and gas reserves and other assets of the Company) which may be
redetermined more frequently at the election of the lenders or the borrowers.
The borrowing base at December 31, 1997 was $138.0 million, including an
overadvance of $23.0 million. The conforming borrowing base was increased from
$115.0 million to $125.0 million and the overadvance reduced to $13.0 million
effective April 13, 1998. At the time of the next borrowing base
determination, which is expected to be no earlier than November 1, 1998, this
overadvance is scheduled to be excluded from the borrowing base. On July 24,
1998, the Company sold its entire interest in the Waskom field in Harrison
County, Texas for the total consideration of $17.4 million. As a result of the
sale of these properties, effective on the sale date, the Company's borrowing
base under the Credit Facility was reduced by $8.0 million. The proceeds from
the sale were used to reduce outstanding borrowings under the Credit Facility.
At December 31, 1997, there were $111.3 million of borrowings and $4.3 million
of letters of credit outstanding under the Credit Facility. At June 30, 1998,
$100.0 million of borrowings and $1.5 million of letters of credit were
outstanding under the Credit Facility.
At December 31, 1997, the Credit Facility also provided a $32.3 million term
loan for use by the Company in the event that holders of the 7 7/8%
Convertible Subordinated Notes due 1999 exercised their redemption right that
occurred in connection with the exercise by Contour of its option to purchase
additional common shares of the Company, which was terminated without being
used on January 23, 1998. To the extent that the borrowing base is less than
the aggregate principal amount of all outstanding loans and letters of credit
under the Credit Facility, 50% of such deficiency must be cured within 90 days
and the balance must be cured within the next 90 days unless such deficiency
is a result of an asset sale, in which case the deficiency must be cured on
the date the borrowing base is re-determined as a result of such sale.
Borrowings under the Credit Facility are secured by substantially all of the
oil and gas assets of the Company and its subsidiaries, the proceeds therefrom
and the Company's equity interests in the DDPs. The weighted average interest
rate on borrowings outstanding at December 31, 1997 under the Credit Facility
was 7.76%.
So long as no default or event of default (as defined in the Credit
Facility) is continuing, borrowings under the Credit Facility, as amended,
bear interest, at the option of the borrowers, at either (i) LIBOR plus 1.0%
to 1.75% or (ii) the higher of (a) the agent's prime rate plus 0% to 0.25% and
(b) the federal funds rate plus 0.5% to 0.75% (either is dependent on the
level of utilization of the borrowing base). The Borrowers incur a quarterly
commitment fee ranging from 0.30% to 0.50% per annum on the average unused
portion of the borrowing base, depending upon the level of utilization.
The Credit Facility contains covenants which, among other things, limit the
amount of debt the Company may incur, limit the placement of liens on its
assets, limit lease transactions, limit its ability to enter into certain
hedging transactions, restrict its ability to merge with or into another
person and prevent it from prepaying certain subordinated indebtedness unless
certain conditions are met. The Credit Facility also restricts the payment of
dividends. Further, certain covenants require that, for specified periods, the
Company maintain specified ratios between EBITDAX and senior indebtedness and
EBITDAX and interest on Indebtedness.
1996 Fourth Quarter Extraordinary Loss. Pursuant to an offer to purchase and
consent solicitation, dated September 24, 1996, as amended, the Company
offered to purchase for cash up to the aggregate principal amount of $100
million of its 13 1/2% Senior Notes at a cash price equal to
F-11
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
$1,110 per $1,000 principal amount, plus interest accrued and unpaid through
the payment date. In conjunction with the offering, the Company also solicited
consents to the adoption of certain amendments to the 13 1/2% Senior Notes
indenture pursuant to which the 13 1/2% Senior Notes were issued, and offered
to pay each consenting holder of the 13 1/2% Senior Notes $30 for each $1,000
principal amount of the 13 1/2% Senior Notes consenting. The Company received
the requisite consents which allowed it to amend the 13 1/2% Senior Notes
indenture on October 28, 1996. The Company also received tenders from holders
of approximately $99.6 million principal amount of the 13 1/2% Senior Notes.
These transactions resulted in an extraordinary loss in the fourth quarter of
1996 of $17.0 million, representing the excess of the aggregate purchase price
of the 13 1/2% Notes (including Consent Payments) over their carrying value as
of the date of the consummation of the refinancing.
10 3/8% Senior Subordinated Notes. In connection with the refinancing of the
13 1/2% Senior Notes, the Company issued an aggregate principal amount of
$125.0 million of 10 3/8% Senior Subordinated Notes due 2006 (the "10 3/8%
Senior Subordinated Notes"). The 10 3/8% Senior Subordinated Notes are
redeemable at the option of the Company, in whole or in part, at redemption
prices declining from 105.19% in 2001 to 100% in 2003 and thereafter. The
Company may redeem up to 35% of the principal amount of the 10 3/8% Senior
Subordinated Notes before October 15, 1999 with the proceeds of an equity
offering (provided that either at least $75.0 million aggregate principal
amount of such notes remains outstanding or such redemption retires such notes
in their entirety). The 10 3/8% Senior Subordinated Notes represent unsecured
obligations of the Company and are subordinate in right of payment to all
existing and future senior indebtedness. The indenture for the notes contains
conditions and limitations, including but not limited to restrictions on
additional indebtedness, payment of dividends, redemption of capital stock,
and certain mergers and consolidations. The holders of the 10 3/8% Senior
Subordinated Notes also can require the Company to repurchase the notes at
101% of the principal amount upon a Change of Control, as defined. Kelley Oil
and Kelley Operating (collectively, the "Guarantor Subsidiaries") are
guarantors of the 10 3/8% Senior Subordinated Notes.
On February 3, 1997, the Company completed an exchange of $125.0 million
aggregate principal amount of publicly registered 10 3/8% Senior Subordinated
Notes, Series B, for all of the then outstanding Series A notes. The Series B
notes were substantially identical to the Series A notes.
In May 1998, the Company sold $30.0 million principal amount of the
Company's 10 3/8% Senior Subordinated Notes due 2006, Series C ("Series C
Notes") at a cash price of $1,015 per $1,000 principal amount. The net
proceeds received were used to reduce outstanding borrowings under the Credit
Facility. The Series C Notes are redeemable at the option of the Company, in
whole or in part, at redemption prices declining ratably from 105.19% on
October 15, 2001 to 100% at October 15, 2003 and thereafter. The Company may
redeem up to 35% of the original principal amount of the Series C Notes before
October 15, 1999 at 110.38% with the proceeds of an equity offering (provided
that either at least $18.0 million aggregate principal amount of such notes
remains outstanding or such redemption retires such notes in their entirety).
The Series C Notes represent unsecured obligations of the Company and are
subordinate in right of payment to all existing and future senior
indebtedness. The indenture for the notes contains conditions and limitations,
including but not limited to restrictions on additional indebtedness, payment
of dividends, redemption of capital stock, and certain mergers and
consolidations. The holders of the Series C Notes also can require the Company
to repurchase the notes at 101% of the principal amount upon
F-12
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
a Change of Control, as defined. Kelley Oil Corporation, a wholly-owned
subsidiary of the Company and Kelley Operating Company, Ltd., an indirect
wholly-owned partnership of the Company are guarantors of the Series C Notes.
The Series C Notes were sold pursuant to Rule 144A of the Securities Act of
1933. The Indenture for the Series C Notes requires the Company to use its
best efforts to register under the Securities Act notes identical in terms to
the Series C Notes ("Exchange Notes"). Upon the registration statement being
declared effective, the Company will offer to exchange the Series C Notes for
the Exchange Notes.
7 7/8% Convertible Subordinated Notes and 8 1/2% Convertible Subordinated
Debentures. The Company has outstanding 7 7/8% Convertible Subordinated Notes
due 1999 (the "7 7/8% Subordinated Notes") in the aggregate principal amount
at maturity of $34.4 million and 8 1/2% Convertible Subordinated Debentures
due April 1, 2000 (the "8 1/2% Subordinated Debentures") in the aggregate
principal amount of $26.9 million (together, the "Subordinated Debt"). Each
$1,000 face value amount of the 7 7/8% Subordinated Notes is convertible into
71.263 shares of the Company's Common Stock or 35.632 shares of the Company's
Common Stock and 7.435 shares of Preferred Stock. Each $1,000 face value
amount of the 8 1/2% Subordinated Debentures is convertible into 51.864 shares
of the Company's Common Stock or 25.932 shares of the Company's Common Stock
and 5.411 shares of Preferred Stock.
Under the Indenture for the 7 7/8% Subordinated Notes, as amended, a "Change
in Control" is defined to occur if, among other things, any person becomes the
beneficial owner of securities representing 50% or more of the equity
interests in the Company. With the purchase by Contour of 27 million shares on
December 1, 1997, each holder of 7 7/8% Subordinated Notes, was afforded the
right, at the holder's option, subject to terms and conditions of the
Indenture, to require the Company to redeem all or any part of the holder's
notes by January 22, 1998 at a specified cash price. Holders redeemed $0.2
million of the 7 7/8% Subordinated Notes under the Change of Control
provision.
Debt Maturities. As of June 30, 1998, the Company has aggregate debt
maturities of $34.5 million in 1999, $126.9 million in 2000 and $155.0 million
in 2006.
NOTE 4--STOCKHOLDERS' EQUITY (DEFICIT)
Contour Stock Purchase. In February 1996, the Company issued 48 million
shares of its Common Stock at $1.00 per share to Contour Production Company
L.L.C. ("Contour") upon the closing of a Stock Purchase Agreement between the
Company and Contour (the "Contour Transaction"). The newly issued shares
represented 49.8% of the Company's voting power. In connection with the
Contour Transaction, the Company (i) entered into an option agreement with
Contour (the "Contour Option Agreement"), (ii) obtained consents from its
principal stockholders, subject to compliance with applicable securities law,
to amend its Certificate of Incorporation to increase its authorized Common
Stock from 100 million shares to 200 million shares, (iii) entered into
employment agreements with John F. Bookout, President of Contour, and three
other new executives named by him, (iv) adopted a nonqualified stock option
plan for the new executives other than Mr. Bookout, (v) amended its existing
incentive stock option plans, (vi) reduced the size of its board of directors
(the "Board") to seven members and reconstituted the Board with three
continuing directors and four designees of Contour and (vii) replaced its
credit facility.
Contour Option. Under the Contour Option Agreement, the Company granted
Contour an option (the "Contour Option") to purchase up to 27 million shares
(the "Maximum Option Number") of Common Stock at $1.00 per share (subject to
antidilution adjustments) upon satisfaction of certain
F-13
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
conditions, including the absence of any Company debt repurchase or redemption
obligations as a result of the purchase. Contour voluntarily exercised its
option in full on December 1, 1997 to partially fund the SPR Acquisition.
Preferred Stock. In May 1994, Kelley Oil completed a public offering of
1,380,000 shares of $2.625 Preferred Stock ("KOIL Preferred Stock") at $25 per
share. Each outstanding share of KOIL Preferred Stock was converted in the
Consolidation into one share of the Company's Preferred Stock, which has the
same terms as the KOIL Preferred Stock, except for expanded voting rights. The
Company issued 649,807 shares of its Preferred Stock to Public Unitholders in
the Consolidation, resulting in a total of 2,442,323 outstanding shares of
Preferred Stock after giving effect to the shares issued to holders of KOIL
Preferred Stock.
In January 1996, the Company suspended the payment of the quarterly
Preferred Stock dividend scheduled for February 1, 1996 to conserve cash. On
April 15, 1997, the Board of Directors of the Company declared a dividend of
$2.625 per preferred share (approximately $4.6 million), which was paid on May
1, 1997. As of December 31, 1997, the Company had not declared the quarterly
dividends of $0.65625 per preferred share for February 1, 1997, May 1, 1997,
August 1, 1997, November 1, 1997 and February 1, 1998, aggregating
approximately $5.7 million. Future dividends on the Preferred Stock are
restricted under the agreement covering the Credit Facility. No interest is
payable on Preferred Stock arrearages; however, the terms of the Preferred
Stock enable holders, voting separately as a class, to elect two additional
directors to the Board at each meeting of stockholders at which directors are
to be elected during any period when Preferred Stock dividends are in arrears
in an aggregate amount equal to at least six quarterly dividends, whether or
not consecutive.
Each share of Preferred Stock is convertible, at the holder's option, into
3.47 shares of Common Stock, equivalent to a conversion price of $7.20 per
share of Common Stock relative to the $25 per share liquidation preference of
the Preferred Stock (the "Preferred Conversion Price"). Under the terms of the
Certificate of Designation governing the Preferred Stock, the Contour
Transaction triggered a special conversion right under which the Preferred
Stock conversion price was reduced to $4.00 for a period of 45 days commencing
March 12, 1996. On April 25, 1996, 696,823 shares of Preferred Stock were
converted into 4,355,040 shares of Common Stock under the special conversion
right.
On April 14, 1998, the Company declared a dividend on its Preferred Stock of
$2.625 per share (approximately $4.6 million), which was paid on April 30,
1998. Future dividends on the Preferred Stock are restricted under the Credit
Facility. As of June 30, 1998, $2.3 million in dividends were in arrears on
the Preferred Stock.
ESOP Preferred Stock. As of December 31, 1995, 1,861,619 shares of ESOP
Preferred Stock were outstanding and held by the Company's Employee Stock
Ownership Plan ("ESOP"). In June 1996, each of the 1,861,619 shares of ESOP
Preferred Stock was redeemed for one share of the Company's Common Stock.
NOTE 5--EMPLOYEE STOCK PLANS
Employee Stock Options. The Company has both qualified and nonqualified
stock option plans that provide for granting of options for the purchase of
common stock to key employees. These stock options may be granted for periods
up to ten years and are generally subject to vesting periods up to three
years, except options granted during 1997 which are subject to a four year
vesting period.
F-14
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
Stock option activity for the Company during 1995, 1996 and 1997 was as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS IN THOUSANDS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- -------------------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding,
beginning of year......... 564 $2.47 2,105 $2.38 4,589 $1.63
Granted.................. 1,766 2.23 2,520 1.01 482 2.61
Exercised................ (225) 1.42 (36) 2.38 (415) 1.31
Surrendered or expired... -- -- -- -- (55) 2.62
----- ----- -----
Stock options outstanding,
end of year............... 2,105 2.38 4,589 1.63 4,601 1.75
===== ===== =====
</TABLE>
In February 1995, all previously issued options to the extent outstanding,
aggregating options to acquire 234,000 shares at prices ranging from $7.00 to
$7.63, were repriced at $4.13 per share. In February 1996, in connection with
the Contour Transaction, all unvested options then held by employees were
fully vested. Additionally, the then-existing plans were amended to extend the
period during which a terminated employee may exercise vested options to three
years after termination of employment.
At December 31, 1997, options were exercisable for 2.5 million shares at a
weighted average exercise price of $2.11. The range of exercise prices on
outstanding options at December 31, 1997 was $1.00 to $4.13. The remaining
contractual life of these options was approximately 7.9 years. At December 31,
1997, 3.8 million shares were available for future option grants.
The weighted average fair value of options granted during 1995, 1996 and
1997 was $1.30, $0.59 and $1.51, respectively. The fair value of the options
granted was estimated on the date of grant using the Black-Scholes option-
pricing model assuming no expected dividend yield, an expected life of five
years and an expected volatility of 60%. The weighted average risk-free
interest rate was assumed to be 6.8% for options granted in 1995 and 1996, and
6.4% for options granted in 1997.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for stock option and purchase plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost been recognized based upon the fair market value
at the grant dates for awards under those plans consistent with the method of
SFAS 123, the Company's net loss and earnings per share for the years ended
December 31, 1995, 1996 and 1997 would have been as reflected in the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- ------
<S> <C> <C> <C>
Net income (loss) before extraordinary item (in
thousands)...................................... $(211,411) $(14,512) $1,319
Loss per common share before extraordinary item.. (5.31) (.21) (.03)
Net income (loss) (in thousands)................. (211,411) (31,542) 1,319
Loss per common share............................ (5.31) (.40) (.03)
</TABLE>
ESOP. Kelley Oil established the ESOP effective January 1, 1984 for the
benefit of substantially all of its employees. No ESOP contributions were made
in 1996. Effective September 1, 1996, the ESOP was amended to include a 401(k)
feature whereby the Company is obligated to make matching contributions up to
6% of each employee's salary. The plan also provides for additional
discretionary contributions. For 1997 the Company made matching contributions
totaling $0.2 million.
F-15
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
NOTE 6--INCOME TAXES
The following table sets forth a reconciliation of the statutory federal
income tax for the years ended December 31, 1995, 1996 and 1997:
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- ------
<S> <C> <C> <C>
Income (loss) before income taxes................. $(211,291) $(28,965) $1,951
--------- -------- ------
Income tax expense (benefit) computed at statutory
rates............................................ (71,839) (9,848) 663
Increase in valuation allowance................. 71,236 16,322 301
Adjustment to net operating loss carryforward
and other...................................... -- (7,209) (1,459)
Permanent differences:
Nondeductible expenses.......................... 567 735 708
Amortization.................................... 33 -- --
Other--net...................................... 3 -- (213)
--------- -------- ------
Tax expense (benefit)......................... $ -- $ -- $ --
========= ======== ======
</TABLE>
No federal income taxes were paid for the years ended December 31, 1995,
1996 and 1997.
The Company's deferred tax position reflects the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
reporting. Significant components of the deferred tax liabilities and assets
are as follows:
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depletion, depreciation and
capitalization methods on oil and gas
properties..................................... $ -- $ -- $ --
Deferred tax assets:
Book over tax depletion, depreciation and
capitalization methods on oil and gas
properties..................................... 53,312 42,696 32,210
Net operating loss carryforwards................ 35,181 62,179 72,992
Charitable contribution carryforwards........... 138 78 52
Alternative minimum tax credit carryforwards.... 21 21 21
Valuation allowance............................. (88,652) (104,974) (105,275)
------- -------- --------
Total deferred tax assets....................... -- -- --
------- -------- --------
Net deferred tax liability........................ $ -- -- $ --
======= ======== ========
</TABLE>
Net Operating Loss Carryforwards and Alternative Minimum Tax Credits. As of
December 31, 1997, the Company had cumulative net operating loss carryforwards
("NOL") for federal income tax purposes of approximately $214.7 million, which
expire in 2000 through 2012, and net operating loss carryforwards for
alternative minimum tax purposes of approximately $175.9 million, which expire
in 2008 through 2012. Due to previous ownership changes, future utilization of
the net operating loss carry forwards will be limited by Internal Revenue Code
section 382.
F-16
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
NOTE 7--RELATED PARTY TRANSACTIONS
The 1994 DDP. In February 1994, the 1994 DDP completed a public offering of
20.9 million units of its limited and general partner interests at $3.00 per
unit. As of December 31, 1997, the Company owned 19.2 million units (91.9%) in
the 1994 DDP, together with its 3.94% general partner interest.
The 1994 DDP's partnership agreement provides that any contributions of the
partners not used or committed to be used for drilling activities during the
two-year period from the commencement of operations through February 29, 1996
(the "Commitment Period") shall be distributed to the partners on a pro rata
basis as a return of capital. In 1997, Kelley Oil reduced the estimate for
Committed Expenditures to $58.0 million based on the amount of committed
capital actually used and committed or allocated to drilling activities by the
end of the Commitment Period. In accordance with the 1994 DDP's partnership
agreement, the 1994 DDP distributed the Outside Share of uncommitted capital
to its unitholders other than Kelley Oil aggregating $0.3 million in March
1996 and $0.1 million in July 1997.
The 1992 DDP. During November 1992, the 1992 DDP completed a public offering
of 16.0 million units of limited and general partner interests at $3.00 per
unit. As of December 31, 1997, Kelley Oil owned 13.4 million units (83.7%) in
the 1992 DDP, together with its 3.94% general partner interest. As of December
31, 1997, the 1992 DDP was indebted to Kelley Oil for loans aggregating $3.2
million ($0.5 million, net of intercompany eliminations). The Company recorded
interest income on this indebtedness of $0.1 million in 1997, net of
intercompany eliminations.
Reimbursements from Affiliated Programs. The Company is reimbursed for
administrative and overhead expenses incurred in connection with the
management and administration of each of these affiliated programs. Such
amounts, net of intercompany eliminations, aggregated $1.6 million, $0.2
million and $0.1 million in 1995, 1996 and 1997, respectively.
Interest on DDP Commitments. During 1995, 1996 and 1997, the Company paid or
accrued interest at a market rate in the amounts, net of intercompany
elimination, of $229,000, $91,000 and $11,000, respectively, on deferred
subscription commitments to DDPs.
Advisory Fees. During 1996 and 1997, pursuant to an agreement dated January
23, 1996, the Company paid Bessemer Partners & Co., an affiliate of the
majority stockholder of Contour Production Company L.P., a financial advisory
fee of $2.5 million and $0.5 million, respectively for advisory services. The
Company is obligated to pay an additional advisory fee of $500,000 in 1998.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Significant Customers. Substantially all of the Company's receivables are
due from a limited number of natural gas transmission companies and other gas
purchasers. During 1997, natural gas sales to two purchasers accounted for
approximately 90% of the Company's total sales. To date, this concentration
has not had a material adverse effect on the consolidated financial condition
of the Company.
Litigation. As previously disclosed, following Kelley Oil's announcement of
the initial proposal for the Consolidation in August 1994, four separate
lawsuits were filed against Kelley Oil and its directors relating to the
Consolidation. In November 1994, Kelley Oil entered into a memorandum of
understanding with the plaintiffs in three of the lawsuits, providing for a
proposed settlement based on a revised Consolidation proposal negotiated by a
special committee of Kelley Oil's non-
F-17
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
management directors and the settling plaintiffs. A stipulation and agreement
of compromise, settlement and release reflecting the terms of the proposed
settlement was filed in the United States District Court for the Southern
District of Texas on November 23, 1994. At a hearing held on the same date,
the court approved the Consolidation of all four lawsuits and the
certification of a Unitholder class requested by the settling parties. On
March 3, 1995, following a hearing on the fairness of the settlement, the
court entered a final order approving the settlement, dismissing the
consolidated lawsuits with prejudice and reducing the award of attorneys' fees
and disbursements contemplated by the stipulation to $1.5 million, plus
interest from March 3, 1995 through the payment date. On April 29, 1997, the
U.S. Court of Appeals for the Fifth Circuit affirmed the final judgement and
order of the District Court. On August 4, 1997, the Company made a cash
payment of $1.7 million which included $0.2 million of interest.
The Company is involved 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 effect on the financial statements of the
Company.
Restructuring Expenses. In each of 1995 and 1996, the Company incurred
restructuring expenses of $1.1 million and $4.3 million, respectively,
associated primarily with staff reductions, related severance settlements and
reorganization costs. Accrued expenses on the balance sheet include $3.5
million and $0.9 million at December 31, 1996 and 1997, respectively, related
to the unpaid portion of these charges.
Leases. The Company leases office space and equipment under operating leases
with options to renew. Rental expenses related to these leases for the years
ended December 31, 1995, 1996 and 1997 were $1.9 million, $1.3 million and
$0.8 million, respectively. For the balance of the lease terms, minimum
rentals are as follows:
(IN THOUSANDS)
<TABLE>
<S> <C>
1998............................................................... $ 545
1999............................................................... 517
2000............................................................... 517
2001............................................................... 255
------
Total............................................................ $1,834
======
</TABLE>
The terms of the Company's office space lease provide that the Company may
terminate its rental obligation upon six months notice and incurring a maximum
obligation of $0.2 million.
NOTE 9--HEDGING ACTIVITIES
The Company periodically uses forward sales contracts, natural gas price
swap agreements, natural gas basis swap agreements and options to reduce
exposure to downward price fluctuations on its natural gas production. The
Company does not engage in speculative transactions and generally does not
enter into hedging arrangements for more than 75% of its anticipated future
production. During 1997 and the first half of 1998, the Company used price and
basis swap agreements. Price swap agreements generally provide for the Company
to receive or make counterparty payments on the differential between a fixed
price and a variable indexed price for natural gas. Basis swap agreements
generally provide for the Company to receive or make counterparty payments on
the differential between a variable indexed price and the price it receives
F-18
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
from the sale of natural gas production, and are used to hedge against
unfavorable price movements in the relationship between such variable indexed
price and the price received for such production. Gains and losses realized by
the Company from hedging activities are included in oil and gas revenues and
average sales prices in the period that the related production is sold. The
Company's hedging activities also cover the oil and gas production
attributable to the interest in such production of the public unitholders in
its subsidiary partnerships. The credit risk exposure from counterparty
nonperformance on natural gas forward sales contracts and derivative financial
instruments is generally the amount of unrealized gains under the contracts.
The Company has not experienced counterparty nonperformance on these
agreements and does not anticipate any in future periods.
Through natural gas price swap agreements, approximately 65% and 37% of the
Company's natural gas production for 1997 and the first half of 1998,
respectively, was affected by its hedging transactions at an average NYMEX
quoted price of $2.35 per Mmbtu and $2.31 per Mmbtu, respectively, before
transaction and transportation costs. As of December 31, 1997 and June 30,
1998, approximately 29% and 31%, respectively, of the Company's anticipated
natural gas production for the remainder of 1998 had been hedged by natural
gas price swap agreements at an average NYMEX quoted price of $2.30 per Mmbtu
and $2.28 per Mmbtu, respectively, before transaction and transportation
costs. Certain natural gas price swap agreements outstanding at December 31,
1997 and June 30, 1998 grant the counterparty the option to double the
contract volume at a specified price. If this option is exercised on all
contracts outstanding at December 31, 1997 and June 30, 1998, approximately
40% and 49%, respectively, of the Company's anticipated natural gas production
for the remainder of 1998 had hedged by natural gas price swap agreements at
an average NYMEX quoted price of $2.31 per Mmbtu and $2.30 per Mmbtu,
respectively, before transaction and transportation costs. In addition, as of
December 31, 1997, the Company had outstanding natural gas basis swap
agreements covering approximately 34% of its anticipated natural gas
production for January 1998 through September 1998. As of June 30, 1998, the
Company had outstanding natural gas basis swap agreements covering
approximately 28% of its anticipated natural gas production for July 1998
through September 1998.
Hedging activities decreased revenues by approximately $4.2 million in 1997
as compared to estimated revenues had no hedging activities been conducted.
Hedging activities increased revenues by approximately $0.8 million in the
first half of 1998 as compared to estimated revenues had no hedging activities
been conducted. At December 31, 1997, the unrealized gain on the Company's
existing hedging instruments for future production months in 1998 approximated
$1.4 million. At June 30, 1998, the unrealized loss on the Company's existing
hedging instruments for future production months in 1998 approximated $1.5
million. The unrealized loss at June 30, 1998 would by $2.5 million assuming
that counterparties exercise their option to double the contract volume where
allowed, as discussed above.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities that
require an entity to recognize all derivatives as an asset or liability
measured at its fair value. Depending on the intended use of the derivative,
changes in its fair value will be reported in the period of change as either a
component of earnings or a component of other comprehensive income.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application of SFAS 133 is encouraged, but not
prior to the beginning of any fiscal quarter that begins
F-19
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
after issuance of the Statement. Retroactive application to periods prior to
adoption is not allowed. The Company has not quantified the impact of adoption
on its financial statements or the date it intends to adopt.
NOTE 10--GUARANTOR FINANCIAL STATEMENTS
Kelley Oil Corporation, a wholly-owned subsidiary of the Company and Kelley
Operating Company Ltd., an indirect wholly-owned partnership of the Company
are guarantors of the Company's Series B and Series C 10 3/8% Senior
Subordinated Notes due 2006. The following guarantor consolidating condensed
financial statements present:
1. Consolidating condensed balance sheets as of December 31, 1996 and 1997
and June 30, 1998, consolidating condensed statements of income (loss)
for each of the years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1997 and 1998 and consolidating condensed
statements of cash flows for each of the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1997 and 1998.
2. Kelley Oil & Gas Corporation (the "Parent"), combined Guarantor
Subsidiaries and combined Non-Guarantor Subsidiaries, all with their
investments in subsidiaries accounted for using the equity method.
3.Elimination entries necessary to consolidate the Parent and all of its
subsidiaries.
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets........ $329,764 $ 11,607 $28,452 $(340,354) $ 29,469
Property and
equipment, net....... -- 137,909 21,349 (790) 158,468
Other non-current
assets, net.......... (171,649) 23,974 4 148,961 1,290
-------- --------- ------- --------- --------
Total assets........ $158,115 $ 173,490 $49,805 $(192,183) $189,227
======== ========= ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities... $ 4,397 $ 345,637 $25,829 $(340,354) $ 35,509
Long term debt........ 184,253 -- -- -- 184,253
Stockholders'
deficit.............. (30,535) (172,147) 23,976 148,171 (30,535)
-------- --------- ------- --------- --------
Total liabilities
and stockholders'
deficit............ $158,115 $ 173,490 $49,805 $(192,183) $189,227
======== ========= ======= ========= ========
</TABLE>
F-20
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets....... $ 427,445 $212,780 $18,926 $(632,293) $ 26,858
Property and
equipment, net...... -- 276,744 17,698 (829) 293,613
Other non-current
assets, net......... (141,957) 24,418 -- 119,670 2,131
--------- -------- ------- --------- --------
Total assets....... $ 285,488 $513,942 $36,624 $(513,452) $322,602
========= ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities.. $ 4,926 $657,128 $12,279 $(632,293) $ 42,040
Long term debt....... 286,183 -- -- -- 286,183
Stockholders'
deficit............. (5,621) (143,186) 24,345 118,841 (5,621)
--------- -------- ------- --------- --------
Total liabilities
and stockholders'
deficit........... $ 285,488 $513,942 $36,624 $(513,452) $322,602
========= ======== ======= ========= ========
</TABLE>
CONSOLIDATING CONDENSED BALANCE SHEETS
JUNE 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets....... $ 426,742 $210,629 $13,041 $(625,564) $ 24,848
Property and
equipment, net...... -- 278,401 16,306 22 294,729
Other non-current
assets, net......... (139,994) 21,857 -- 119,821 1,684
--------- -------- ------- --------- --------
Total assets....... $ 286,748 $510,887 $29,347 $(505,721) $321,261
========= ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities.. $ 4,803 $652,558 $ 7,519 $(625,564) $ 39,316
Long term debt....... 306,366 -- -- -- 306,366
Stockholders'
deficit............. (24,421) (141,671) 21,828 119,843 (24,421)
--------- -------- ------- --------- --------
Total liabilities
and stockholders'
deficit........... $ 286,748 $510,887 $29,347 $(505,721) $321,261
========= ======== ======= ========= ========
</TABLE>
F-21
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
CONSOLIDATING CONDENSED STATEMENTS OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES................ $ -- $ 25,507 $ 15,942 $ (2,688) $ 38,761
COSTS AND EXPENSES...... (7,795) (202,929) (42,016) 2,688 (250,052)
EQUITY IN LOSS OF SUB-
SIDIARIES.............. (203,496) (26,074) -- 229,570 --
--------- --------- -------- -------- ---------
NET LOSS................ $(211,291) $(203,496) $(26,074) $229,570 $(211,291)
========= ========= ======== ======== =========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES................ $ -- $39,248 $24,784 $ (1,749) $ 62,283
COSTS AND EXPENSES...... (22,397) (39,293) (13,150) 623 (74,217)
EQUITY IN EARNINGS OF
SUBSIDIARIES........... 10,463 11,634 -- (22,097) --
EXTRAORDINARY ITEM...... (17,030) -- -- -- (17,030)
-------- ------- ------- -------- --------
NET INCOME (LOSS)....... $(28,964) $11,589 $11,634 $(23,223) $(28,964)
======== ======= ======= ======== ========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES................ $ 8 $57,064 $19,508 $ (442) $76,138
COSTS AND EXPENSES...... (27,196) (36,975) (10,329) 313 (74,187)
EQUITY IN EARNINGS OF
SUBSIDIARIES........... 29,139 9,179 -- (38,318) --
------- ------- ------- -------- -------
NET INCOME.............. $ 1,951 $29,268 $ 9,179 $(38,447) $ 1,951
======= ======= ======= ======== =======
</TABLE>
F-22
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES................ $ -- $24,983 $10,676 $ (300) $35,359
EXPENSES................ (13,064) (15,457) (6,186) (197) (34,904)
EQUITY IN EARNINGS OF
SUBSIDIARIES........... 13,519 4,490 -- (18,009) --
------- ------- ------- -------- -------
NET INCOME.............. $ 455 $14,016 $ 4,490 $(18,506) $ 455
======= ======= ======= ======== =======
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES................ $ (18) $38,583 $5,839 $ (129) $ 44,275
EXPENSES................ (16,602) (39,157) (3,754) 982 (58,531)
EQUITY IN EARNINGS OF
SUBSIDIARIES........... 2,364 2,085 -- (4,449) --
-------- ------- ------ ------- --------
NET INCOME (LOSS)....... $(14,256) $ 1,511 $2,085 $(3,596) $(14,256)
======== ======= ====== ======= ========
</TABLE>
F-23
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..... $(211,291) $(203,496) $(26,074) $ 229,570 $(211,291)
Non-cash income (loss)
adjustments.......... 204,129 201,553 36,944 (229,570) 213,056
Changes in operating
assets and
liabilities.......... (99,009) 91,297 4,141 -- (3,571)
--------- --------- -------- --------- ---------
Net cash provided by
(used in) operating
activities............. (106,171) 89,354 15,011 -- (1,806)
--------- --------- -------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures.. -- (29,761) (22,479) -- (52,240)
Cash received in
consolidation........ -- 1,596 -- -- 1,596
Proceeds from sale of
properties........... -- 6,916 504 -- 7,420
Capital contributed to
partnerships......... -- (14,722) -- 14,722 --
Distributions from
partnerships......... -- 6,887 -- (6,887) --
--------- --------- -------- --------- ---------
Net cash provided by
(used in) investing
activities............. -- (29,084) (21,975) 7,835 (43,224)
--------- --------- -------- --------- ---------
FINANCING ACTIVITIES:
Net payments on long
term borrowings...... -- (62,900) -- -- (62,900)
Proceeds from sale of
notes, net........... 95,302 -- -- -- 95,302
Proceeds from sale of
common stock, net.... 16,299 20 -- -- 16,319
Distributions to
partners............. -- -- (6,887) 6,887 --
Capital contributed by
partners............. -- -- 14,722 (14,722) --
Dividends on preferred
stock................ (5,430) (1,177) -- -- (6,607)
--------- --------- -------- --------- ---------
Net cash provided by
(used in) financing
activities............. 106,171 (64,057) 7,835 (7,835) 42,114
--------- --------- -------- --------- ---------
Increase (decrease) in
cash and cash
equivalents............ -- (3,787) 871 -- (2,916)
Cash and cash
equivalents, beginning
of period.............. 1 7,441 1,826 -- 9,268
--------- --------- -------- --------- ---------
Cash and cash
equivalents, end of
period................. $ 1 $ 3,654 $ 2,697 $ -- $ 6,352
========= ========= ======== ========= =========
</TABLE>
F-24
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..... $ (28,964) $ 11,589 $11,634 $(23,223) $ (28,964)
Non-cash income (loss)
adjustments.......... 10,133 12,280 6,542 23,223 52,178
Changes in operating
assets and
liabilities.......... (31,460) 26,767 (9,259) -- (13,952)
--------- -------- ------- -------- ---------
Net cash provided by
(used in) operating
activities............. (50,291) 50,636 8,917 -- 9,262
--------- -------- ------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures.. -- (35,203) (12,398) -- (47,601)
Acquisition of oil and
gas properties....... -- (11,594) -- -- (11,594)
Proceeds from sale of
properties........... -- 3,811 1,992 -- 5,803
--------- -------- ------- -------- ---------
Net cash used in
investing activities... -- (42,986) (10,406) -- (53,392)
--------- -------- ------- -------- ---------
FINANCING ACTIVITIES:
Net payments on long
term borrowings...... -- (8,500) -- -- (8,500)
Proceeds from sale of
notes, net........... 120,938 -- -- -- 120,938
Debenture conversion
costs................ (1,100) -- -- -- (1,100)
Proceeds from sale of
common stock, net.... 43,998 -- -- -- 43,998
Retirement of senior
notes................ (113,488) -- -- -- (113,488)
--------- -------- ------- -------- ---------
Net cash provided by
(used in) financing
activities............. 50,348 (8,500) -- -- 41,848
--------- -------- ------- -------- ---------
Increase (decrease) in
cash and cash
equivalents............ 57 (850) (1,489) -- (2,282)
Cash and cash
equivalents, beginning
of period.............. 1 3,654 2,697 -- 6,352
--------- -------- ------- -------- ---------
Cash and cash
equivalents, end of
period................. $ 58 $ 2,804 $ 1,208 $ -- $ 4,070
========= ======== ======= ======== =========
</TABLE>
F-25
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..... $ 1,951 $ 29,268 $ 9,179 $(38,447) $ 1,951
Non-cash income (loss)
adjustments.......... (24,842) 16,880 5,098 38,447 35,583
Changes in operating
assets and
liabilities.......... (97,813) 105,584 (5,701) -- 2,070
--------- --------- -------- -------- ---------
Net cash provided by
(used in) operating
activities............. (120,704) 151,732 8,576 -- 39,604
--------- --------- -------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures.. -- (51,592) (1,548) -- (53,140)
Acquisition of oil and
gas properties....... -- (111,135) -- -- (111,135)
Capital contributed to
partnerships......... -- (5,819) -- 5,819 --
Distributions from
partnerships......... -- 14,014 -- (14,014) --
--------- --------- -------- -------- ---------
Net cash used in
investing activities... -- (154,532) (1,548) (8,195) (164,275)
--------- --------- -------- -------- ---------
FINANCING ACTIVITIES:
Net proceeds from long
term borrowings...... 97,800 -- -- -- 97,800
Proceeds from sale of
common stock, net.... 27,545 -- -- -- 27,545
Distributions to
partners............. -- -- (14,014) 14,014 --
Capital contributed by
partners............. -- -- 5,819 (5,819) --
Dividends on preferred
stock................ (4,582) -- -- -- (4,582)
--------- --------- -------- -------- ---------
Net cash provided by
(used in) financing
activities............. 120,763 -- (8,195) 8,195 120,763
--------- --------- -------- -------- ---------
Increase (decrease) in
cash and cash
equivalents............ 59 (2,800) (1,167) -- (3,908)
Cash and cash
equivalents, beginning
of period.............. 58 2,804 1,208 -- 4,070
--------- --------- -------- -------- ---------
Cash and cash
equivalents, end of
period................. $ 117 $ 4 $ 41 $ -- $ 162
========= ========= ======== ======== =========
</TABLE>
F-26
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..... $ 455 $ 14,016 $ 4,490 $(18,506) $ 455
Non-cash income (loss)
adjustments.......... (11,391) 5,989 2,971 18,506 16,075
Changes in operating
assets and
liabilities.......... 7,292 (2,504) (4,955) -- (167)
-------- -------- ------- -------- --------
Net cash provided by
(used in) operating
activities............. (3,644) 17,501 2,506 -- 16,363
-------- -------- ------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures.. -- (22,892) (1,082) -- (23,974)
Capital contributed to
partnerships......... -- (5,819) -- 5,819 --
Distributions from
partnerships......... -- 8,408 -- (8,408) --
-------- -------- ------- -------- --------
Net cash used in
investing activities... -- (20,303) (1,082) (2,589) (23,974)
-------- -------- ------- -------- --------
FINANCING ACTIVITIES:
Net payments on long
term borrowings...... 8,000 -- -- -- 8,000
Proceeds from sale of
common stock, net.... 203 -- -- -- 203
Distributions to
partners............. -- -- (8,408) 8,408 --
Capital contributed by
partners............. -- -- 5,819 (5,819) --
Dividends on preferred
stock................ (4,582) -- -- -- (4,582)
-------- -------- ------- -------- --------
Net cash provided by
(used in) financing
activities............. 3,621 -- (2,589) 2,589 3,621
-------- -------- ------- -------- --------
Decrease in cash and
cash equivalents....... (23) (2,802) (1,165) -- (3,990)
Cash and cash
equivalents, beginning
of period.............. 58 2,804 1,208 -- 4,070
-------- -------- ------- -------- --------
Cash and cash
equivalents, end of
period................. $ 35 $ 2 $ 43 $ -- $ 80
======== ======== ======= ======== ========
</TABLE>
F-27
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..... $(14,256) $ 1,511 $ 2,085 $(3,596) $(14,256)
Non-cash income (loss)
adjustments.......... 248 25,007 1,616 3,596 30,467
Changes in operating
assets and
liabilities.......... 349 (2,380) 1,102 -- (929)
-------- -------- ------- ------- --------
Net cash provided by
(used in) operating
activities............. (13,659) 24,138 4,803 -- 15,282
-------- -------- ------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures.. -- (28,746) (225) -- (28,971)
Distributions from
partnerships......... -- 4,604 -- (4,604) --
-------- -------- ------- ------- --------
Net cash used in
investing activities... -- (24,142) (225) (4,604) (28,971)
-------- -------- ------- ------- --------
FINANCING ACTIVITIES:
Net borrowings from
long term
borrowings........... (11,300) -- -- -- (11,300)
Proceeds from sale of
notes, net........... 29,696 -- -- -- 29,696
Proceeds from sale of
common stock, net.... 38 -- -- -- 38
Redemption of
subordinated notes... (228) -- -- -- (228)
Distributions to
partners............. -- -- (4,604) 4,604 --
Dividends on preferred
stock................ (4,582) -- -- -- (4,582)
-------- -------- ------- ------- --------
Net cash provided by
(used in) financing
activities............. 13,624 -- (4,604) 4,604 13,624
-------- -------- ------- ------- --------
Decrease in cash and
cash equivalents....... (35) (4) (26) -- (65)
Cash and cash
equivalents, beginning
of period.............. 117 4 41 -- 162
-------- -------- ------- ------- --------
Cash and cash
equivalents, end of
period................. $ 82 $ -- $ 15 $ -- $ 97
======== ======== ======= ======= ========
</TABLE>
F-28
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
NOTE 11--SUPPLEMENTARY FINANCIAL AND OPERATING INFORMATION ON OIL AND GAS
EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities."
Capitalized Costs. Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Company's oil and gas producing activities,
all of which are conducted within the continental United States, are summarized
below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Unevaluated properties....................... $ 13,050 $ 12,521 $ 49,854
Properties subject to amortization........... 287,970 338,794 463,263
--------- --------- ---------
Capitalized costs............................ 301,020 351,315 513,117
Accumulated depreciation, depletion and amor-
tization.................................... (173,996) (194,367) (221,729)
--------- --------- ---------
Net capitalized costs........................ $ 127,024 $ 156,948 $ 291,388
========= ========= =========
</TABLE>
Costs Incurred. Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
-------- ------- --------
<S> <C> <C> <C>
Property acquisition costs:(1)
Proved............................................. $126,577 $11,594 $ 73,190
Unproved (2)....................................... 88,539 2,160 40,997
Exploration costs.................................... 9,521 5,438 9,525
Development costs.................................... 31,730 41,790 40,713
-------- ------- --------
Total costs incurred............................... $256,367 $60,982 $164,425
======== ======= ========
</TABLE>
- --------
(1) Includes assets acquired in the Consolidation aggregating $207 million for
the year ended December 31, 1995.
(2) Includes $40 million in unproved assets acquired from SPR on December 1,
1997.
F-29
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
Reserves. The following table summarizes the Company's net ownership
interests in estimated quantities of proved oil and gas reserves and changes
in net proved reserves, all of which are located in the continental United
States, for the years ended December 31, 1995, 1996 and 1997. Reserves
estimates contained below were prepared by H.J. Gruy & Associates, Inc.
("Gruy"), independent petroleum engineers. See "Estimated Proved Reserves--
Uncertainties in Estimating Reserves and Future Net Cash Flows" under Items 1
and 2 of this Report.
<TABLE>
<CAPTION>
CRUDE OIL,
CONDENSATE AND
NATURAL GAS NATURAL GAS
LIQUIDS (MBBLS) (MMCF)
-------------------- -------------------------
1995 1996 1997 1995 1996 1997
------ ----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year.......... 1,236 1,387 1,466 93,612 196,273 297,634
Revisions of previous
estimates................. (1,324) (89) 106 (64,027) (30,519) 21,831
Purchases of reserves in
place..................... 1,756 57 1,351 127,962 30,844 51,712
Extensions and
discoveries............... 156 477 256 66,864 128,692 13,892
Sale of reserves in place.. (118) (134) -- (10,388) (4,190) --
Production................. (319) (232) (226) (17,750) (23,466) (30,202)
------ ----- ----- ------- ------- -------
End of year................ 1,387 1,466 2,953 196,273 297,634 354,867
====== ===== ===== ======= ======= =======
Proved developed reserves at
end of year................. 1,197 977 2,432 111,287 173,465 257,800
====== ===== ===== ======= ======= =======
</TABLE>
Standardized Measure. The following table of the Standardized Measure of
Discounted Future Net Cash Flows concerning the standardized measure of future
cash flows from proved oil and gas reserves are presented in accordance with
Statement of Financial Accounting Standards No. 69. As prescribed by this
statement, the amounts shown are based on prices and costs at the end of each
period, and assume continuation of existing economic conditions. Future income
taxes are based on year-end statutory rates, adjusted for operating loss
carryforwards and tax credits. A discount factor of 10% was used to reflect
the timing of future net cash flows. Extensive judgments are involved in
estimating the timing of production and the costs that will be incurred
throughout the remaining lives of the fields. Accordingly, the estimates of
future net cash flows from proved reserves and the present value thereof may
not be materially correct when judged against actual subsequent results.
Further, since prices and costs do not remain static, and no price or cost
changes have been considered, and future production and development costs are
estimates to be incurred in developing and producing the estimated proved oil
and gas reserves, the results are not necessarily indicative of the fair
market value of estimated proved reserves, and the results may not be
comparable to estimates disclosed by other oil and gas producers.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
Future cash inflows.......................... $ 431,351 $1,099,089 $ 930,357
Future production costs...................... (76,021) (113,178) (196,048)
Future development costs..................... (36,524) (81,932) (106,123)
Future income tax expenses................... (8,577) (162,887) (37,050)
--------- ---------- ---------
Future net cash flows...................... 310,229 741,092 591,136
10% annual discount for estimating timing of
cash flows.................................. (139,177) (307,321) (227,249)
--------- ---------- ---------
Standardized measure of discounted future
net cash flows............................ $ 171,052 $ 433,771 $ 363,887
========= ========== =========
</TABLE>
F-30
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PRESENTED HEREIN FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1997 IS
UNAUDITED)
The standardized measure of discounted future net cash flows as of December
31, 1995, 1996 and 1997 was calculated using prices in effect as of those
dates, which averaged $19.73, $25.18 and $16.93, respectively, per barrel of
oil and $2.06, $3.66 and $2.49, respectively, per Mcf of natural gas.
Change in Standardized Measure. Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Changes due to current year operations:
Sales of oil and gas, net of production
costs....................................... $(25,207) $(48,307) $ (62,080)
Sale of reserves in place.................... (5,884) (6,836) --
Extensions and discoveries................... 62,407 192,174 21,945
Purchases of reserves in place............... 90,660 11,594 91,034
Future development costs incurred............ 10,216 24,500 21,806
Changes due to revisions in standardized varia-
bles:
Prices and production costs.................. 21,055 159,292 (243,851)
Revisions of previous quantity estimates..... (22,223) (50,594) 25,345
Revisions of purchased oil and gas
properties.................................. (28,199) -- --
Estimated future development costs........... 17,676 3,254 (17,413)
Income taxes................................. (893) (82,831) 69,489
Accretion of discount........................ 7,145 17,575 51,818
Production rates (timing) and other.......... (26,541) 42,898 (27,977)
-------- -------- ---------
Net increase (decrease).................... 100,212 262,719 (69,884)
Beginning of year.............................. 70,840 171,052 433,771
-------- -------- ---------
End of year.................................. $171,052 $433,771 $ 363,887
======== ======== =========
</TABLE>
Sales of oil and gas, net of production costs, are based on historical pre-
tax results. Extensions and discoveries, purchases of reserves in place and
the changes due to revisions in standardized variables are reported on a pre-
tax discounted basis, while the accretion of discount is presented after tax.
Extensions and discoveries include proved undeveloped reserves attributable to
Kelley Oil's interests in drill sites assigned to DDPs but do not give effect
to the Consolidation prior to 1995.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Kelley Oil & Gas Corporation
We have audited the accompanying statements of revenues and direct operating
expenses of the properties acquired by Kelley Oil & Gas Corporation (the
"Company") from SCANA Petroleum Resources, Inc. ("SPR") (the "SPR Producing
Properties") for each of the two years in the period ended December 31, 1996
and the eleven months ended November 30, 1997. These statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statements. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion on Form 8-K of the Company) as described in Note 2 to the statements
and are not intended to be a complete presentation of the Company's interests
in the properties described above.
In our opinion, the statements referred to above present fairly, in all
material respects, the revenues and direct operating expenses of the
properties acquired by the Company from SPR for each of the two years in the
period ended December 31, 1996 and the eleven months ended November 30, 1997,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 6, 1998
F-32
<PAGE>
KELLEY OIL & GAS CORPORATION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
OF THE SPR PRODUCING PROPERTIES
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
AND THE ELEVEN MONTHS ENDED NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
DECEMBER 31, ENDED
--------------- NOVEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Oil and natural gas rev-
enues.................. $36,309 $50,653 $36,004
Direct operating ex-
penses................. 6,011 6,046 5,134
------- ------- -------
Revenues in excess of
direct operating ex-
penses................. $30,298 $44,607 $30,870
======= ======= =======
</TABLE>
See accompanying notes.
F-33
<PAGE>
KELLEY OIL & GAS CORPORATION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING
EXPENSES OF THE SPR PRODUCING PROPERTIES
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
AND THE ELEVEN MONTHS ENDED NOVEMBER 30, 1997
NOTE 1--OPERATIONS, ORGANIZATION AND BASIS OF PRESENTATION
The accompanying statements represent the interests in the oil and natural
gas revenues and direct operating expenses of the oil and natural gas
producing properties acquired by Kelley Oil & Gas Corporation (the "Company")
from SCANA Petroleum Resources, Inc. ("SPR") on December 1, 1997 for
approximately $110 million. The oil and natural gas producing properties
acquired are located primarily in the Gulf of Mexico and in east Texas. These
properties are referred to herein as the "SPR Producing Properties".
The accompanying statements were derived from the historical accounting
records of SPR. Direct operating expenses include payroll, lease and well
repairs, production taxes, maintenance and other direct operating expenses.
During the periods presented, the SPR Producing Properties were not accounted
for as a separate entity. Certain costs such as depreciation, depletion and
amortization, general and administrative expenses, interest expense and
corporate taxes were not allocated to the SPR Producing Properties.
Revenue Recognition and Gas Balancing. The SPR Producing Properties
recognize oil and natural gas revenue from its interests in producing wells as
it sells oil and gas from those wells ("sales method"). Accordingly, the SPR
Producing Properties use the sales method to account for gas production volume
imbalances that arise when it sells a percentage of gas that differs from its
ownership percentage. Substantially all such gas imbalances were anticipated
to be settled with production in future periods. At December 1, 1997, the
Company owed net future production from the SPR Producing Properties of
approximately 759 million cubic feet of gas.
Use of Estimates. The process of preparing financial statements in
conformity with generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of revenues and expenses.
Such estimates primarily relate to unsettled transactions and events as of the
date of the financial statements. Accordingly, upon settlement, actual results
may differ from estimated amounts.
NOTE 2--OMITTED HISTORICAL FINANCIAL INFORMATION
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting principles
are not presented as such information is not readily available on an
individual property basis and not meaningful for the properties. Historically,
no allocation of general and administrative, litigation, interest, federal
income tax expense, depreciation, depletion and amortization was made to the
SPR Producing Properties. Accordingly, the statements are presented in lieu of
the financial statements required under Rule 3-05 of Securities and Exchange
Commission Regulation S-X.
NOTE 3--COMMITMENTS AND CONTINGENCIES
The Company is unaware of any legal, environmental or other contingencies
that would have a material adverse effect in relation to the statements.
F-34
<PAGE>
KELLEY OIL & GAS CORPORATION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING
EXPENSES OF THE SPR PRODUCING PROPERTIES--(CONTINUED)
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
AND THE ELEVEN MONTHS ENDED NOVEMBER 30, 1997
NOTE 4--SUPPLEMENTAL DISCLOSURES ON OIL AND GAS EXPLORATION, DEVELOPMENT AND
PRODUCTION ACTIVITIES (UNAUDITED)
Reserves. The following table summarizes the Company's net ownership
interests in estimated quantities of the proved oil and gas reserves of the
SPR Producing Properties at December 1, 1997. Reserve estimates at December 1,
1997 contained below were determined using estimates prepared by H.J. Gruy &
Associates, Inc. ("Gruy"), independent petroleum engineers. Comparable reserve
estimates applicable to the SPR Producing Properties were not available for
prior periods.
<TABLE>
<CAPTION>
OIL GAS
(MBBL) (MMCF)
------ ------
<S> <C> <C>
Proved developed reserves......................................... 1,282 51,620
Proved undeveloped reserves....................................... 69 92
----- ------
Total proved reserves........................................... 1,351 51,712
===== ======
</TABLE>
After the acquisition date of December 1, 1997 and prior to December 31,
1997, the Company drilled or participated in the drilling of four successful
exploration wells on acreage acquired from SPR. These reserve volume additions
are not included in the above table, but will be included in the Company's
year-end reserves. They amounted to net proved and proved developed reserves
of approximately 160 thousand barrels of oil and 6.4 billion cubic feet of
natural gas based upon estimates prepared by Gruy.
Standardized Measure. The following table displays the Standardized Measure
of Discounted Future Net Cash Flows before future income taxes from proved oil
and gas reserves of the SPR Producing Properties. As prescribed by the
Financial Accounting Standards Board, the amounts shown are based on average
prices and costs at the end of the period and assume continuation of existing
economic conditions. A discount factor of 10% was used to reflect the timing
of future net cash flow. Extensive judgments are involved in estimating the
timing of production and the costs that will be incurred throughout the
remaining lives of the fields. Accordingly, the estimates of future net cash
flows from proved reserves and the present value thereof may not be materially
correct when judged against actual subsequent results. Further, since prices
and costs do not remain static, and no price or cost changes have been
considered, and future production and development costs are estimates to be
incurred in developing and producing the estimated proved oil and gas
reserves, the results are not necessarily indicative of the fair market value
of estimated proved reserves, and the results may not be comparable to
estimates disclosed by other oil and gas producers.
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
NOVEMBER 30,
1997
------------
<S> <C>
Future cash inflows............................................... $188,910
Future production costs........................................... 37,683
Future development costs.......................................... 17,995
--------
Future net cash flows before income taxes....................... 133,232
10% annual discount for estimating timing of cash flows........... 42,198
--------
Standardized measure of discounted future net cash flows before
income taxes................................................... $ 91,034
========
</TABLE>
F-35
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary................................................................... 1
Risk Factors.............................................................. 14
The Exchange offer........................................................ 22
Use of Proceeds........................................................... 31
Capitalization............................................................ 31
Selected Consolidated Financial Data...................................... 32
Unaudited Pro Forma Condensed Consolidated Financial Data................. 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 36
Business and Properties................................................... 43
Management................................................................ 58
Principal Stockholders.................................................... 65
Certain Transactions...................................................... 66
Description of the Credit Facility........................................ 67
Description of Certain Other Indebtedness................................. 67
Description of the Notes.................................................. 68
Book-Entry; Delivery and Form............................................. 103
Certain U.S. Federal Income Tax Considerations............................ 105
Plan of Distribution...................................................... 108
Legal Matters............................................................. 109
Experts................................................................... 109
Available Information..................................................... 110
Incorporation of Certain Documents........................................ 110
Glossary.................................................................. 111
Index to Financial Statements............................................. F-1
</TABLE>
PROSPECTUS
$30,000,000
KELLEY OIL & GAS CORPORATION
10 3/8% SENIOR SUBORDINATED NOTES
DUE 2006, SERIES D
[Logo of Kelley Oil & Gas Corporation appears here]
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Bylaws of Kelley Oil & Gas Corporation (the "Company")
provides for the Company's indemnification of officers, directors and
controlling persons to the full extent provided in the General Corporation Law
of the State of Delaware (the "GCLD"). Section 145 of the GCLD provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed proceeding (other than
a proceeding 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 in a similar position with
another entity, against expenses (including attorneys' fees), judgments, fines
and settlements incurred by him in connection with the proceeding if he acted
in good faith and in a manner 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.
Indemnification under Section 145 of the GCLD is limited in a proceeding by or
in the right of the corporation to expenses (including attorneys' fees)
incurred in connection with the proceeding. In either case, no indemnification
shall be made if the indemnified person has been adjudged to be liable for
negligence or misconduct in the performance of this duty to the corporation,
unless, and to the extent the Delaware court of Chancery or other court in
which the proceeding was brought, despite the adjudication of liability
determines such person is entitled to indemnity.
Section 145 of the GCLD provides that the indemnity obligations of a
corporation shall only arise if authorized by (i) a majority of a quorum of
directors who are not a party to the proceeding, (ii) independent legal
counsel to the corporation if a quorum of directors is not obtainable, (iii)
independent legal counsel to the corporation if a quorum if directors is
obtainable and the directors direct counsel to make the determination or (iv)
the stockholders. The board of directors of the corporation may authorize
expenses in connection with a proceeding to be paid in advance of the final
disposition upon receipt of an undertaking by the person on whose behalf the
expenses are to be paid to repay the expenses in the event he is not entitled
to indemnity.
Pursuant to Section 102(b) of the GCLD, the Certificate of Incorporation of
the Company provides that a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) in connection with certain illegal dividend
payments and stock redemptions or (iv) for any transaction from which the
director derived an improver personal benefit.
Delaware corporations also are authorized under the GCLD to obtain insurance
to protect officers and directors from certain liabilities, including
liabilities against which the corporation cannot indemnify its directors and
officers. The Company currently has no directors' and officers' liability
insurance in effect.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <C> <S>
2.1 -- Agreement and Plan of Consolidation among the Registrant, Kelley
Oil Corporation, Kelley Oil & Gas Partners, Ltd. ("Kelley
Partners") and the other parties named therein (incorporated by
reference to Exhibit 2.1 to the Registrant's Registration
Statement (the "Consolidation Registration Statement") on Form S-4
(Reg No. 33-84338) filed September 26, 1994, as amended).
3.1 -- Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Consolidation Registration
Statement).
3.2 -- Certificate of Amendment to Certificate of Incorporation of the
Registrant dated December 20, 1994 (incorporated by reference to
Exhibit 3.2 to the Consolidation Registration Statement).
3.3 -- Certificate of Correction to Certificate of Incorporation of the
Registrant dated February 12, 1996 (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K (File
No. 0-25214) dated February 15, 1996).
3.4 -- Certificate of Designation of $2.625 Convertible Exchangeable
Preferred Stock of the Registrant (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K (File
No. 0-25214) dated February 10, 1995).
3.5 -- Certificate of Designations of Cumulative $2.625 Preferred Stock
of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Current Report on Form 8-K (File No. 0-25214) dated
February 10, 1995).
3.6 -- Certificate of Merger of Kelley Oil & Gas Partners, Ltd. into
Kelley Oil & Gas Corporation dated March 28, 1996 (incorporated by
reference to Exhibit 3.6 to the Registrant's Annual Report on Form
10-K (File No. 0-25214) for the year ended December 31, 1997).
3.7 -- Certificate of Amendment to Certificate of Incorporation of the
Registrant dated April 26, 1996 (incorporated by reference to
Exhibit 3.7 to the Registrant's Annual Report on Form 10-K (File
No. 0-25214) for the year ended December 31, 1997).
3.8 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.5
to the Consolidation Registration Statement).
4.1 -- Supplemental Indenture dated February 7, 1995 among the
Registrant, Kelley Partners and United States Trust Company of New
York, relating to Kelley Partners' 8% Convertible Subordinated
Debentures (the "8% Debentures") due 2000 (incorporated by
reference to exhibit 4.1 to the Registrant's Current Report on
Form 8-K (File No. 0-25214) dated February 10, 1995).
4.2 -- Supplemental Indenture dated March 29, 1996 between the Registrant
and the United States Trust Company of New York, relating to the
8% Debentures (incorporated by reference to Exhibit 4.4 to the
Registrant's Annual Report on Form 10-K (File No. 0-25214) for the
year ended December 31, 1995).
4.3 -- Supplemental Indenture dated February 7, 1995 among the
Registrant, Kelley Partners and United States Trust Company of New
York, relating to Kelley Partners' 7% Convertible Subordinated
Notes (the "7% Notes") due 1999 (incorporated by reference to
Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File
No. 0-25214) dated February 10, 1995).
4.4 -- Supplemental Indenture dated March 29, 1996 between the Registrant
and the United States Trust Company of New York, relating to the
7% Notes (incorporated by reference to Exhibit 4.6 to the
Registrant's Annual Report on Form 10-K (File No. 0-25214) for the
year ended December 31, 1995).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <C> <S>
4.5 -- Indenture dated as of October 15, 1996, among the Registrant, as
issuer, Kelley Oil Corporation and Kelley Operating Company, Ltd.,
as guarantors, and United States Trust Company of New York,
relating to the Registrant's 10% Senior Subordinated Notes due
2006 (incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q (File No. 0-25214) for the quarterly
period ended September 30, 1996).
4.6 -- Form of the Registrant's 10% Senior Subordinated Note Due 2006,
Series B (incorporated by reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-18481) filed December 20, 1996, as amended).
4.7+ -- Indenture dated as of May 29, 1998, among the Registrant, as
issuer, Kelley Oil Corporation and Kelley Operating Company, Ltd.,
as guarantors, and United States Trust Company of New York,
relating to the Registrant's 10% Senior Subordinated Notes due
2006.
4.8+ -- Form of the Registrant's 10% Senior Subordinated Note Due 2006,
Series D.
5.1* -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- Amended and Restated Employee Stock Ownership Plan of Kelley Oil
effective as of January 1, 1989 (incorporated by reference to
Exhibit 10.15 to Kelley Oil's Annual Report on Form 10-K (File No.
0-17585) for the year ended December 31, 1991).
10.2 -- 1987 Incentive Stock Option Plan (the "1987 Plan") of Kelley Oil
(incorporated by reference to Kelley Oil's Annual Report on Form
10-K (File No. 0-17585) for the year ended December 31, 1988).
10.3 -- 1991 Incentive Stock Option Plan (the "1991 Plan") of Kelley Oil
(incorporated by reference to Exhibit 10.3 to Kelley Oil's Annual
Report on Form 10-K (File No. 0-175850) for the year ended
December 31, 1991).
10.4 -- 1995 Incentive Stock Option Plan of the Registrant (the "1995
Plan") (incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K (File No. 0-25214) for the
year ended December 31, 1995).
10.5 -- Amendment to the 1987 Plan, 1991 Plan and 1995 Plan (incorporated
by reference to Exhibit 10.5 to the Registrant's Current Report on
Form 8-K (File No. 0-25214) dated February 15, 1996).
10.6 -- 1996 Nonqualified Stock Option Plan of the Registrant
(incorporated by reference to Exhibit 10.4 to the Registrant's
Current Report on Form 8-K (File No. 0-25214) dated February 15,
1996).
10.7 -- Employment Agreement dated as of February 15, 1996 between the
Registrant and John F. Bookout, Jr. (incorporated by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File
No. 0-25214) dated February 15, 1996).
10.8 -- Form of Employment Agreements dated as of February 15, 1996
between the Registrant and each of Dallas Laumbach and William
Albrecht (incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on Form 8-K (File No. 0-25214) dated
February 15, 1996).
10.9 -- Employment Agreement dated as of March 20, 1997 between the
Company and David C. Baggett (incorporated by reference to Exhibit
10.9 to the Registrant's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1996).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <C> <S>
10.10 -- Amended and Restated Credit Agreement among Kelley Oil & Gas
Corporation, Kelley Oil Corporation and Kelley Operating Company,
Ltd., as Borrowers, Concorde Gas Marketing, Inc., Kelley Partners
1992 Development Drilling Joint Venture, Kelley Partners 1994
Development Drilling Joint Venture, Kelley Partners 1992
Development Drilling Program and Kelley Partners 1994 Development
Drilling Program, as Guarantors, Texas Commerce Bank National
Association, as Agent, Chase Securities Inc., as Arranger and
Syndication Agent, and the Lenders Signatory thereto, dated as of
December 1, 1997. (incorporated by reference to Exhibit 99.1 to
the Registrant's Current Report on Form 8-K (File No. 0-25214)
dated December 1, 1997).
10.10 -- Purchase and Sale Agreement, dated October 21, 1997, between the
Company and SCANA Petroleum Resources, Inc. (incorporated by
reference to Exhibit 10.2 to the Registrant's Current Report on
Form 8-K (File No. 0-25214) dated December 1, 1997).
10.11 -- 1997 Annual and Long-Term Incentive-Performance Plan of the
Registrant (incorporated by reference to Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K
(File No. 0-25214) for the year ended December 31, 1997).
21.1+ -- Subsidiaries of the Registrant.
23.1+ -- Consent of Deloitte & Touche LLP.
23.2+ -- Consent of H.J. Gruy & Associates, Inc.
23.3* -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1)
24.1+ -- Powers of Attorney.
25.1* -- Statement of Eligibility Under Trust Indenture Act of 1939 of a
Corporation Designated to Act as Trustee on Form T-1.
99.1+ -- Forms of Letter of Transmittal, Notice of Guaranteed Delivery, and
Substitute W-9 Instructions.
</TABLE>
- --------
+ Filed herewith.
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules for which provision is made in applicable accounting
regulations of the SEC have been omitted as the schedules are either not
required under the related instructions, are not applicable or the information
required thereby is set forth in the Company's Consolidated Financial
Statements or the Notes thereto.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) 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.
Insofar as indemnification for liabilities arising under the Securities Act
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 to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 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-5
<PAGE>
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 August 17, 1998.
KELLEY OIL & GAS CORPORATION
/s/ John F. Bookout
By:__________________________________
John F. Bookout
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of the 17th day of August, 1998 by
the following persons in the capacities indicated.
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE DATE
/s/ John F. Bookout Chairman of the August 17, 1998
- ----------------------------------- Board, President
John F. Bookout and Chief Executive
Officer (Principal
Executive Officer),
Director
/s/ Kenneth R. Bickett Controller and Chief August 17, 1998
- ----------------------------------- Accounting Officer
Kenneth R. Bickett (Principal
Accounting Officer)
/s/ Stephen M. Smith Treasurer (Principal August 17, 1998
- ----------------------------------- Financial Officer)
Stephen M. Smith
* Director August 17, 1998
- -----------------------------------
John J. Conklin, Jr.
Director
- -----------------------------------
Ralph P. Davidson
Director
- -----------------------------------
Adam P. Godfrey
* Director August 17, 1998
- -----------------------------------
William J. Murray
* Director August 17, 1998
- -----------------------------------
Ogden M. Phipps
* Director August 17, 1998
- -----------------------------------
Ward W. Woods
/s/ John F. Bookout
*By: ______________________________
John F. Bookout,
Attorney-in-Fact
II-6
<PAGE>
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 August 17, 1998.
KELLEY OPERATING COMPANY, LTD.
by Kelley Oil Corporation, its
General Partner
/s/ John F. Bookout
By:__________________________________
John F. Bookout
President and Chief
Executive Officer
KELLEY OIL CORPORATION
/s/ John F. Bookout
By:__________________________________
John F. Bookout
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of the 17th day of August, 1998 by
the following persons in the capacities indicated with respect to Kelley Oil
Corporation.
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE DATE
/s/ John F. Bookout Chairman of the August 17, 1998
- ----------------------------------- Board, President
John F. Bookout and Chief Executive
Officer (Principal
Executive Officer),
Director
/s/ Kenneth R. Bickett Controller and Chief August 17, 1998
- ----------------------------------- Accounting Officer
Kenneth R. Bickett (Principal
Accounting Officer)
/s/ Stephen M. Smith Treasurer (Principal August 17, 1998
- ----------------------------------- Financial Officer)
Stephen M. Smith
/s/ Dallas D. Laumbach Director August 17, 1998
- -----------------------------------
Dallas D. Laumbach
Director
- -----------------------------------
David C. Baggett
II-7
<PAGE>
EXHIBIT 4.7
================================================================================
KELLEY OIL & GAS CORPORATION,
Issuer
KELLEY OIL CORPORATION,
Subsidiary Guarantor
KELLEY OPERATING COMPANY, LTD.
Subsidiary Guarantor
10 3/8% Senior Subordinated Notes Due 2006, Series C
_________________________
INDENTURE
Dated as of May 29, 1998
________________________
UNITED STATES TRUST COMPANY OF NEW YORK,
Trustee
================================================================================
<PAGE>
<TABLE>
<CAPTION>
CROSS-REFERENCE TABLE
<S> <C>
TIA Indenture
Section Section
- --------------- ---------
310(a)(1) 7.10
(a)(2) 7.10
(a)(3) N.A.
(a)(4) N.A.
(a)(5) 7.10
(b) 7.08; 7.10
(c) N.A.
311(a) 7.11
(b) 7.11
(c) N.A.
312(a) 2.06
(b) 12.03
(c) 12.03
313(a) 7.06
(b)(1) N.A.
(b)(2) 7.06
(c) 12.02
(d) 7.06
314(a) 4.02; 4.13;
12.02
(b) N.A.
(c)(1) 12.04
(c)(2) 12.04
(c)(3) N.A.
(d) N.A.
(e) 12.05
(f) N.A.
315(a) 7.01
(b) 7.05; 12.02
(c) 7.01
(d) 7.01
(e) 6.11
316(a)(last sentence) 12.06
(a)(1)(A) 6.05
(a)(1)(B) 6.04
(a)(2) N.A.
(b) 6.07
(c) 6.07
317(a)(1) 6.08
(a)(2) 6.09
(b) 2.05
318(a) 12.01
N.A. means Not Applicable.
</TABLE>
- ---------------------
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be
part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE 1
Definitions and Incorporation by Reference
------------------------------------------
<S> <C> <C>
SECTION 1.01. Definitions................................... 1
SECTION 1.02. Other Definitions............................. 32
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act................................ 32
SECTION 1.04. Rules of Construction......................... 33
ARTICLE 2
The Securities
--------------
SECTION 2.01. Amount of Securities Issuable
in Series................................... 34
SECTION 2.02. Form and Dating............................... 35
SECTION 2.03. Execution and Authentication.................. 36
SECTION 2.04. Registrar and Paying Agent.................... 36
SECTION 2.05. Paying Agent To Hold Money in Trust........... 37
SECTION 2.06. Securityholder Lists.......................... 38
SECTION 2.07. Transfer and Exchange......................... 38
SECTION 2.08. Replacement Securities........................ 39
SECTION 2.09. Outstanding Securities........................ 40
SECTION 2.10. Temporary Securities.......................... 40
SECTION 2.11. Cancelation................................... 41
SECTION 2.12. Defaulted Interest............................ 41
SECTION 2.13. CUSIP Numbers................................. 41
ARTICLE 3
Redemption
----------
SECTION 3.01. Notices to Trustee............................ 41
SECTION 3.02. Selection of Securities To Be Redeemed........ 42
SECTION 3.03. Notice of Redemption.......................... 42
SECTION 3.04. Effect of Notice of Redemption................ 43
SECTION 3.05. Deposit of Redemption Price................... 43
SECTION 3.06. Securities Redeemed in Part................... 43
</TABLE>
<PAGE>
ii
<TABLE>
<CAPTION>
Page
----
ARTICLE 4
Covenants
---------
<S> <C> <C>
SECTION 4.01. Payment of Securities...................... 44
SECTION 4.02. SEC Reports................................ 44
SECTION 4.03. Limitation on Indebtedness................. 44
SECTION 4.04. Limitation on Restricted Payments.......... 48
SECTION 4.05. Limitation on Restrictions on
Distributions from Restricted
Subsidiaries............................. 51
SECTION 4.06. Limitation on Sales of Assets and
Subsidiary Stock......................... 52
SECTION 4.07. Limitation on Affiliate Transactions....... 55
SECTION 4.08. Change of Control.......................... 56
SECTION 4.09. Limitation on the Sale or Issuance
of Capital Stock of Restricted
Subsidiaries............................. 57
SECTION 4.10. Limitation on Liens........................ 58
SECTION 4.11. Limitation on Sale/Leaseback
Transactions............................. 58
SECTION 4.12. Future Guarantors.......................... 58
SECTION 4.13. Compliance Certificate..................... 59
SECTION 4.14. Further Instruments and Acts............... 59
ARTICLE 5
Successor Company
-----------------
SECTION 5.01. When Company May Merge or Transfer
Assets .................................. 59
SECTION 5.02. When Subsidiary Guarantors May
Merge or Transfer Assets................. 60
ARTICLE 6
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default.......................... 61
SECTION 6.02. Acceleration............................... 63
SECTION 6.03. Other Remedies............................. 64
SECTION 6.04. Waiver of Past Defaults.................... 64
SECTION 6.05. Control by Majority........................ 64
SECTION 6.06. Limitation on Suits........................ 65
SECTION 6.07. Rights of Holders To Receive Payment....... 65
SECTION 6.08. Collection Suit by Trustee................. 65
</TABLE>
<PAGE>
iii
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 6.09. Trustee May File Proofs of Claim........... 66
SECTION 6.10. Priorities................................. 66
SECTION 6.11. Undertaking for Costs...................... 66
SECTION 6.12. Waiver of Stay or Extension Laws........... 67
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee.......................... 67
SECTION 7.02. Rights of Trustee.......................... 69
SECTION 7.03. Individual Rights of Trustee............... 69
SECTION 7.04. Trustee's Disclaimer....................... 69
SECTION 7.05. Notice of Defaults......................... 70
SECTION 7.06. Reports by Trustee to Holders.............. 70
SECTION 7.07. Compensation and Indemnity................. 70
SECTION 7.08. Replacement of Trustee..................... 71
SECTION 7.09. Successor Trustee by Merger................ 72
SECTION 7.10. Eligibility; Disqualification.............. 72
SECTION 7.11. Preferential Collection of Claims
Against Company.......................... 73
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Securities;
Defeasance............................... 73
SECTION 8.02. Conditions to Defeasance................... 74
SECTION 8.03. Application of Trust Money................. 75
SECTION 8.04. Repayment to Company....................... 76
SECTION 8.05. Indemnity for Government Obligations....... 76
SECTION 8.06. Reinstatement............................. 76
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders................. 77
SECTION 9.02. With Consent of Holders.................... 78
SECTION 9.03. Compliance with Trust Indenture Act........ 79
SECTION 9.04. Revocation and Effect of Consents and
Waivers.................................. 79
</TABLE>
<PAGE>
iv
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 9.05. Notation on or Exchange of Securities....... 79
SECTION 9.06. Trustee To Sign Amendments.................. 80
SECTION 9.07. Payment for Consent......................... 80
ARTICLE 10
Subordination
-------------
SECTION 10.01. Agreement To Subordinate.................... 80
SECTION 10.02. Liquidation, Dissolution, Bankruptcy........ 81
SECTION 10.03. Default on Designated Senior
Indebtedness.............................. 81
SECTION 10.04. Acceleration of Payment of Securities....... 82
SECTION 10.05. When Distribution Must Be Paid Over......... 83
SECTION 10.06. Subrogation................................. 83
SECTION 10.07. Relative Rights............................. 83
SECTION 10.08. Subordination May Not Be Impaired
by Company................................ 83
SECTION 10.09. Rights of Trustee and Paying Agent.......... 83
SECTION 10.10. Distribution or Notice to
Representative............................ 84
SECTION 10.11. Article 10 Not To Prevent Events of
Default or Limit Right To Accelerate...... 84
SECTION 10.12. Trust Moneys Not Subordinated............... 84
SECTION 10.13. Trustee Entitled To Rely.................... 84
SECTION 10.14. Trustee To Effectuate Subordination......... 85
SECTION 10.15. Trustee Not Fiduciary for Holders
of Senior Indebtedness.................... 85
SECTION 10.16. Reliance by Holders of Senior Indebtedness
on Subordination Provisions............... 85
ARTICLE 11
Subsidiary Guaranty
-------------------
SECTION 11.01. Guarantee................................... 86
SECTION 11.02. Limitation on Liability..................... 88
SECTION 11.03. Successors and Assigns...................... 89
</TABLE>
<PAGE>
v
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 11.04. No Waiver.................................... 89
SECTION 11.05. Modification................................. 89
SECTION 11.06. Release of Subsidiary Guarantor.............. 89
ARTICLE 12
Miscellaneous
-------------
SECTION 12.01. Trust Indenture Act Controls................. 90
SECTION 12.02. Notices...................................... 90
SECTION 12.03. Communication by Holders with Other Holders.. 90
SECTION 12.04. Certificate and Opinion as to
Conditions Precedent....................... 91
SECTION 12.05. Statements Required in Certificate or
Opinion.................................... 91
SECTION 12.06. When Securities Disregarded.................. 91
SECTION 12.07. Rules by Trustee, Paying Agent and
Registrar.................................. 92
SECTION 12.08. Legal Holidays............................... 92
SECTION 12.09. Governing Law................................ 92
SECTION 12.10. No Recourse Against Others................... 92
SECTION 12.11. Successors................................... 92
SECTION 12.12. Multiple Originals........................... 92
SECTION 12.13. Table of Contents; Headings.................. 92
Appendix A - Provisions Relating to Initial Securities
and Exchange Securities.
Exhibit A - Form of Initial Security.
Exhibit B - Form of Exchange Security.
</TABLE>
<PAGE>
INDENTURE dated as of May 29, 1998, among KELLEY OIL & GAS
CORPORATION, a Delaware corporation (the "Company"), KELLEY OIL
CORPORATION, a Delaware corporation ("Kelley Oil" and, individually, a
"Subsidiary Guarantor"), KELLEY OPERATING COMPANY, LTD., a Texas limited
partnership ("Kelley Operating" and, individually, a "Subsidiary
Guarantor"), and UNITED STATES TRUST COMPANY OF NEW YORK, a New York
banking corporation (the "Trustee").
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the holders of (i) the Company's 10 3/8%
Senior Subordinated Notes Due 2006, Series C (the "Original Securities"), (ii)
any Additional Securities (as defined herein) that may be issued on any Issue
Date (all such Original Securities and Additional Securities being referred to
collectively as the "Initial Securities") and, if and when issued pursuant to a
registered exchange for Initial Securities, the Company's 10 3/8% Senior
Subordinated Notes Due 2006 (the "Exchange Securities", together with the
Initial Securities, the "Securities"):
ARTICLE 1
Definitions and Incorporation by Reference
------------------------------------------
Section 1.01. Definitions.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in the Oil and Gas Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary or (iii) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary; provided, however, that any such
Restricted Subsidiary described in clauses (ii) or (iii) above is primarily
engaged in the Oil and Gas Business.
"Additional Securities" means up to $50,000,000 aggregate principal
amount of 10 3/8% Senior Subordinated Notes due 2006, Series C, issued under the
terms of this Indenture subsequent to the Issue Date.
"Adjusted Consolidated Assets" means at any time the total amount of
assets of the Company and its
<PAGE>
2
consolidated Restricted Subsidiaries (less applicable depreciation, amortization
and other valuation reserves), after deducting therefrom all current liabilities
of the Company and its consolidated Restricted Subsidiaries (excluding
intercompany items), all as set forth on the consolidated balance sheet of the
Company and its consolidated Restricted Subsidiaries as of the end of the most
recent fiscal quarter ended at least 45 days prior to the date of determination.
"Adjusted Consolidated Net Tangible Assets" or "CNTA" means (without
duplication), as of the date of determination, (a) the sum of (i) discounted
future net revenues from proved oil and gas reserves of the Company and its
Restricted Subsidiaries calculated in accordance with SEC guidelines before any
state or federal income taxes, as estimated in a reserve report prepared as of
the end of the Company's most recently completed fiscal year, which reserve
report is prepared or reviewed by independent petroleum engineers, as increased
by, as of the date of determination, the discounted future net revenues of (A)
estimated proved oil and gas reserves of the Company and its Restricted
Subsidiaries attributable to any material acquisition consummated since the date
of such year-end reserve report, and (B) estimated oil and gas reserves of the
Company and its Restricted Subsidiaries attributable to material extensions,
discoveries and other additions and upward determinations of estimates of proved
oil and gas reserves due to exploration, development or exploitation, production
or other activities conducted or otherwise occurring since the date of such
year-end reserve report which would, in the case of determinations made pursuant
to clauses (A) and (B), in accordance with standard industry practice, result in
such additions or revisions, in each case calculated in accordance with SEC
guidelines (utilizing the prices utilized in such year-end reserve report), and
decreased by, as of the date of determination, the discounted future net
revenues of (C) estimated proved oil and gas reserves of the Company and its
Restricted Subsidiaries produced or disposed of since the date of such year-end
reserve report and (D) reductions in the estimated oil and gas reserves of the
Company and its Restricted Subsidiaries since the date of such year-end reserve
report attributable to material downward determinations of estimates of proved
oil and gas reserves due to exploration, development or exploitation, production
or other activities conducted or otherwise occurring since the date of such
year-end reserve report which would, in the case of determinations made pursuant
to clauses (C) and (D), in accordance with standard industry practice, result in
such determinations, in each case calculated in accordance with SEC guidelines
(utilizing the
<PAGE>
3
prices utilized in such year-end reserve report); provided that, in the case of
each of the determinations made pursuant to clauses (A) through (D), such
increases and decreases shall be as estimated by the Company's engineers, except
that if as a result of such acquisitions, dispositions, discoveries, extensions
or revisions, there is a Material Change which is an increase, then such
increases and decreases in the discounted future net revenue shall be confirmed
in writing by an independent petroleum engineer, (ii) the capitalized costs that
are attributable to oil and gas properties of the Company and its Restricted
Subsidiaries to which no proved oil and gas reserves are attributed, based on
the Company's books and records as of a date no earlier than the date of the
Company's latest annual or quarterly financial statements, (iii) the Net Working
Capital on a date no earlier than the date of the Company's latest annual or
quarterly financial statements and (iv) the greater of (I) the net book value on
a date no earlier than the date of the Company's latest annual or quarterly
financial statements and (II) the appraised value, as estimated by independent
appraisers, of other tangible assets of the Company and its Restricted
Subsidiaries as of a date no earlier than the date of the Company's latest
audited financial statements (provided that the Company shall not be required to
obtain such an appraisal of such assets if no such appraisal has been
performed), minus (b) the sum of (i) minority interests, (ii) any gas balancing
liabilities of the Company and its Restricted Subsidiaries reflected in the
Company's latest audited financial statements, (iii) the discounted future net
revenue, calculated in accordance with SEC guidelines (utilizing the same prices
utilized in the Company's year-end reserve report), attributable to reserves
subject to participation interests, overriding royalty interests or other
interests of third parties, pursuant to participation, partnership, vendor
financing or other agreements then in effect, or which otherwise are required to
be delivered to third parties, (iv) the discounted future net revenues,
calculated in accordance with SEC guidelines (utilizing the same prices utilized
in the Company's year-end reserve report), attributable to reserves that are
required to be delivered to third parties to fully satisfy the obligations of
the Company and its Restricted Subsidiaries with respect to Volumetric
Production Payments on the schedules specified with respect thereto and (v) the
discounted future net revenues, calculated in accordance with SEC guidelines,
attributable to reserves subject to Dollar-Denominated Production Payments that,
based on the estimates of production included in determining the discounted
future net revenues specified in the immediately preceding clause (a)(i)
(utilizing the same prices utilized in the
<PAGE>
4
Company's year-end reserve report), would be necessary to satisfy fully the
obligations of the Company and its Restricted Subsidiaries with respect to
Dollar-Denominated Production Payments on the schedules specified with respect
thereto.
"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 the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of Section 4.04, Section 4.06 and Section 4.07 only, "Affiliate" shall
also mean any beneficial owner of Capital Stock representing 5% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the Company
or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof. Shareholders and
Affiliates of Bessemer Securities Corporation ("BSC") that would not be
Affiliates of the Company other than by reason of being shareholders or
Affiliates of BSC and that neither in fact participate in the management of any
of BSC, Bessemer, Holdings or the Company, nor are controlled by BSC, Bessemer,
Holdings, the Company, or any of their respective Affiliates who in fact
participate in the management of any of BSC, Bessemer, Holdings or the Company,
shall not be deemed to be "Affiliates" of the Company.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares or
shares required by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary.
Notwithstanding the foregoing, none of the following shall be deemed to be an
Asset Disposition: (1) a disposition by a Restricted
<PAGE>
5
Subsidiary to the Company or by the Company or a Restricted Subsidiary to a
Wholly Owned Subsidiary, (2) for purposes of Section 4.06 only, a disposition
that constitutes a Restricted Payment permitted by Section 4.04, (3) the sale or
transfer (whether or not in the ordinary course of business) of oil and gas
properties or direct or indirect interests in real property; provided, however,
that at the time of such sale or transfer such properties do not have associated
with them any proved reserves, (4) the abandonment, farm-out, lease or sublease
of developed or undeveloped oil and gas properties in the ordinary course of
business, (5) the trade or exchange by the Company or any Restricted Subsidiary
of any oil and gas property owned or held by the Company or such Restricted
Subsidiary for any oil and gas property owned or held by another Person or (6)
the sale or transfer of hydrocarbons or other mineral products or surplus or
obsolete equipment in the ordinary course of business.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means,
as at the time of determination, the present value (discounted at the interest
rate implicit in the Sale/Leaseback Transaction, compounded annually) of the
total obligations of the lessee for rental payments during the remaining term of
the lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Banks" has the meaning specified in the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or
any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by
<PAGE>
6
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means the occurrence of any of the following
events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 35% 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 and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause (i),
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 in this clause (i)), directly or
indirectly, of 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 power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation);
<PAGE>
7
(ii) during any period of two consecutive years from and after the
Original Issue Date, 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; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent, immediately after such transaction,
at least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in the preamble to this
Indenture until a successor replaces it and, thereafter, means the successor
and, for purposes of any provision contained herein and required by the TIA,
each other obligor on the indenture securities.
"Consolidated Coverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days prior to the
date of such determination to (ii) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest
<PAGE>
8
Expense for such period shall be calculated after giving effect on a pro forma
basis to such Indebtedness as if such Indebtedness had been Incurred on the
first day of such period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period,
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of such
period or if any Indebtedness is to be repaid, repurchased, defeased or
otherwise discharged on the date of the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest
Expense for such period shall be calculated on a pro forma basis as if such
discharge had occurred on the first day of such period and as if the Company or
such Restricted Subsidiary has not earned the interest income actually earned
during such period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if
since the beginning of such period the Company or any Restricted Subsidiary
shall have made any Asset Disposition (other than an Asset Disposition involving
assets having a fair market value of less than the greater of one percent (1%)
of Adjusted Consolidated Net Tangible Assets as of the end of the Company's then
most recently completed fiscal year and $2.0 million), then EBITDA for such
period shall be reduced by an amount equal to EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to EBITDA (if negative), directly
attributable thereto for such period and Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to
the Company and its continuing Restricted Subsidiaries in connection with such
Asset Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (4) if since the beginning of such period the
Company or any Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any person which becomes a
Restricted Subsidiary) or an acquisition (including by way of lease) of assets,
including any acquisition of assets occurring in connection with a transaction
requiring a calculation to be made hereunder,
<PAGE>
9
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the first day of
such period and (5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition, any Investment or acquisition of assets that
would have required an adjustment pursuant to clause (3) or (4) above if made by
the Company or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the amount
of income or earnings relating thereto and the amount of Consolidated Interest
Expense associated with any Indebtedness Incurred in connection therewith, the
pro forma calculations shall be determined in good faith by a responsible
financial or accounting Officer of the Company. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect, the interest on
such Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Current Liabilities" as of the date of determination
means the aggregate amount of liabilities of the Company and its consolidated
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), on a consolidated basis, after
eliminating (i) all intercompany items between the Company and any Restricted
Subsidiary and (ii) all current maturities of long-term Indebtedness, all as
determined in accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its consolidated Restricted Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP, plus,
to the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication, (i)
interest expense attributable to capital leases and imputed interest with
respect to Attributable Debt, (ii) capitalized interest, (iii) non-cash interest
expenses, (iv) commis-
<PAGE>
10
sions, discounts and other fees and charges owed with respect to letters of
credit and bankers' acceptance financing, (v) net costs (including amortization
of fees and upfront payments) associated with interest rate caps and other
interest rate and currency options that, at the time entered into, resulted in
the Company and its Restricted Subsidiaries being net payees as to future
payouts under such caps or options, and interest rate and currency swaps and
forwards for which the Company or any of its Restricted Subsidiaries has paid a
premium, (vi) Preferred Stock dividends in respect of all Preferred Stock held
by Persons other than the Company or a Wholly Owned Subsidiary to the extent
that, by the terms of the Preferred Stock, failure to pay such dividends would
result in a bankruptcy of the issuer thereof and (vii) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by the Company or any Restricted Subsidiary or secured by a Lien on assets of
the Company or any Restricted Subsidiary to the extent such Indebtedness
constitutes Indebtedness of the Company or any Restricted Subsidiary (whether or
not such Guarantee or Lien is called upon); provided, however, "Consolidated
Interest Expense" shall not include any (w) amortization of costs relating to
debt issuances (including the amortization of debt discount) other than the
amortization of debt discount related to the issuance of securities or other
securities with an original issue price of not more than 90% of the principal
thereof, (x) amortization of debt discount to the extent it relates to
revaluations of financial instruments recognized in connection with the
Consolidation, (y) Consolidated Interest Expense with respect to any
Indebtedness Incurred pursuant to Section 4.03(b)(8) and (z) noncash interest
expense Incurred in connection with interest rate caps and other interest rate
and currency options that resulted, at the time entered into, in the Company and
its Restricted Subsidiaries being either neutral or net payors as to future
payouts under such caps or options.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person (other than the Company) if such Person is not a Restricted Subsidiary,
except that (A) subject to the exclusion contained in clause (iv) below, the
Company's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution paid to a Restricted
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11
Subsidiary, to the limitations contained in clause (iii) below) and (B) the
Company's equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income; (ii) any net income (or
loss) of any Person acquired by the Company or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the exclusion contained
in clause (iv) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to the Company or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the Company's equity in a net loss
of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (iv) any gain or loss realized upon
the sale or other disposition of any assets of the Company or its consolidated
Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain or loss realized upon the sale or other disposition of any Capital Stock of
any Person; (v) extraordinary gains or losses; and (vi) the cumulative effect of
a change in accounting principles. Notwithstanding the foregoing, for the
purposes of Section 4.04 only, there shall be excluded from Consolidated Net
Income any dividends, repayments of loans or advances or other transfers of
assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary
to the extent such dividends, repayments or transfers increase the amount of
Restricted Payments permitted under Section 4.04(a)(3)(E).
"Consolidated Net Tangible Assets", as of any date of determination,
means the total amount of assets (less accumulated depreciation and
amortization, allowances for doubtful receivables, other applicable reserves and
other properly deductible items) which would appear on a consolidated balance
sheet of the Company and its consolidated Restricted Subsidiaries, determined on
a consolidated basis in accordance with GAAP, and after giving effect to
purchase accounting and after deducting therefrom Consolidated Current
Labilities and, to the extent otherwise included, the amounts of: (i) minority
interests in
<PAGE>
12
consolidated Subsidiaries held by Persons other than the Company or a Restricted
Subsidiary; (ii) excess of cost over fair value of assets of businesses
acquired, as determined in good faith by the Board of Directors; (iii) any
revaluation or other write-up in book value of assets subsequent to the Issue
Date as a result of a change in the method of valuation in accordance with GAAP
consistently applied; (iv) unamortized debt discount and expenses and other
unamortized deferred charges, goodwill, patents, trademarks, service marks,
trade names, copyrights, licenses, organization or developmental expenses and
other intangible items; (v) treasury stock; (vi) cash set apart and held in a
sinking or other analogous fund established for the purpose of redemption or
other retirement of Capital Stock to the extent such obligation is not reflected
in Consolidated Current Liabilities; and (vii) Investments in and assets of
Unrestricted Subsidiaries.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii) paid-
in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Consolidation" means the conversion in 1994 of capital stock of
Kelley Oil and units in Kelley Oil & Gas Partners, Ltd., a Texas limited
partnership, into shares of common stock, Convertible Exchangeable Preferred
Stock and cumulative convertible stock of the Company.
"Convertible Exchangeable Preferred Stock" means the $2.625
Convertible Exchangeable Preferred Stock of the Company.
"Credit Agreement" means that certain Credit Agreement, dated as of
February 14, 1996, by and among the Company and Texas Commerce Bank National
Association (or any successor thereto or replacement thereof) as agent and as a
lender, and certain other institutions, as lenders, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, restated, modified, renewed,
refunded, replaced or refinanced, in whole or in part, from time to time,
including the Amended and Restated
<PAGE>
13
Credit Agreement, dated as of December 1, 1997, by and among the Company, Kelley
Oil and Kelley Operating, as borrowers, certain other Subsidiaries of the
Company, as guarantors, Texas Commerce Bank National Association, as agent and a
lender, and certain other institutions, as lenders.
"Credit Facilities" means, with respect to the Company or any
Restricted Subsidiary, one or more debt facilities (including the Credit
Agreement) or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, production payments,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all obligations of the
Company or any Restricted Subsidiary under any Credit Facility and (ii) any
other Senior Indebtedness of the Company 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 $25.0
million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of this Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock to the extent 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, it (i) matures or is mandatorily redeemable pursuant to a sinking
fund obligation or otherwise, (ii) is convertible or exchangeable for
Indebtedness or Disqualified Stock or (iii) is redeemable, in whole or in part,
at the option of the holder thereof, in each case described in the immediately
preceding clause (i), (ii) or (iii) on or prior to the Stated Maturity of the
Securities; provided, however, that any Capital Stock that
<PAGE>
14
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Securities shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the provisions contained in Sections 4.06 and 4.08; provided
further, however, that the Company's Convertible Exchangeable Preferred Stock
outstanding on the Original Issue Date shall not be deemed Disqualified Stock.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) provision for taxes based on
income or profits, (b) depletion and depreciation expense, (c) amortization
expense, (d) exploration costs and (e) all other non-cash charges (excluding any
such non-cash charge to the extent that it represents an accrual of or reserve
for cash charges in any future period or amortization of a prepaid cash expense
that was paid in a prior period except such amounts as the Company determines in
good faith are nonrecurring), and less, to the extent included in calculating
such Consolidated Net Income and in excess of any costs or expenses attributable
thereto and deducted in calculating such Consolidated Net Income, the sum of (x)
the amount of deferred revenues that are amortized during such period and are
attributable to reserves that are subject to Volumetric Production Payments and
(y) amounts recorded in accordance with GAAP as repayments of principal and
interest pursuant to Dollar-Denominated Production Payments. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
Company shall be added to Consolidated Net Income to compute EBITDA only to the
extent (and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders,
<PAGE>
15
statutes, rules and governmental regulations applicable to such Subsidiary or
its stockholders.
"Equity Offering" means a primary offering, whether public or private,
of shares of common stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indenture" means the Indenture, dated as of October 15,
1996, among the Company, as Issuer, certain of its subsidiaries, as Subsidiary
Guarantors, and the United States Trust Company of New York, as Trustee.
"Existing Securities" means the Securities issued under the Existing
Indenture and outstanding on the Issue Date.
"Existing Subsidiary Guarantee" means any Subsidiary Guarantee under
the Existing Indenture, whether in effect on the Issue Date or thereafter
Incurred.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect on the Original Issue Date, including those set
forth in (i) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means, without duplication, any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of
any Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the
<PAGE>
16
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning. The
term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Oil and Gas Hedging Contract, Interest Rate Agreement or
Currency Agreement.
"Holder" or "Securityholder" means the Person in whose name a Security
is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property
(which purchase price is due more than six months after the date of taking
delivery of title to such property), including all obligations of such Person
for the deferred purchase price of property under any title retention agreement
(but excluding trade accounts payable arising in the ordinary course of
business); (iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit securing
obligations (other than obligations described in (i) through (iii) above)
entered into in the ordinary course of business of such Person to the extent
such letters of credit are not
<PAGE>
17
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit); (v) the amount of
all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock or, with respect to any Subsidiary of
such Person the liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends); (vi) all obligations of such
Person relating to any Production Payment or in respect of production imbalances
(but excluding production imbalances arising in the ordinary course of
business); (vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee (including, with respect to any Production Payment, any warranties or
guarantees of production or payment by such Person with respect to such
Production Payment but excluding other contractual obligations of such Person
with respect to such Production Payment); (viii) all obligations of the type
referred to in clauses (i) through (vii) of other Persons secured by any Lien on
any property or asset of such first-mentioned Person (whether or not such
obligation is assumed by such first-mentioned Person), the amount of such
obligation being deemed to be the lesser of the value of such property or assets
or the amount of the obligation so secured and (ix) to the extent not otherwise
included in this definition, Hedging Obligations of such Person. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
It is understood that none of the following shall constitute
Indebtedness: (i) indebtedness arising from agreements providing for
indemnification or adjustment of purchase price or from guarantees securing any
obligations of the Company or any of its Subsidiaries pursuant to such
agreements, incurred or assumed in connection with the disposition of any
business, assets or Subsidiary of the Company, other than guarantees or similar
credit support by the Company or any of its Subsidiaries of Indebtedness
incurred by any Person acquiring all or any portion of such business, assets or
Subsidiary for the purpose of financing such acquisition; (ii) any trade
payables and other accrued liabilities incurred in the ordinary course of
business as the deferred purchase price of property; (iii) obligations
<PAGE>
18
arising from guarantees to suppliers, lessors, licensees, contractors,
franchisees or customers incurred in the ordinary course of business; (iv)
obligations (other than express Guarantees of indebtedness for borrowed money)
in respect of Indebtedness of other Persons arising in connection with (A) the
sale or discount of accounts receivable, (B) trade acceptances and (C)
endorsements of instruments for deposit in the ordinary course of business; (v)
obligations in respect of performance bonds provided by the Company or its
Subsidiaries in the ordinary course of business and refinancings thereof; (vi)
obligations arising from the honoring by a bank or other financial institution
of a check, draft or similar instrument drawn against insufficient funds in the
ordinary course of business; provided, however, that such obligation is
extinguished within two business days of its incurrence; and (vii) obligations
in respect of any obligations under workers' compensation laws and similar
legislation.
"Indenture" means this Indenture as amended or supplemented from time
to time, including the provisions of the TIA that are deemed to be a part of and
govern this Indenture and any supplemental indenture, respectively.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement designed
to protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers or joint interest partners or drilling
partnerships sponsored by the Company or any Restricted Subsidiary in the
ordinary course of business that are recorded as accounts receivable on the
balance sheet of the lender) or other extensions of credit (including by way of
Guarantee or similar arrangement) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by such Person.
For purposes of the definition of "Unrestricted Subsidiary", the definition of
"Restricted Payment" and Section 4.04, (i) "Investment" shall include the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
<PAGE>
19
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means the date of this Indenture.
"Kelley Oil" means the party named as such in the preamble to this
Indenture until a successor replaces it and, thereafter, means the successor.
"Kelley Operating" means the party named as such in the preamble to
this Indenture until a successor replaces it and, thereafter, means the
successor.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any conditional sale or other title
retention agreement or lease in the nature thereof).
"Limited Recourse Indebtedness" means, with respect to any Production
Payments, Indebtedness, the terms of which limit the liability of the Company
and its Restricted Subsidiaries solely to the hydrocarbons covered by such
Production Payments; provided, however, that no default with respect to such
Indebtedness would permit any holder of any other Indebtedness of the Company or
any Restricted Subsidiary to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity.
"Material Change" means an increase or decrease (excluding changes
that result solely from changes in prices) of more than 15% during a fiscal
quarter in the discounted future net revenues from proved oil and gas reserves
of the Company and its Restricted Subsidiaries, calculated in accordance with
clause (a)(i) of the definition of Adjusted Consolidated Net Tangible Assets;
provided, however, that the following will be excluded from the calculation of
Material Change: (i) any acquisitions during the fiscal quarter of oil and gas
reserves that have been estimated by independent petroleum engineers and with
respect to which a report or reports of such engineers exist and (ii) any
disposition of properties existing at the
<PAGE>
20
beginning of such fiscal quarter that have been disposed of in compliance with
Section 4.06.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees (including financial and other advisory
fees) and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Present Value" means, with respect to any proved hydrocarbon
reserves, the discounted future net revenues associated with such reserves,
determined in accordance with the rules and regulations (including
interpretations thereof) of the SEC in effect on the Original Issue Date.
"Net Working Capital" means (a) all current assets of the Company and
its Restricted Subsidiaries minus (b) all current liabilities of the Company and
its Restricted
<PAGE>
21
Subsidiaries, except current liabilities included in Indebtedness, determined in
accordance with GAAP.
"Offering Memorandum" means the Offering Memorandum dated May 26,
1998, in connection with the sale of the Original Securities.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Oil and Gas Business" means the business of the exploration for, and
exploitation, development, acquisition, production, processing (but not
refining), marketing, storage and transportation of, hydrocarbons, and other
related energy and natural resource businesses (including oil and gas services
businesses related to the foregoing).
"Oil and Gas Hedging Contract" means any oil and gas purchase or
hedging agreement, and other agreement or arrangement, in each case, that is
designed to provide protection against oil and gas price fluctuations.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Original Issue Date" means October 29, 1996, being the date on which
the Company's 10 3/8% Senior Subordinated Notes, Series A, were originally
issued.
"Permitted Business Investment" means any Investment made in the
ordinary course of, and of a nature that is or shall have become customary in,
the Oil and Gas Business as a means of actively exploiting, exploring for,
acquiring, developing, producing, processing, gathering, marketing or
transporting oil and gas through agreements, transactions, interests or
arrangements which permit one to share risks or costs, comply with regulatory
requirements regarding local ownership or satisfy other objectives customarily
achieved though the conduct of Oil and Gas Business jointly with third parties,
including (i) ownership interests in oil and gas properties, processing
facilities, gathering systems or ancillary real property interests and (ii)
Investments in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-
<PAGE>
22
out agreements, development agreements, area of mutual interest agreements,
unitization agreements, pooling agreements, joint bidding agreements, service
contracts, joint venture agreements, partnership agreements (whether general or
limited), subscription agreements, stock purchase agreements and other similar
agreements with third parties.
"Permitted Holders" means (i) the members of Contour Production
Company L.L.C., a Delaware limited liability company ("Contour"), as of the
Original Issue Date (the "Contour Group"), (ii) Contour, so long as Contour is
controlled (as defined in the definition of "Affiliate" above), directly or
indirectly, by the Contour Group, (iii) officers, principals, employees, direct
or indirect owners or Affiliates of Persons described in clauses (i) or (ii),
(iv) Persons who beneficially own Voting Stock of the Company on the Original
Issue Date and (v) officers or employees of the Company or any of its
Subsidiaries as of the Original Issue Date.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is an Oil and
Gas Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is an Oil and Gas
Business; (iii) Temporary Cash Investments; (iv) receivables owing to the
Company or any Restricted Subsidiary if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans or advances to employees made in the ordinary
course of business; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) any
Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to Section
4.06 and (ix) Permitted Business Investments.
<PAGE>
23
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for non-
payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially impair their use in
the operation of the business of such Person; (f) Liens securing Indebtedness
Incurred to finance the construction, purchase or lease of, or repairs,
improvements or additions to, property of such Person (including Liens securing
Indebtedness of the pollution control or revenue bond type); provided, however,
that the Lien may not extend to any other property owned by such Person or any
of its Subsidiaries at the time the Lien is Incurred, and the Indebtedness
secured by the Lien may not be Incurred more than 180 days after the later of
the acquisition, completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien; (g) Liens
securing Indebtedness permitted under Section 4.03(b)(1) or Section 4.03(b)(8);
provided, however, that any such Lien securing Indebtedness described in Section
4.03(b)(8) shall be limited to the hydrocarbons related thereto and any
gathering systems utilized in gathering and transporting
<PAGE>
24
such hydrocarbons; (h) Liens existing on the Original Issue Date or created
since the Original Issue Date and existing on the Issue Date and otherwise
permitted under the Existing Indenture; (i) Liens on property or shares of
Capital Stock of another Person at the time such other Person becomes a
Subsidiary of such Person; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such other
Person becoming such a Subsidiary; provided further, however, that such Lien may
not extend to any other property owned by such Person or any of its
Subsidiaries; (j) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of a
merger or consolidation with or into such Person or a Subsidiary of such Person;
provided, however, that such Liens are not created, incurred or assumed in
connection with, or in contemplation of, such acquisition; provided further,
however, that the Liens may not extend to any other property owned by such
Person or any of its Subsidiaries; (k) Liens securing Indebtedness or other
obligations of a Subsidiary of such Person owing to such Person or a wholly
owned Subsidiary of such Person (or, in the case of the Company, to a Wholly
Owned Subsidiary); (l) Liens securing Hedging Obligations so long as such
Hedging Obligations relate to Indebtedness that is, and is permitted to be under
this Indenture, secured by a Lien on the same property securing such Hedging
Obligations; (m) Liens arising in the ordinary course of business in favor of
the United States, any state thereof, any foreign country or any department,
agency, instrumentality or political subdivision of any such jurisdiction, to
secure partial, progress, advance or other payments pursuant to any contract or
statute; (n) Liens to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Indebtedness secured by any Lien referred to in the
foregoing clauses (f), (h), (i) and (j); provided, however, that (x) such new
Lien shall be limited to all or part of the same property that secured the
original Lien (plus improvements to or on such property) and (y) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clause (f), (h),(i) or (j)
at the time the original Lien became a Permitted Lien and (B) an amount
necessary to pay any fees and expenses, including premiums, related to such
Refinancing; (o) Liens on, or related to, properties to secure all or part of
the costs incurred in the ordinary course of business of exploration, drilling,
development or operation thereof; (p) Liens on pipeline or pipeline facilities
which arise out of operation of law; (q) Liens reserved in oil and gas mineral
leases for bonus or rental
<PAGE>
25
payments and for compliance with the terms of such leases; and (r) Liens arising
under partnership agreements, oil and gas leases, farm-out agreements, division
orders, contracts for the sale, purchase, exchange, transportation or processing
(but not the refining) of oil, gas or other hydrocarbons, unitization and
pooling declarations and agreements, development agreements, operating
agreements, area of mutual interest agreements, and other similar agreements
which are customary in the Oil and Gas Business. Notwithstanding the foregoing,
"Permitted Liens" will not include any Lien described in clause (f), (i) or (j)
above to the extent (A) such Lien applies to any Additional Assets or Permitted
Business Investment acquired directly or indirectly from Net Available Cash
pursuant to Section 4.06(a)(i)(B) or Section 4.06(c) and (B) the fair value of
such Additional Assets or Permitted Business Investment is less than the sum of
(x) the amount of Indebtedness secured by such Lien plus (y) the amount of Net
Available Cash so invested in such Additional Assets or Permitted Business
Investment.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Security means the principal of the Security plus the
premium, if any, payable on the Security which is due or overdue or is to become
due at the relevant time.
"Production Payments" means, collectively, Dollar-Denominated
Production Payments and Volumetric Production Payments.
"Programs" means Kelley Partners 1992 Development Drilling Program, a
Texas limited partnership, and Kelley Partners 1994 Development Drilling
Program, a Texas limited partnership, together with Kelley Partners 1992
Development Drilling Joint Venture, a Texas general partnership, Kelley Partners
1994 Development Drilling Joint Venture, a Texas
<PAGE>
26
general partnership, and each of their respective successors.
"Public Market" means any time when at least 15% of the total issued
and outstanding common stock of the Company has been distributed by means of an
effective registration statement under the Securities Act or sales pursuant to
Rule 144 under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness (including
an Incurrence pursuant to clause (ii) of Section 5.01 or Section 5.02).
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date and otherwise in compliance with the Existing Indenture or Incurred in
compliance with this Indenture including Indebtedness that Refinances
Refinancing Indebtedness and Indebtedness that is deemed to be Incurred at the
time of a merger or consolidation pursuant to clause (ii) of Section 5.01 or
Section 5.02; provided, however, that (i) such Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
Refinanced, (ii) such Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced and (iii) such Refinancing
Indebtedness has an aggregate principal amount (or if Incurred with original
issue discount, an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue discount, the
aggregate accreted value) then outstanding or committed (plus fees and expenses,
including any premium and defeasance costs) under the Indebtedness being
Refinanced; provided further, however, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Subsidiary (other than a Subsidiary Guarantor)
that Refinances Indebtedness of the Company or (y) Indebtedness of the Company
or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Representative" means any trustee, agent or representative (if any)
for an issue of Senior Indebtedness of the Company.
<PAGE>
27
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than (x) dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock), (y) dividends or distributions payable solely to the Company or a
Restricted Subsidiary and (z) pro rata dividends or other distributions made by
a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) the making of any
Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is
not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property
now owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured
by a Lien.
"Securities" means the Securities issued under this Indenture.
<PAGE>
28
"Senior Indebtedness" means with respect to any Person (i)
Indebtedness of such Person, and all obligations of such Person under any Credit
Facility, whether outstanding on the Original Issue Date or thereafter
Incurred, and (ii) accrued and unpaid interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization relating
to such Person to the extent post-filing interest is allowed in such proceeding)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable unless, with
respect to obligations described in the immediately preceding clause (i) or
(ii), in the instrument creating or evidencing the same or pursuant to which the
same is outstanding, it is provided that such obligations are subordinate in
right of payment to the Securities or the applicable Subsidiary Guaranty, as the
case may be; provided, however, that Senior Indebtedness shall not include (1)
any obligation of such Person to any Subsidiary of such Person, (2) any
liability for Federal, state, local or other taxes owed or owing by such Person,
(3) any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness of such Person (and any
accrued and unpaid interest in respect thereof) which is subordinate or junior
in any respect to any other Indebtedness or other obligation of such Person or
(5) that portion of any Indebtedness which at the time of Incurrence is Incurred
in violation of this Indenture (other than, in the case of the Company or any of
its Restricted Subsidiaries, Indebtedness under any Credit Facility that is
Incurred on the basis of a representation by the Company to the applicable
lenders that such person is permitted to Incur such Indebtedness under this
Indenture).
"Senior Subordinated Indebtedness" means (i) with respect to the
Company, the Existing Securities, the Securities and any other Indebtedness of
the Company that specifically provides that such Indebtedness is to rank pari
passu with the Securities in right of payment and is not subordinated by its
terms in right of payment to any Indebtedness or other obligation of the Company
which is not Senior Indebtedness and (ii) with respect to any Subsidiary
Guarantor, the Subsidiary Guaranty of such Subsidiary Guarantor, the Existing
Subsidiary Guarantee of such Subsidiary Guarantor and any other Indebtedness of
such Subsidiary Guarantor that specifically provides that such Indebtedness is
to rank pari passu with such Subsidiary Guaranty in right of payment and is not
subordinated by its
<PAGE>
29
terms in right of payment to any Indebtedness or other obligation of such
Subsidiary Guarantor which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Securities pursuant to a
written agreement to that effect.
"Subsidiary" means, in respect of any Person, 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 interests (including
partnership interests) entitled (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,
(ii) such person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Subsidiary Guarantors" means Kelley Operating, Kelley Oil and each
other Restricted Subsidiary of the Company (other than the Programs) that (i)
has total net assets as of the end of the most recent fiscal year (as set forth
on the balance sheet of such Subsidiary prepared in accordance with GAAP) equal
to or greater than the greater of $2.5 million and one percent (1%) of Adjusted
Consolidated Net Tangible Assets as of such date and (ii) delivers a Subsidiary
Guaranty.
"Subsidiary Guaranty" means a Guarantee, pursuant to Article 11 of
this Indenture, by a Subsidiary Guarantor of the Company's obligations with
respect to the Securities, which Guarantee will be subordinated to Senior
Indebtedness of such Subsidiary Guarantor on substantially the same terms
<PAGE>
30
as the Securities are subordinated to Senior Indebtedness of the Company.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50.0 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a Person (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-2"
(or higher) according to Moody's Investors Service, Inc. or "A-2" (or higher)
according to Standard & Poor's Ratings Group, and (v) investments in securities
with maturities of six months or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Services, a division of the McGraw-
Hill Companies Inc., or "A" by Moody's Investors Service, Inc.
"TIA" means the Trust Indenture Act of 1939, as amended (15 U.S.C.
(S)(S) 77aaa-77bbbb), as in effect on the date of this Indenture except as
provided in Section 9.03.
"Total Assets" of the Company means the total consolidated assets of
the Company and its Restricted Subsidiaries, as shown on the most recent balance
sheet of the Company.
<PAGE>
31
"Trustee" means the party named as such in the preamble to this
Indenture until a successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any
other officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform Commercial Code
as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under Section 4.04. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under Section 4.03(a) and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced by the Company to the Trustee by promptly filing with the
Trustee a copy of the board resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
<PAGE>
32
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares and shares held
by other Persons to the extent such shares are required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary) is owned by
the Company or one or more Wholly Owned Subsidiaries.
Section 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
- -------------------------------------- --------------
<S> <C>
"Affiliate Transaction".......... 4.07
"Bankruptcy Law"................. 6.01
"Blockage Notice"................ 10.03
"covenant defeasance option"..... 8.01(b)
"Custodian"...................... 6.01
"Event of Default"............... 6.01
"Excess Proceeds"................ 4.06(a)
"Excess Proceeds Offer".......... 4.06(b)(i)
"Excess Proceeds Payment"........ 4.06(b)(i)
"Excess Proceeds Payment Date"... 4.06(b)(ii)
"Guaranteed Obligations"......... 11.01
"legal defeasance option"........ 8.01(b)
"Legal Holiday".................. 12.08
"pay the Securities"............. 10.03
"Paying Agent"................... 2.04
"Payment Blockage Period"........ 10.03
"Registrar"...................... 2.03
"Successor Company".............. 5.01
</TABLE>
Additional terms used in this Indenture are defined in Appendix A hereto (the
"Appendix").
Section 1.03. Incorporation by Reference of Trust Indenture Act.
This Indenture is subject to the mandatory provisions of the TIA which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC.
<PAGE>
33
"indenture securities" means the Securities and, to the extent
Subsidiary Guaranties are given, such Subsidiary Guaranties.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any other
obligor on the indenture securities, including any Subsidiary Guarantors.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
Section 1.04. 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) "including" means including without limitation;
(5) words in the singular include the plural and words in the plural
include the singular;
(6) unsecured Indebtedness shall not be deemed to be subordinate or
junior to Secured Indebtedness merely by virtue of its nature as unsecured
Indebtedness;
(7) the principal amount of any noninterest bearing or other discount
security at any date shall be the principal amount thereof that would be
shown on a balance sheet of the Company dated such date prepared in
accordance with GAAP;
(8) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory
<PAGE>
34
redemption or mandatory repurchase price with respect to such Preferred
Stock, whichever is greater; and
(9) all references to the date the Securities were originally issued
shall refer to the date the Initial Securities were originally issued.
ARTICLE 2
The Securities
--------------
Section 2.01. Amount of Securities; Issuable in Series. The
aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is $80,000,000 (except for Securities
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other Securities pursuant to Section 2.07, 2.08, 2.09, 2.10
or 3.06 or the Appendix). The Securities may be issued in one or more series.
All Securities of any one series shall be substantially identical except as to
denomination.
With respect to any Additional Securities (except for Securities
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other Securities pursuant to Section 2.07, 2.08, 2.09, 2.10
or 3.06 or the Appendix), there shall be (i) established in or pursuant to a
resolution of the Board of Directors and (ii), (A) set forth or determined in
the manner provided in an Officer's Certificate or (B) established in one or
more indentures supplemental hereto, prior to the issuance of such Additional
Securities:
(1) whether such Additional Securities shall be issued as part of a
new or existing series of Securities and the title of such Additional
Securities (which shall distinguish the Additional Securities of the series
from Securities of any other series);
(2) the aggregate principal amount of such Additional Securities which
may be authenticated and delivered under this Indenture, which shall be in
an aggregate principal amount not to exceed $50,000,000 (except for
Securities authenticated and delivered upon registration of transfer of, or
in exchange for, or in lieu of, other Securities of the same series
pursuant to Section 2.07, 2.08, 2.09, 2.10 or 3.06 or the Appendix and
except for Securities which, pursuant to Section 2.03, are deemed never to
have been authenticated and delivered hereunder);
<PAGE>
35
(3) the issue price and issuance date of such Additional Securities,
including the date from which interest on such Additional Securities shall
accrue; provided, however, that no Additional Securities may be issued at a
price that would cause such Additional Securities to have "original issue
discount" within the meaning of Section 1273 of the Code.
(4) if applicable, that such Additional Securities shall be issuable
in whole or in part in the form of one or more Global Securities (as
defined in the Appendix) and, in such case, the respective depositaries for
such Global Securities, the form of any legend or legends which shall be
borne by such Global Securities in addition to or in lieu of those set
forth in Exhibit A hereto and any circumstances in addition to or in lieu
of those set forth in Section 2.3 of the Appendix in which any such Global
Security may be exchanged in whole or in part for Additional Securities
registered, or any transfer of such Global Security in whole or in part may
be registered, in the name or names of Persons other than the depositary
for such Global Security or a nominee thereof; and
(5) if applicable, that such Additional Securities shall not be issued
in the form of Initial Securities as set forth in Exhibit A, but shall be
issued in the form of Exchange Securities as set forth in Exhibit B.
If any of the terms of any Additional Securities are established by
action taken pursuant to a resolution of the Board of Directors, a copy of an
appropriate record of such action shall be certified by the Secretary or any
Assistant Secretary of the Company and delivered to the Trustee at or prior to
the delivery of the Officers' Certificate or the indenture supplemental hereto
setting forth the terms of the Additional Securities.
Section 2.02. Form and Dating. Provisions relating to the Original
Securities, the Additional Securities, the Private Exchange Securities and the
Exchange Securities are set forth in the Appendix, which is hereby incorporated
in and expressly made a part of this Indenture. The (i) Original Securities and
the Trustee's certificate of authentication, (ii) Private Exchange Securities
and the Trustee's certificate of authentication and (iii) any Additional
Securities (if issued as Transfer Restricted Securities (as defined in the
Appendix)) and the Trustee's certificate of authentication shall each be
substantially in the form of Exhibit A hereto, which is hereby incorporated
<PAGE>
36
in and expressly made a part of this Indenture. The Exchange Securities and any
Additional Securities issued other than as Transfer Restricted Securities and
the Trustee's certificate of authentication shall each be substantially in the
form of Exhibit B hereto, which is hereby incorporated in and expressly made a
part of this Indenture. The Securities may have notations, legends or
endorsements required by law, stock exchange rule, agreements to which the
Company or any Subsidiary Guarantor is subject, if any, or usage (provided that
any such notation, legend or endorsement is in a form acceptable to the
Company). Each Security shall be dated the date of its authentication. The
Securities shall be issued only in registered form without coupons and only in
denominations of $1,000 and integral multiples thereof.
Section 2.03. Execution and Authentication. One or more Officers
shall sign the Securities for the Company by manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall
be valid nevertheless.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been
authenticated under this Indenture.
The Trustee shall authenticate and make available for delivery
Securities as set forth in the Appendix.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate the Securities. Any such appointment shall be
evidenced by an instrument signed by a Trust Officer, a copy of which shall be
furnished to the Company. Unless limited by the terms of such appointment, an
authenticating agent may authenticate Securities 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
any Registrar, Paying Agent or agent for service of notices and demands.
Section 2.04. Registrar and Paying Agent. The Company shall maintain
an office or agency where Securities may be presented for registration of
transfer or for exchange (the "Registrar") and an office or agency where
Securities may be presented for payment (the "Paying
<PAGE>
37
Agent"). The Registrar shall keep a register of the Securities and of their
transfer and exchange. The Company may have one or more co-registrars and one or
more additional paying agents. The term "Paying Agent" includes any additional
paying agent, and the term "Registrar" includes any co-registrars.
The Company shall enter into an appropriate agency agreement with any
Registrar or Paying Agent not a party to this Indenture, which shall incorporate
the terms of the TIA. The agreement shall implement the provisions of this
Indenture that relate to such agent. The Company shall notify the Trustee of
the name and address of any such agent. If the Company fails to maintain a
Registrar or Paying Agent, the Trustee shall act as such and shall be entitled
to appropriate compensation therefor pursuant to Section 7.07. The Company or
any of its domestically organized Wholly Owned Subsidiaries may act as Paying
Agent or Registrar.
The Company initially appoints the Trustee as (i) Registrar and Paying
Agent in connection with the Securities and (ii) the Securities Custodian (as
defined in the Appendix) with respect to the Global Securities (as defined in
the Appendix).
The Company may remove any Registrar or Paying Agent upon written
notice to such Registrar or Paying Agent and to the Trustee; provided, however,
that no such removal shall become effective until (1) acceptance of an
appointment by a successor as evidenced by an appropriate agreement entered into
by the Company and such successor Registrar or Paying Agent, as the case may be,
and delivered to the Trustee or (2) notification to the Trustee that the Trustee
shall serve as Registrar or Paying Agent until the appointment of a successor in
accordance with clause (1) above. The Registrar or Paying Agent may resign at
any time upon written notice; provided, however, that the Trustee may resign as
Paying Agent or Registrar only if the Trustee also resigns as Trustee in
accordance with Section 7.08.
Section 2.05. Paying Agent To Hold Money in Trust. Prior to each due
date of the principal and interest on any Security, the Company shall deposit
with the Paying Agent (or if the Company or a Subsidiary is acting as Paying
Agent, segregate and hold in trust for the benefit of the Persons entitled
thereto) a sum sufficient to pay such principal and interest when so becoming
due. The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that the Paying Agent shall hold in trust for the benefit of
Securityholders or the Trustee all money
<PAGE>
38
held by the Paying Agent for the payment of principal of or interest on the
Securities and shall notify the Trustee of any default by the Company in making
any such payment. If the Company or a Subsidiary of the Company acts as Paying
Agent, it shall segregate the money held by it as Paying Agent and hold it as a
separate trust fund. The Company at any time may require a Paying Agent to pay
all money held by it to the Trustee and to account for any funds disbursed by
the Paying Agent. Upon complying with this Section, the Paying Agent shall have
no further liability for the money delivered to the Trustee.
Section 2.06. Securityholder 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 Securityholders. If the Trustee is not the
Registrar, the Company shall furnish, or cause the Registrar to furnish, to the
Trustee, in writing at least five 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 Securityholders.
Section 2.07. Transfer and Exchange. The Securities shall be issued
in registered form and shall be transferable only upon the surrender of a
Security for registration of transfer and in compliance with the Appendix. When
a Security is presented to the Registrar with a request to register a transfer,
the Registrar shall register the transfer as requested if the requirements of
Section 8-401(a)(l) of the Uniform Commercial Code are met. When Securities are
presented to the Registrar with a request to exchange them for an equal
principal amount of Securities of other denominations, the Registrar shall make
the exchange as requested if the same requirements are met. To permit
registration of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Securities at the Registrar's request. The Company
may require payment of a sum sufficient to pay all taxes, assessments or other
governmental charges in connection with any transfer or exchange pursuant to
this Section. The Company shall not be required to make and the Registrar need
not register transfers or exchanges of Securities selected for redemption
(except, in the case of Securities to be redeemed in part, the portion thereof
not to be redeemed) or any Securities for a period of 15 days before a selection
of Securities to be redeemed.
Prior to the due presentation for registration of transfer of any
Security, the Company, the Subsidiary Guarantors, the Trustee, the Paying Agent
and the Registrar
<PAGE>
39
may deem and treat the Person in whose name a Security is registered as the
absolute owner of such Security for the purpose of receiving payment of
principal of and interest, if any, on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
any Subsidiary Guarantor, the Trustee, the Paying Agent or the Registrar shall
be affected by notice to the contrary.
Any Holder of a Global Security shall, by acceptance of such Global
Security, agree that transfers of beneficial interest in such Global Security
may be effected only through a book-entry system maintained by (i) the Holder of
such Global Security (or its agent) or (ii) any Holder of a beneficial interest
in such Global Security, and that ownership of a beneficial interest in such
Global Security shall be required to be reflected in a book entry.
All Securities issued upon any transfer or exchange pursuant to the
terms of this Indenture will evidence the same debt and will be entitled to the
same benefits under this Indenture as the Securities surrendered upon such
transfer or exchange.
Section 2.08. Replacement Securities. If a mutilated Security is
surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Security if the requirements of
Section 8-405 of the Uniform Commercial Code are met, such that the Holder (i)
satisfies the Company or the Trustee that it meets such requirements within a
reasonable time after he has notice of such loss, destruction or wrongful taking
and the Registrar does not register a transfer prior to receiving such
notification, (ii) makes such request to the Company or the Trustee prior to the
Company or the Trustee, as applicable, receiving notice that the Security has
been acquired by a protected purchaser as defined in Section 8-303 of the
Uniform Commercial Code (a "protected purchaser") and (iii) satisfies any other
reasonable requirements of the Trustee. If required by the Trustee or the
Company, such Holder shall furnish an indemnity bond sufficient in the judgment
of the Trustee to protect the Company, the Trustee, the Paying Agent and the
Registrar from any loss that any of them may suffer if a Security is replaced.
The Company and the Trustee may charge the Holder for their expenses in
replacing a Security. In the event any such mutilated, lost, destroyed or
wrongfully taken Security has become or is about to become due and payable, the
Company in its
<PAGE>
40
discretion may pay such Security instead of issuing a new Security in
replacement thereof.
Every replacement Security is an additional obligation of the Company.
The provisions of this Section 2.08 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, lost, destroyed or wrongfully taken
Securities.
Section 2.09. Outstanding Securities. Securities outstanding at any
time are all Securities authenticated by the Trustee except for those canceled
by it, those delivered to it for cancelation and those described in this Section
as not outstanding. A Security does not cease to be outstanding because the
Company or an Affiliate of the Company holds the Security.
If a Security is replaced pursuant to Section 2.08, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Security is held by a protected purchaser.
If the Paying Agent segregates and holds in trust, in accordance with
this Indenture, on a redemption date or maturity date money sufficient to pay
all principal and interest payable on that date with respect to the Securities
(or portions thereof) to be redeemed or maturing, as the case may be, and the
Paying Agent is not prohibited from paying such money to the Securityholders on
that date pursuant to the terms of this Indenture, then on and after that date
such Securities (or portions thereof) cease to be outstanding and interest on
them ceases to accrue.
Section 2.10. Temporary Securities. In the event that Definitive
Securities (as defined in the Appendix) are to be issued under the terms of this
Indenture, until such Definitive Securities are ready for delivery, the Company
may prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of Definitive Securities but may
have variations that the Company considers appropriate for temporary Securities.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate Definitive Securities and deliver them in exchange for temporary
Securities upon surrender of such temporary Securities at the office or agency
of the Company, without charge to the Holder.
<PAGE>
41
Section 2.11. Cancelation. The Company at any time may deliver
Securities to the Trustee for cancelation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel all
Securities surrendered for registration of transfer, exchange, payment or
cancelation and deliver canceled Securities to the Company pursuant to written
direction by an Officer. The Company may not issue new Securities to replace
Securities it has redeemed, paid or delivered to the Trustee for cancelation.
The Trustee shall not authenticate Securities in place of canceled Securities
other than pursuant to the terms of this Indenture.
Section 2.12. Defaulted Interest. If the Company defaults in a
payment of interest on the Securities, the Company shall pay the defaulted
interest (plus interest on such defaulted interest to the extent lawful) in any
lawful manner. The Company may pay the defaulted interest to the Persons who
are Securityholders on a subsequent special record date. The Company shall fix
or cause to be fixed any such special record date and payment date to the
reasonable satisfaction of the Trustee and shall promptly mail or cause to be
mailed to each Securityholder a notice that states the special record date, the
payment date and the amount of defaulted interest to be paid.
Section 2.13. CUSIP Numbers. The Company in issuing the Securities
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, however, that any such notice may state that no representation is made
as to the correctness of such numbers either as printed on the Securities or as
contained in any notice of a redemption and that reliance may be placed only on
the other identification numbers printed on the Securities, and any such
redemption shall not be affected by any defect in or omission of such numbers.
ARTICLE 3
Redemption
----------
Section 3.01. Notices to Trustee. If the Company elects to redeem
Securities pursuant to paragraph 5 of the Securities, it shall notify the
Trustee in writing of the redemption date, the principal amount of Securities to
be redeemed and the paragraph of the Securities pursuant to which the redemption
will occur.
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42
The Company shall give each notice to the Trustee provided for in this
Section at least 45 days before the redemption date unless the Trustee consents
to a shorter period. Such notice shall be accompanied by an Officers'
Certificate and an Opinion of Counsel from the Company to the effect that such
redemption will comply with the conditions herein.
Section 3.02. Selection of Securities To Be Redeemed. If fewer than
all the Securities are to be redeemed, the Trustee shall select the Securities
to be redeemed pro rata or by lot or by a method that complies with applicable
legal and securities exchange requirements, if any, and that the Trustee in its
sole discretion considers fair and appropriate. The Trustee shall make the
selection from outstanding Securities not previously called for redemption. The
Trustee may select for redemption portions of the principal of Securities that
have denominations larger than $1,000. Securities and portions of them the
Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000.
Provisions of this Indenture that apply to Securities called for redemption also
apply to portions of Securities called for redemption. The Trustee shall notify
the Company and the Registrar and Paying Agent promptly of the Securities or
portions of Securities to be redeemed.
Section 3.03. Notice of Redemption. At least 30 days but not more
than 60 days before a date for redemption of Securities, the Company shall
mail a notice of redemption by first-class mail to each Holder of Securities to
be redeemed.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be redeemed,
the identification and principal amounts of the particular Securities to be
redeemed;
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43
(6) that, unless the Company defaults in making such redemption
payment or the Paying Agent is prohibited from making such payment pursuant
to the terms of this Indenture, interest on Securities (or portion thereof)
called for redemption ceases to accrue on and after the redemption date;
and
(7) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Securities.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
Section 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice, subject to
any condition or contingency stated therein. Upon surrender to the Paying
Agent, such Securities shall be paid at the redemption price stated in the
notice, plus accrued interest to the redemption date. Failure to give notice or
any defect in the notice to any Holder shall not affect the validity of the
notice to any other Holder.
Section 3.05. Deposit of Redemption Price. Prior to the redemption
date, the Company shall deposit with the Paying Agent (or, if the Company or a
Subsidiary is the Paying Agent, shall segregate and hold in trust) money
sufficient to pay the redemption price of and accrued interest on all Securities
to be redeemed on that date other than Securities or portions of Securities
called for redemption which have been delivered by the Company to the Trustee
for cancellation.
Section 3.06. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate and deliver to the Holder (at the Company's expense) a new
Security equal in principal amount to the unredeemed portion of the Security
surrendered.
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44
ARTICLE 4
Covenants
---------
Section 4.01. Payment of Securities. The Company shall promptly pay
the principal of and interest on the Securities on the dates and in the manner
provided in the Securities and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all
principal and interest then due and the Trustee or the Paying Agent, as the case
may be, is not prohibited from paying such money to the Securityholders on that
date pursuant to the terms of this Indenture.
The Company shall pay interest on overdue principal at the rate
specified therefor in the Securities, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
Section 4.02. SEC Reports. Notwithstanding that the Company may not
at any time be subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act, the Company shall file with the SEC and provide the Trustee
and Securityholders with such annual reports and such information, documents and
other reports as are specified in Sections 13 and 15(d) of the Exchange Act
(excluding however information with respect to benefit plans and long-term
compensation arrangements) and applicable to a U.S. corporation subject to such
Sections, such information, documents and other reports to be so filed and
provided at the times specified for the filing of such information, documents
and reports under such Sections.
Section 4.03. Limitation on Indebtedness. (a) The Company shall not,
and shall not permit any Restricted Subsidiary to, Incur, directly or
indirectly, any Indebtedness; provided, however, that the Company or a
Subsidiary Guarantor may Incur Indebtedness if, on the date of such Incurrence
and after giving effect thereto, the Consolidated Coverage Ratio equals or
exceeds (i) 2.0 to 1.0, if such Indebtedness is Incurred on or prior to
September 30, 1999, (ii) 2.25 to 1.0, if such Indebtedness is Incurred after
September 30, 1999 and on or prior to September 30, 2001, and (iii) 2.5 to 1.0
if such Indebtedness is Incurred after September 30, 2001.
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45
(b) Notwithstanding the foregoing paragraph (a), the Company and any
Restricted Subsidiary may Incur the following Indebtedness:
(1) Indebtedness of the Company Incurred pursuant to any Credit
Facility, so long as the aggregate principal amount of all Indebtedness
outstanding under all Credit Facilities does not, at any one time, exceed
the aggregate amount of borrowing availability as of such date under all
Credit Facilities that determine availability on the basis of a borrowing
base or other asset-based calculation; provided, however, that in no event
shall the aggregate principal amount of Indebtedness Incurred pursuant to
this Section 4.03(b)(1) outstanding at any one time exceed $250.0 million;
provided further, however, that if the Company or a Subsidiary Guarantor
Incurs any Indebtedness pursuant to this Section 4.03(b)(1) that would
cause the total principal amount of Indebtedness outstanding under this
Section 4.03(b)(1) to exceed an amount equal to $150.0 million (less the
aggregate amount of all Net Available Cash of Asset Dispositions applied to
reduce Senior Indebtedness pursuant to Section 4.06(a)(i)(A), the
Consolidated Coverage Ratio on the date of such Incurrence must be at least
2.0 to 1.0;
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or another Wholly Owned Subsidiary)
shall be deemed, in each case, to constitute the Incurrence of such
Indebtedness by the issuer thereof;
(3) the Securities and the Subsidiary Guaranties and the Existing
Securities and the Existing Subsidiary Guaranties;
(4) Indebtedness outstanding on the Original Issue Date (other than
Indebtedness described in Section 4.03(b)(1), (2) or (3)) and Indebtedness
Incurred prior to the Issue Date that was permitted under Section 4.03(a),
4.03(b)(5), 4.03(b)(6), 4.03(b)(7) or 4.03(b)(13) of the Existing
Indenture;
(5) Indebtedness or Preferred Stock of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such Restricted
Subsidiary
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46
was acquired by the Company (other than Indebtedness or Preferred Stock
Incurred in connection with, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company); provided, however,
that on the date of such acquisition and after giving effect thereto, the
Consolidated Coverage Ratio equals or exceeds (i) 1.8 to 1.0, if such
Indebtedness is Incurred on or prior to September 30, 1999, (ii) 2.05 to
1.0, if such Indebtedness is Incurred after September 30, 1999 and on or
prior to September 30, 2001, and (iii) 2.3 to 1.0, if such Indebtedness is
Incurred after September 30, 2001;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to Section 4.03(a) or pursuant to Section 4.03(b)(3), (4) or (5),
this Section 4.03(b)(6) or Section 4.03(b)(7) or (13); provided, however,
that to the extent such Refinancing Indebtedness directly or indirectly
Refinances Indebtedness or Preferred Stock of a Restricted Subsidiary
described in Section 4.03(b)(5), such Refinancing Indebtedness shall be
Incurred only by such Restricted Subsidiary or the Company;
(7) Indebtedness of the Company or a Restricted Subsidiary represented
by Capital Lease Obligations, mortgage financings or purchase money
obligations, in each case Incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of
property used in an Oil and Gas Business and in each case Incurred no later
than 365 days after the date of such acquisition or the date of completion
of such construction or improvement; provided, however, that the principal
amount of any Indebtedness Incurred pursuant to this Section 4.03(b)(7) in
any single calendar year shall not exceed $15.0 million;
(8) Indebtedness with respect to Production Payments; provided,
however, that any such Indebtedness shall be Limited Recourse Indebtedness;
provided further, however, that the Net Present Value of the reserves
related to such Production Payments shall not exceed 30% of the Total
Assets of the Company at the time of Incurrence;
(9) Indebtedness consisting of Interest Rate Agreements directly
related to Indebtedness permitted
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47
to be Incurred by the Company and its Restricted Subsidiaries pursuant to
this Indenture or, prior to the Issue Date, pursuant to the Existing
Indenture;
(10) Indebtedness under Oil and Gas Hedging Contracts and Currency
Agreements 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;
(11) Indebtedness in respect of letters of credit issued for the
benefit of the Company or any of its Restricted Subsidiaries to the extent
they are issued in connection with the ordinary course of business of the
Company and its Restricted Subsidiaries, Incurred in an aggregate principal
amount which, when taken together with the principal amount of all other
Indebtedness Incurred pursuant to this Section 4.03(b)(11) and then
outstanding, does not exceed $15.0 million;
(12) Indebtedness of the Company or a Restricted Subsidiary Incurred
to finance capital expenditures (or Refinancings thereof) in an aggregate
principal amount which, when taken together with the principal amount of
all other Indebtedness Incurred pursuant to this Section 4.03(b)(12) and
then outstanding, does not exceed $10.0 million;
(13) Indebtedness of the Company or a Restricted Subsidiary Incurred
for the purpose of financing all or any part of the cost of acquiring oil
and gas reserves, another Person (other than a Person that was, immediately
prior to such acquisition, a Subsidiary of the Company) engaged in the Oil
and Gas Business or all or substantially all the assets of such a Person;
provided, however, that on the date of such Incurrence and after giving
effect thereto, the Consolidated Coverage Ratio equals or exceeds (i) 1.8
to 1.0, if such Indebtedness is Incurred on or prior to September 30, 1999,
(ii) 2.05 to 1.0, if such Indebtedness is Incurred after September 30, 1999
and on or prior to September 30, 2001, and (iii) 2.3 to 1.0 if such
Indebtedness is Incurred after September 30, 2001; and
(14) Indebtedness in an aggregate principal amount which, together
with the principal amount of all other Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the date of such Incurrence (other
than Indebtedness permitted by
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48
Section 4.03(b)(1) through (13) above or Section 4.03(a)) does not exceed
the greater of 6% of Adjusted Consolidated Net Tangible Assets as of the
end of the most recent fiscal year ending at least 90 days prior to the
date of such Incurrence and $15.0 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing Section 4.03(b) if the proceeds thereof
are used, directly or indirectly, to Refinance any Subordinated Obligations
unless such Indebtedness shall be subordinated to the Securities to at least the
same extent as such Subordinated Obligations; provided, however, that this
Section 4.03(c) shall not prohibit the Company from refinancing at maturity any
of its Subordinated Obligations outstanding on the Issue Date; provided further,
however, that this Section 4.03(c) shall not prohibit the Refinancing of the
Company's 7-7/8% Convertible Subordinated Securities due 1999.
(d) For purposes of determining compliance with this Section 4.03,
(i) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(ii) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
(e) Notwithstanding Sections 4.03(a) and (b) above, the Company shall
not, and the Company shall not permit any Subsidiary Guarantor to, Incur (i) any
Indebtedness if such Indebtedness is subordinate or junior in ranking in any
respect to any Senior Indebtedness of such Person, unless such Indebtedness is
Senior Subordinated Indebtedness of such Person or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness of such Person or (ii) any
Secured Indebtedness that is not Senior Indebtedness of such Person unless
contemporaneously therewith effective provision is made to secure the Securities
equally and ratably with such Secured Indebtedness for so long as such
Indebtedness is secured by a Lien.
Section 4.04. Limitation on Restricted Payments. (a) The Company
shall not, and shall not permit any Restricted Subsidiary, directly or
indirectly, to make a Restricted Payment if at the time the Company or such
Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have
occurred and be continuing (or would result therefrom); (2) the Company is not
able to Incur an
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49
additional $1.00 of Indebtedness pursuant to Section 4.03(a); or (3) the
aggregate amount of such Restricted Payment and all other Restricted Payments
since the Original Issue Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the beginning of the fiscal quarter immediately following the
fiscal quarter during which the Existing Securities were originally issued to
the end of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment (or, in case such Consolidated Net Income shall
be a deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds
received by the Company from the issuance or sale of its Capital Stock (other
than Disqualified Stock) subsequent to the Original Issue Date (other than an
issuance or sale to a Subsidiary of the Company and other than an issuance or
sale to an employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their employees); (C) the
aggregate Net Cash Proceeds received by the Company from the issue or sale
subsequent to the Original Issue Date of its Capital Stock (other than
Disqualified Stock) to an employee stock ownership plan; provided, however, that
if such employee stock ownership plan incurs any Indebtedness with respect
thereto, such aggregate amount shall be limited to an amount equal to any
increase in the Consolidated Net Worth of the Company resulting from principal
repayments made by such employee stock ownership plan with respect to such
Indebtedness; (D) the amount by which Indebtedness of the Company is reduced on
the Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Original Issue Date, of any
Indebtedness of the Company convertible or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company (less the amount of any cash, or the
fair value of any other property, distributed by the Company upon such
conversion or exchange); and (E) an amount equal to the sum of (i) the net
reduction in Investments in Unrestricted Subsidiaries resulting from dividends,
repayments of loans or advances or other transfers of assets, in each case to
the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, and
(ii) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall not exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously made
(and treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary.
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50
(b) The provisions of Section 4.04(a) shall not prohibit: (i) any
purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other Capital Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided, however, that
(A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under Section 4.04(a)(3)(B) (but
only to the extent that such Net Cash Proceeds were used to purchase or redeem
such Capital Stock as provided in this Section 4.04(b)(i)); (ii) any purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value
of Subordinated Obligations made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Indebtedness of the Company which is permitted
to be Incurred pursuant to Section 4.03; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value
shall be excluded in the calculation of the amount of Restricted Payments; (iii)
dividends paid within 60 days after the date of declaration thereof if at such
date of declaration such dividend would have complied with this Section 4.04;
provided, however, that at the time of payment of such dividend, no other
Default shall have occurred and be continuing (or result therefrom); provided
further, however, that such dividend shall be included in the calculation of the
amount of Restricted Payments; (iv) the repurchase of shares of, or options to
purchase shares of, common stock of the Company or any of its Subsidiaries from
employees, former employees, directors or former directors of the Company or any
of its Subsidiaries (or permitted transferees of such employees, former
employees, directors or former directors), pursuant to the terms of the
agreements (including employment agreements) or plans (or amendments thereto)
approved by the Board of Directors under which such individuals purchase or sell
or are granted the option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such repurchases shall not
exceed $1.0 million in any calendar year and $6.0 million in the aggregate
during the period from and after the Original Issue Date; provided further,
however, that such repurchases shall be excluded in the calculation of the
amount of Restricted Payments; (v) amounts paid to holders of the Company's
Convertible Exchangeable Preferred Stock to the extent such amounts do not
exceed the amount of dividends in arrears through and
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51
including November 1, 1996 in respect of such Convertible Exchangeable Preferred
Stock; provided, however, that at the time of payment of such amounts, no
Default shall have occurred and be continuing (or result therefrom); provided
further, however, that such amounts shall be excluded in the calculation of the
amount of Restricted Payments; (vi) dividends paid from time to time in respect
of the Company's Convertible Exchangeable Preferred Stock (other than amounts
permitted by clause (v) above); provided, however, that at the time of payment
of such dividends, no Default shall have occurred and be continuing (or result
therefrom); provided further, however, that the amount of such dividends shall
be included in the calculation of the amount of Restricted Payments; or (vii)
other Restricted Payments in an aggregate amount not to exceed $10.0 million
since the Original Issue Date; provided, however, that such Restricted Payment
shall be excluded in the calculation of the amount of Restricted Payments.
Section 4.05. Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary (a) to pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness owed to the Company or a Restricted
Subsidiary, (b) to make any loans or advances to the Company or a Restricted
Subsidiary or (c) to transfer any of its property or assets to the Company or a
Restricted Subsidiary, except: (i) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Original Issue Date; (ii) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary
on or prior to the date on which such Restricted Subsidiary was acquired by the
Company (other than Indebtedness Incurred as consideration in, or to provide all
or any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the Company) and
outstanding on such date; (iii) any encumbrance or restriction pursuant to an
agreement effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of this Section 4.05 or this clause
(iii) or contained in any amendment to an agreement referred to in clause (i) or
(ii) of this Section 4.05 or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment are
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52
no less favorable to the Securityholders than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in such agreements; (iv) any
such encumbrance or restriction consisting of customary nonassignment provisions
in leases governing leasehold interests to the extent such provisions restrict
the transfer of the lease or the property leased thereunder; (v) in the case of
clause (c) above, restrictions contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements or
mortgages; and (vi) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition.
Section 4.06. Limitation on Sales of Assets and Subsidiary Stock.
(a) In the event and to the extent that the Net Available Cash received by the
Company or any Restricted Subsidiary from one or more Asset Dispositions
occurring on or after the Original Issue Date in any period of 12 consecutive
months exceeds 10% of Adjusted Consolidated Assets as of the beginning of such
12-month period, then the Company shall (i) within 180 days (in the case of
clause (A) below) or 360 days (in the case of clause (B) below) after the date
such Net Available Cash so received exceeds such 10% of Adjusted Consolidated
Assets (A) apply an amount equal to such excess Net Available Cash to repay
Senior Indebtedness of the Company or Indebtedness of a Restricted Subsidiary,
in each case owing to a Person other than the Company or any Affiliate of the
Company or (B) invest an equal amount, or the amount not so applied pursuant to
clause (A), in Additional Assets or a Permitted Business Investment, (ii) within
120 days of the expiration of the period described in clause (i) (B) above,
apply such excess Net Available Cash, or the amount not applied pursuant to
clause (i), to fund the purchase price of Existing Securities tendered in
response to an Excess Proceeds Offer (as defined in the Existing Indenture) for
the Existing Securities or (iii) apply such excess Net Available Cash (to the
extent not applied pursuant to clause (i) or (ii)) as provided in the following
paragraphs of this Section 4.06. The amount of such excess Net Available Cash
required to be applied during the applicable period and not applied as so
required by the end of such period shall constitute "Excess Proceeds".
(b)(i) If, as of the first day of any calendar month, the aggregate
amount of Excess Proceeds not theretofore subject to an Excess Proceeds Offer
(as defined
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53
below) totals at least $10.0 million, the Company must, not later than the
fifteenth Business Day of such month, make an offer (an "Excess Proceeds Offer")
to purchase from the Holders on a pro rata basis an aggregate principal amount
of Securities equal to the Excess Proceeds (rounded down to the nearest multiple
of $1,000) on such date, at a purchase price equal to 100% of the principal
amount of such Securities, plus, in each case, accrued interest (if any) to the
date of purchase (the "Excess Proceeds Payment").
(ii) The Company shall commence any Excess Proceeds Offer with
respect to the Securities by mailing a notice to the Trustee and each Holder
stating: (A) that the Excess Proceeds Offer is being made pursuant to this
Section 4.06 and that all Securities validity tendered will be accepted for
payment on a pro rata basis; (B) the purchase price and the date of purchase
(which shall be a Business Day no earlier than 30 days nor later than 60 days
from the date such notice is mailed) (the "Excess Proceeds Payment Date"); (C)
that any Security not tendered will continue to accrue interest pursuant to its
terms; (D) that, unless the Company defaults in the payment of the Excess
Proceeds Payment, any Security accepted for payment pursuant to the Excess
Proceeds Offer shall cease to accrue interest on and after the Excess Proceeds
Payment Date; (E) that Holders electing to have a Security purchased pursuant to
the Excess Proceeds Offer will be required to surrender the Security, together
with the form entitled "Option of Holder to Elect Purchase" on the reverse side
of the Security completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately preceding
the Excess Proceeds Payment Date; (F) that Holders will be entitled to withdraw
their election if the Paying Agent receives, not later than the close of
business on the third Business Day immediately preceding the Excess Proceeds
Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such Holder, the principal amount of Securities delivered for purchase
and a statement that such Holder is withdrawing his election to have such
Securities purchased; and (G) that Holders whose Securities are being purchased
only in part will be issued new Securities equal in principal amount to the
unpurchased portion of the Securities surrendered; provided, however, that each
Security purchased and each new Security issued shall be in a principal amount
of $1,000 or integral multiples thereof.
(iii) On the Excess Proceeds Payment Date, the Company shall (A)
accept for payment on a pro rata basis Securities or portions thereof tendered
pursuant to the Excess Proceeds Offer, (B) deposit with the Paying Agent
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54
money sufficient to pay the purchase price of all Securities or portions thereof
so accepted, and (C) deliver, or cause to be delivered, to the Trustee all
Securities or portions thereof so accepted together with an Officers'
Certificate specifying the Securities or portions thereof so accepted for
payment by the Company. The Paying Agent shall promptly mail to the Holders of
Securities so accepted payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a new Security
equal in principal amount to any unpurchased portion of the Security
surrendered; provided, however; that each Security purchased and each new
Security issued shall be in a principal amount of $1,000 or integral multiples
thereof. The Company will publicly announce the results of the Excess Proceeds
Offer as soon as practicable after the Excess Proceeds Payment Date. For
purposes of this Section 4.06, the Trustee shall act as the Paying Agent.
(iv) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations thereunder in the event that such Excess Proceeds are received by
the Company under this Section 4.06 and the Company is required to repurchase
Securities as described above. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of this Section
4.06, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under this
Section 4.06 by virtue thereof.
(c) In the event of the transfer of substantially all (but not all)
the property and assets of the Company as an entirety to a Person in a
transaction permitted by Section 5.01, the Successor Company (as defined
therein) shall be deemed to have sold the properties and assets of the Company
not so transferred for purposes of the covenant described hereunder, and shall
comply with the provisions of the covenant described hereunder with respect to
such deemed sale as if it were an Asset Disposition and the Successor Company
shall be deemed to have received Net Available Cash in an amount equal to the
fair market value (as determined in good faith by the Board of Directors) of the
properties and assets not so transferred or sold.
(d) In the event of an Asset Disposition by the Company or any
Restricted Subsidiary that consists of a sale of hydrocarbons and results in
Production Payments, the Company or such Restricted Subsidiary shall apply an
amount equal to the Net Available Cash received by the Company or such
Restricted Subsidiary to (i) reduce Senior Indebtedness
<PAGE>
55
of the Company or Indebtedness of a Restricted Subsidiary, in each case owing to
a Person other than the Company or any Affiliate of the Company, within 180 days
after the date such Net Available Cash is so received or (ii) invest in
Additional Assets or a Permitted Business Investment within 360 days after the
date such Net Available Cash is so received.
Section 4.07. Limitation on Affiliate Transactions. (a) The
Company shall not, and shall not permit any Restricted Subsidiary to, enter into
or permit to exist any transaction (including the purchase, sale, lease or
exchange of any property, employee compensation arrangements or the rendering of
any service) with any Affiliate of the Company (an "Affiliate Transaction")
unless the terms thereof (1) are no less favorable to the Company or such
Restricted Subsidiary than those that could be obtained at the time of such
transaction in arm's-length dealings with a Person who is not such an Affiliate,
(2) if such Affiliate Transaction involves an amount in excess of $1.0 million,
is set forth in writing and has been approved by a majority of the members of
the Board of Directors having no personal stake in such Affiliate Transaction or
(3) if such Affiliate Transaction involves an amount in excess of $10.0 million,
has been determined by a nationally recognized investment banking firm to be
fair, from a financial standpoint, to the Company and its Restricted
Subsidiaries.
(b) The provisions of Section 4.07(a) shall not prohibit (i) any sale
of hydrocarbons or other mineral products or the entering into or performance of
Oil and Gas Hedging Contracts, gas gathering, transportation or processing
contracts or oil or natural gas marketing or exchange contracts, in each case,
in the ordinary course of business, so long as the terms of any such transaction
are approved by a majority of the members of the Board of Directors who are
disinterested with respect to such transaction as being the most favorable of at
least (x) two bids, quotes or proposals, at least one of which is from a Person
that is not an Affiliate of the Company (in the event that the Company
determines in good faith that it is able to obtain only two bids, quotes or
proposals with respect to such transaction) or (y) three bids, quotes or
proposals, at least two of which are from Persons that are not Affiliates of the
Company (in all other circumstances), (ii) the sale to an Affiliate of the
Company of Capital Stock of the Company that does not constitute Disqualified
Stock, (iii) transactions contemplated by any employment agreement or other
compensation plan or arrangement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
industry
<PAGE>
56
practice, (iv) transactions between or among the Company and its Restricted
Subsidiaries, (v) Restricted Payments and Permitted Investments that are
permitted by Section 4.04, and (vi) the transactions described in the Company's
Offering Memorandum, dated October 25, 1996, relating to the initial issuance of
securities under the Existing Indenture, under the caption "Certain
Transactions" and (vii) loans or advances to employees in the ordinary course of
business and approved by the Company's Board of Directors in an aggregate
principal amount not to exceed $1.0 million outstanding at any one time.
Section 4.08. Change of Control. (a) Upon the occurrence of a
Change of Control, each Holder shall have the right to require that the Company
repurchase such Holder's Securities at a purchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of Holders of record on the relevant
record date to receive interest on the relevant interest payment date), in
accordance with the terms contemplated in Section 4.08(b). In the event that at
the time of such Change of Control the terms of the Indebtedness under the
Credit Agreement restrict or prohibit the repurchase of Securities pursuant to
this Section, then prior to the mailing of the notice to Holders provided for in
Section 4.08(b) below but in any event within 30 days following any Change of
Control, the Company shall (i) repay in full all Indebtedness under the Credit
Agreement or offer to repay in full all such Indebtedness and repay such
Indebtedness of each lender which has accepted such offer or (ii) obtain the
requisite consent under the agreements governing the Indebtedness under the
Credit Agreement to permit the repurchase of the Securities as provided for in
Section 4.08(b).
(b) Within 30 days following any Change of Control, the Company shall
mail a notice to each Holder with a copy to the Trustee stating: (1) that a
Change of Control has occurred and that such Holder has the right to require the
Company to purchase such Holder's Securities at a purchase price in cash equal
to 101% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase (subject to the right of Holders of record on the
relevant record date to receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income, cash flow
and capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined
<PAGE>
57
by the Company, consistent with this Section 4.08, that a Holder must follow in
order to have its Securities purchased.
(c) Holders electing to have a Security purchased will be required to
surrender the Security, with an appropriate form duly completed, to the Company
at the address specified in the notice at least three Business days prior to the
purchase date. Holders will be entitled to withdraw their election if the
Trustee or the Company receives not later than one Business Day prior to the
purchase date, a telegram, telex, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the Security which was delivered
for purchase by the Holder and a statement that such Holder is withdrawing his
election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the Company
under this Section shall be delivered by the Trustee for cancellation, and the
Company shall pay the purchase price plus accrued and unpaid interest, if any,
to the Holders entitled thereto.
(e) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section 4.08. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under this Section 4.08 by
virtue thereof.
(f) Notwithstanding the foregoing, the Company shall not be required
to comply with the provisions of this Section 4.08 to the extent any other
Person complies with such provisions as if such Person were the Company.
Section 4.09. Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries. The Company shall not sell or otherwise dispose of any
shares of Capital Stock of a Restricted Subsidiary, and shall not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise
dispose of any shares of its Capital Stock except (i) to the Company or a Wholly
Owned Subsidiary, (ii) if, immediately after giving effect to such issuance,
sale or other disposition, the Company and its Restricted Subsidiaries would own
less than 20% of the Voting Stock of such Restricted Subsidiary and have no
greater economic interest in such Restricted Subsidiary, (iii) if,
<PAGE>
58
immediately after giving effect to such issuance, sale or other disposition, the
Company and its Restricted Subsidiaries would own greater than 80% of the Voting
Stock of such Restricted Subsidiary and have no lesser economic interest in such
Restricted Subsidiary or (iv) to the extent such shares represent directors'
qualifying shares or shares required by applicable law to be held by a Person
other than the Company or a Restricted Subsidiary.
Section 4.10. Limitation on Liens. The Company shall not, and shall
not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit
to exist any Lien of any nature whatsoever on any of its properties (including
Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or
thereafter acquired, to secure Indebtedness that is not Senior Indebtedness of
the Company or such Restricted Subsidiary, other than Permitted Liens, without
effectively providing that the Securities or the applicable Subsidiary Guaranty
shall be secured equally and ratably with (or prior to) the obligations so
secured for so long as such obligations are so secured.
Section 4.11. Limitation on Sale/Leaseback Transactions. The Company
shall not, and shall not permit any Restricted Subsidiary to, enter into any
Sale/Leaseback Transaction with respect to any property unless (i) the Company
or such Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an
amount equal to the Attributable Debt with respect to such Sale/Leaseback
Transaction pursuant to Section 4.03 and (B) create a Lien on such property
securing such Attributable Debt without equally and ratably securing the
Securities or the applicable Subsidiary Guaranty pursuant to Section 4.10, (ii)
the net proceeds received by the Company or any Restricted Subsidiary in
connection with such Sale/Leaseback Transaction are at least equal to the fair
value (as determined by the Board of Directors) of such property and (iii) the
Company applies the proceeds of such transaction in compliance with Section
4.06.
Section 4.12. Future Guarantors. Promptly after the end of the first
fiscal year in which any Restricted Subsidiary (other than the Programs), at the
end of such fiscal year, has total net assets (as set forth on the balance sheet
of such Subsidiary prepared in accordance with GAAP) equal to or greater than
the greater of $2.5 million and one percent (1%) of Adjusted Consolidated Net
Tangible Assets, the Company shall cause such Restricted Subsidiary to issue a
Subsidiary Guaranty for the benefit of the holders of the Securities.
<PAGE>
59
Section 4.13. Compliance Certificate. The Company shall deliver to
the Trustee within 120 days after the end of each fiscal year of the Company an
Officers' Certificate stating that in the course of the performance by the
signers of their duties as Officers of the Company they would normally have
knowledge of any Default and whether or not the signers know of any Default that
occurred during such fiscal year. If they do, the certificate shall describe
the Default, its status and what action the Company is taking or proposes to
take with respect thereto. The Company also shall comply with TIA (S)
314(a)(4).
Section 4.14. Further Instruments and Acts. Upon request of the
Trustee, the Company will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
ARTICLE 5
Successor Company
-----------------
Section 5.01. When Company May Merge or Transfer Assets. The Company
shall not consolidate with or merge with or into, or convey, transfer or lease,
in one transaction or a series of transactions, all or substantially all its
assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental hereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under
the Securities and this Indenture;
(ii) immediately after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the Successor Company or
any Restricted Subsidiary as a result of such transaction as having been
Incurred by the Successor Company or any Subsidiary as a result of such
transaction as having been Incurred by such Successor Company or such
Subsidiary at the time of such transaction), no Default shall have occurred
and be continuing;
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60
(iii) immediately after giving effect to such transaction, the
Successor Company would be able to incur an additional $1.00 of
Indebtedness pursuant to Section 4.03(a) or, if applicable, Section
4.03(b)(13);
(iv) immediately after giving effect to such transaction, the
Successor Company shall have Adjusted Consolidated Net Tangible Assets in
an amount that is not less than the Adjusted Consolidated Net Tangible
Assets of the Company immediately prior to such transaction; and
(v) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with this Indenture;
provided, however, that clauses (iii) and (iv) shall not be applicable to any
such transaction solely between the Company and any Restricted Subsidiary.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease of all or substantially all its assets shall not
be released from the obligation to pay the principal of and interest on the
Securities.
Section 5.02. When Subsidiary Guarantors May Merge or Transfer
Assets. The Company will not permit any Subsidiary Guarantor to consolidate
with or merge with or into, or convey, transfer or lease, in one transaction or
series of transactions, all or substantially all its assets to any Person
unless: (i) the resulting, surviving or transferee Person shall expressly
assume by a guaranty agreement, in a form acceptable to the Trustee, all the
obligations of such Subsidiary Guarantor, if any, under its Subsidiary Guaranty;
(ii) immediately after giving effect to such transaction or transactions on a
pro forma basis (and, treating any Indebtedness which becomes an obligation of
the resulting, surviving or transferee Person as a result of such transaction as
having been issued by such Person at time of such transaction), no Default shall
have occurred and be continuing; and (iii) the Company delivers to the Trustee
an Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such guaranty agreement, if any, complies
with this Indenture. Notwithstanding the foregoing, if any Subsidiary Guarantor
is released from its obligations under its
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61
Subsidiary Guaranty pursuant to Section 11.06, then such Subsidiary Guarantor's
successor or transferee shall be released from all of such Subsidiary
Guarantor's obligations under its Subsidiary Guaranty.
ARTICLE 6
Defaults and Remedies
---------------------
Section 6.01. Events of Default. An "Event of Default" occurs if:
(1) the Company defaults in any payment of interest on any Security
when the same becomes due and payable, whether or not such payment shall be
prohibited by Article 10, and such default continues for a period of 30
days;
(2) the Company (i) defaults in the payment of the principal of any
Security when the same becomes due and payable at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment shall be prohibited by Article 10 or
(ii) fails to redeem or purchase Securities when required pursuant to this
Indenture or the Securities, whether or not such redemption or purchase
shall be prohibited by Article 10;
(3) the Company fails to comply with Section 5.01;
(4) the Company fails to comply with Section 4.02, 4.03, 4.04, 4.05,
4.06 (other than a failure to purchase Securities when required under
Section 4.06), 4.07, 4.08 (other than a failure to purchase Securities when
required under Section 4.08), 4.09, 4.10, 4.11 or 4.12 and such failure
continues for 30 days after the notice specified below;
(5) the Company fails to comply with any of its agreements contained
in the Securities or in this Indenture (other than those referred to in
(1), (2), (3) or (4) above) and such failure continues for 60 days after
the notice specified below;
(6) Indebtedness of the Company or any Significant Subsidiary (other
than Limited Recourse Indebtedness) is not paid within any applicable grace
period after final maturity or is accelerated by the holders thereof
because of a default and the total amount of such
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62
Indebtedness unpaid or accelerated exceeds $10.0 million or its foreign
currency equivalent at the time;
(7) the Company or any Significant Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in an
involuntary case;
(C) consents to the appointment of a Custodian of it or for any
substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(8) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any Significant
Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Company or any
Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order
or decree remains unstayed and in effect for 60 days;
(9) any judgment or decree for the payment of money in excess of $10.0
million or its foreign currency equivalent at the time is rendered against
the Company or a Significant Subsidiary and is not discharged and either
(A) an enforcement proceeding has been commenced by any creditor upon such
judgment or decree or (B) there is a period of 60 days following the entry
of such judgment or decree during which such judgment or decree is not
discharged, waived or the execution thereof stayed, in either case 10 days
after the notice specified below; or
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63
(10) any Subsidiary Guaranty ceases to be in full force and effect
(other than in accordance with the terms of such Subsidiary Guaranty) or a
Subsidiary Guarantor denies or disaffirms its obligations under its
Subsidiary Guaranty if such default continues for a period of 10 days after
the notice specified below.
The foregoing will constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
The term "Bankruptcy Law" means Title 11, United States Code, or any
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, custodian or similar official
under any Bankruptcy Law.
A Default under clause (4), (5), (9) or (10) is not an Event of
Default until the Trustee or the Holders of at least 25% in principal amount of
the Securities notify the Company of the Default and the Company does not cure
such Default within the time specified after receipt of such notice. Such
notice must specify the Default, demand that it be remedied and state that such
notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any Event of Default under clause (6) and any event which with the giving of
notice or the lapse of time would become an Event of Default under clause (4) or
(5), its status and what action the Company is taking or proposes to take with
respect thereto. The Trustee shall not be deemed to have knowledge of any
Default or Event of Default unless one of its Trust Officers receives written
notice thereof from the Company or any of the Holders.
Section 6.02. Acceleration. If an Event of Default (other than an
Event of Default specified in Section 6.01(7) or (8) with respect to the
Company) occurs and is continuing, the Trustee by written notice to the Company,
or the Holders of at least 25% in principal amount of the outstanding Securities
by written notice to the Company and the Trustee, may declare the principal of
and accrued but unpaid interest on all the Securities to be due and payable.
Upon such a declaration, such principal and interest shall be due and payable
immediately. If an Event
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64
of Default specified in Section 6.01(7) or (8) with respect to the Company
occurs and is continuing, the principal of and interest on all the Securities
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Securityholders.
The Holders of a majority in principal amount of the outstanding Securities by
written notice to the Trustee may rescind any such acceleration and its
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
acceleration. No such rescission shall affect any subsequent Default or impair
any right consequent thereto.
Section 6.03. Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Securities or to enforce the performance of
any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder 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. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
Section 6.04. Waiver of Past Defaults. The Holders of a majority in
principal amount of the Securities by written notice to the Trustee may waive an
existing Default and its consequences except (i) a Default in the payment of the
principal of or interest on a Security or (ii) a Default in respect of a
provision that under Section 9.02 cannot be amended without the consent of each
Securityholder affected. When a Default is waived, it is deemed cured, but no
such waiver shall extend to any subsequent or other Default or impair any
consequent right.
Section 6.05. Control by Majority. The Holders of a majority in
principal amount of the outstanding Securities may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or this Indenture or,
subject to Section 7.01, that the Trustee determines is unduly prejudicial to
the rights of other Securityholders or
<PAGE>
65
would involve the Trustee in personal liability; provided, however, that the
Trustee may take any other action deemed proper by the Trustee that is not
inconsistent with such direction. Prior to taking any action hereunder, the
Trustee shall be entitled to indemnification satisfactory to it in its sole
discretion against all losses and expenses caused by taking or not taking such
action.
Section 6.06. Limitation on Suits. A Securityholder may not pursue
any remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating that an
Event of Default is continuing;
(2) the Holders of at least 25% in principal amount of the Securities
make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the outstanding
Securities do not give the Trustee a direction inconsistent with the
request during such 60-day period.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over another
Securityholder.
Section 6.07. Rights of Holders To Receive Payment. Notwithstanding
any other provision of this Indenture, the right of any Holder to receive
payment of principal of, premium (if any) or interest on the Securities held by
such Holder, on or after the respective due dates expressed in the Securities,
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 6.08. Collection Suit by Trustee. If an Event of Default
specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount then due and owing (together
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66
with interest on any unpaid interest to the extent lawful) and the amounts
provided for in Section 7.07.
Section 6.09. Trustee May File Proofs of Claim. The Trustee may 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 and the Securityholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property and, unless prohibited by law or applicable regulations, may vote
on behalf of the Holders in any election of a trustee in bankruptcy or other
Person performing similar functions, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to the Trustee
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 it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and its counsel, and any other amounts due the Trustee under Section
7.07.
Section 6.10. Priorities. If the Trustee collects any money or
property pursuant to this Article 6, it shall pay out the money or property in
the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to holders of Senior Indebtedness to the extent required by
Article 10;
THIRD: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
FOURTH: to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section. At least 15 days before such record
date, the Company shall mail to each Securityholder and the Trustee a notice
that states the record date, the payment date and amount to be paid.
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
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67
taken or omitted by it as 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, 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 pursuant to Section 6.07 or a suit by Holders of more than an aggregate
of 10% in principal amount of the Securities.
Section 6.12. Waiver of Stay or Extension Laws. The Company (to the
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension 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 shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE 7
Trustee
-------
Section 7.01. Duties of Trustee. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent Person would exercise or use under the circumstances
in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture 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
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68
furnished to the Trustee and conforming to the requirements of this
Indenture. However, the Trustee shall examine such certificates and
opinions to determine whether or not they conform to the requirements of
this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(1) this paragraph does not limit the effect of paragraph (b) of this
Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) 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 6.05.
(d) 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) 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.
(f) Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to
advance, expend or risk its own funds or otherwise incur financial liability in
the performance of any of its duties hereunder or in the exercise of any of its
rights or powers. The Trustee, however, may so advance or expend its own funds
if, in its own reasonable judgment, the Trustee believes that repayment of such
funds or adequate indemnity against such risk or liability has been reasonably
assured to it.
(h) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
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69
(i) Notwithstanding anything to the contrary herein, the Trustee
shall have no duty to review the reports and information documents required to
be provided by Section 4.02 for the purposes of determining compliance with any
provisions of this Indenture.
Section 7.02. Rights of Trustee. (a) The Trustee may rely on 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 Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on the
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through 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 which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute wilful
misconduct or negligence.
(e) The Trustee may consult with counsel, and the advice or opinion
of counsel with respect to legal matters relating to this Indenture and the
Securities shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder in
good faith and in accordance with the advice or opinion of such counsel.
Section 7.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar
or co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 7.10 and 7.11.
Section 7.04. 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 Securities, it shall not be accountable for the Company's
use of the proceeds from the Securities, and it shall not be responsible for any
statement of the Company in the
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Indenture or in any document issued in connection with the sale of the
Securities or in the Securities other than the Trustee's certificate of
authentication.
Section 7.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case of a Default in payment of principal of or interest on any Security
(including payments pursuant to the mandatory redemption provisions of such
Security, if any), the Trustee may withhold the notice if and so long as the
Trust Officer responsible for administering this Indenture and the Securities in
good faith determines that withholding notice is not opposed to the interests of
Securityholders.
Section 7.06. Reports by Trustee to Holders. Within sixty (60) days
after May 15 of each year, beginning with May 15, 1997, the Trustee shall mail
to each Securityholder a brief report dated as of May 15 of such year, that
complies with TIA (S) 313(a). The Trustee also shall comply with TIA (S)
313(b).
A copy of each report at the time of its mailing to Securityholders
shall be filed with the SEC and each stock exchange (if any) on which the
Securities are listed. The Company agrees to notify promptly the Trustee
whenever the Securities become listed on any stock exchange and of any delisting
thereof.
Section 7.07. Compensation and Indemnity. The Company shall pay to
the Trustee from time to time and upon its request reasonable compensation for
its services. 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 upon request for all reasonable out-of-pocket expenses incurred or made
by it, including costs of collection, in addition to the compensation for its
services. Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Trustee's agents, counsel, accountants and
experts. The Company shall indemnify the Trustee against any and all loss,
liability or expense (including attorneys' fees) incurred by it in connection
with the administration of this trust and the performance of its duties
hereunder, including the costs and expenses of enforcing this Indenture against
the Company (including under Section 7.07). The Trustee shall notify the
Company promptly of any claim (whether asserted by any Securityholder or the
Company) for which it may seek indemnity. Failure by the Trustee to so notify
the Company shall not relieve the Company of its obligations
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71
hereunder. The Company shall defend the claim and the Trustee may have separate
counsel and the Company shall pay the fees and expenses of such counsel. The
Company need not reimburse any expense or indemnify against any loss, liability
or expense incurred by the Trustee through the Trustee's own wilful misconduct,
negligence or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Securities.
The Company's payment obligations pursuant to this Section shall
survive the discharge of this Indenture. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 6.01(7) or (8) with respect to
the Company, the expenses are intended to constitute expenses of administration
under the Bankruptcy Law.
Section 7.08. Replacement of Trustee. The Trustee may resign at any
time by so notifying the Company. The Holders of a majority in principal amount
of the Securities may remove the Trustee by so notifying the Trustee and may
appoint a successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders of
a majority in principal amount of the Securities and such Holders do not
reasonably promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint 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
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72
mail a notice of its succession to Securityholders. The retiring Trustee shall
promptly transfer all property held by it as Trustee to the successor Trustee,
subject to the lien provided for in Section 7.07.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
10% in principal amount of the Securities may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this
Section, the Company's obligations under Section 7.07 shall continue for the
benefit of the retiring Trustee.
Section 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger, conversion
or consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Securities shall have been authenticated but not delivered,
any such successor to the Trustee may adopt the certificate of authentication of
any predecessor trustee, and deliver such Securities so authenticated; and in
case at that time any of the Securities shall not have been authenticated, any
successor to the Trustee may authenticate such Securities either in the name of
any predecessor hereunder or in the name of the successor to the Trustee; and in
all such cases such certificates shall have the full force which it is anywhere
in the Securities or in this Indenture provided that the certificate of the
Trustee shall have.
Section 7.10. Eligibility; Disqualification. The Trustee shall at
all times satisfy the requirements of TIA (S) 310(a). The Trustee shall have a
combined capital and surplus of at least $50.0 million as set forth in its most
recent annual report of condition. The Trustee shall comply with TIA (S)
310(b); provided, however, that there shall be excluded from the operation of
TIA (S) 310(b)(1) any indenture
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73
or indentures under which other securities or certificates of interest or
participation in other securities of the Company are outstanding if the
requirements for such exclusion set forth in TIA (S) 310(b)(1) are met.
Section 7.11. Preferential Collection of Claims Against Company. The
Trustee shall comply with TIA (S) 311(a), excluding any creditor relationship
listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be
subject to TIA (S) 311(a) to the extent indicated.
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
Section 8.01. Discharge of Liability on Securities; Defeasance. (a)
When (i) the Company delivers to the Trustee all outstanding Securities (other
than Securities replaced pursuant to Section 2.08) for cancellation or (ii) all
outstanding Securities have become due and payable, whether at maturity or as a
result of the mailing of a notice of redemption pursuant to Article 3 hereof and
the Company irrevocably deposits with the Trustee funds sufficient to pay at
maturity or upon redemption all outstanding Securities, including interest
thereon to maturity or such redemption date (other than Securities replaced
pursuant to Section 2.08), and if in either case the Company pays all other sums
payable hereunder by the Company, then this Indenture shall, subject to Section
8.01(c), cease to be of further effect. The Trustee shall acknowledge
satisfaction and discharge of this Indenture on demand of the Company
accompanied by an Officers' Certificate and an Opinion of Counsel and at the
cost and expense of the Company.
(b) Subject to Sections 8.01(c) and 8.02, the Company at any time may
terminate (i) all its obligations under the Securities and this Indenture
("legal defeasance option") or (ii) its obligations under Sections 4.02, 4.03,
4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11 and 4.12 and the operation of
Sections 6.01(4), 6.01(6), 6.01(7) (but only with respect to Significant
Subsidiaries), 6.01(8) (but only with respect to Significant Subsidiaries),
6.01(9) and 6.01(10) and its obligations under Sections 5.01(iii) and (iv)
("covenant defeasance option"). The Company may exercise its legal defeasance
option notwithstanding its prior exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated
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74
because of an Event of Default. If the Company exercises its covenant
defeasance option, payment of the Securities may not be accelerated because of
an Event of Default specified in Section 6.01(4), 6.01(6), 6.01(7) (but only
with respect to Significant Subsidiaries), 6.01(8) (but only with respect to
Significant Subsidiaries), 6.01(9) or 6.01(10) or because of the failure of the
Company to comply with Section 5.01(iii) or (iv). If the Company exercises its
legal defeasance option or its covenant defeasance option, each Subsidiary
Guarantor, if any, will be released from all its obligations with respect to its
Subsidiary Guaranty.
Upon satisfaction of the conditions set forth herein and upon request
of the Company, the Trustee shall acknowledge in writing the discharge of those
obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.04, 2.05, 2.06, 2.08, 7.07, 7.08 and this Article 8
shall survive until the Securities have been paid in full. Thereafter, the
Company's obligations in Sections 7.07, 8.04 and 8.05 shall survive.
Section 8.02. Conditions to Defeasance. The Company may exercise its
legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations for the payment of principal and interest on
the Securities to maturity or redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal of and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any
deposited money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest when due
on all the Securities to maturity or redemption, as the case may be;
(3) 123 days pass after the deposit is made and during the 123-day
period no Default specified in Section 6.01(7) or (8) with respect to the
Company occurs which is continuing at the end of the period;
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(4) the deposit does not constitute a default under any other
agreement binding on the Company and is not prohibited by Article 10;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that the trust resulting from the deposit does not constitute, or is
qualified as, a regulated investment company under the Investment Company
Act of 1940;
(6) in the case of the legal defeasance option, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that (i) the Company
has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of this Indenture there has been a
change in the applicable Federal income tax law, in either case to the
effect that, and based thereon such Opinion of Counsel shall confirm that,
the Securityholders will not recognize income, gain or loss for Federal
income tax purposes as a result of such 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 defeasance had not occurred;
(7) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Securityholders will not recognize income, gain or loss for Federal
income tax purposes as a result of such covenant 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 covenant defeasance
had not occurred; and
(8) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Securities as contemplated by this Article
8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date in
accordance with Article 3.
Section 8.03. Application of Trust Money. The Trustee shall hold in
trust money or U.S. Government Obligations deposited with it pursuant to this
Article 8. It shall apply the deposited money and the money from U.S. Government
Obligations through the Paying Agent and in accordance with this Indenture to
the payment of
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principal of and interest on the Securities. Money and securities so held in
trust are not subject to Article 10.
Section 8.04. Repayment to Company. The Trustee and the Paying Agent
shall promptly turn over to the Company upon request any excess money or
securities held by them at any time.
Subject to any applicable abandoned property law, the Trustee and the
Paying Agent shall pay to the Company upon request any money held by them for
the payment of principal or interest that remains unclaimed for two years, and,
thereafter, Securityholders entitled to the money must look to the Company for
payment as general creditors.
Section 8.05. Indemnity for Government Obligations. The Company
shall pay and shall indemnify the Trustee against any tax, fee or other charge
imposed on or assessed against deposited U.S. Government Obligations or the
principal and interest received on such U.S. Government Obligations.
Section 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with this
Article 8 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 Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article 8 until such time as the Trustee
or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with this Article 8; provided, however, that, if the
Company has made any payment of interest on or principal of any Securities
because of the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the
money or U.S. Government Obligations held by the Trustee or Paying Agent.
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ARTICLE 9
Amendments
----------
Section 9.01. Without Consent of Holders. The Company and the
Trustee may amend this Indenture or the Securities without notice to or consent
of any Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or in
place of certificated Securities; provided, however, that the
uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code;
(4) to make any change in Article 10 that would limit or terminate the
benefits available to any holder of Senior Indebtedness (or Representatives
therefor) under Article 10;
(5) to add guarantees with respect to the Securities, including adding
any Subsidiary of the Company as a Subsidiary Guarantor under Article 11,
or to secure the Securities;
(6) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company;
(7) to comply with any requirements of the SEC in connection with
qualifying this Indenture under the TIA; or
(8) to make any change that does not adversely affect the rights of
any Securityholder.
An amendment under this Section may not make any change that adversely
affects the rights under Article 10 of any holder of Senior Indebtedness then
outstanding unless the holders of such Senior Indebtedness (or any group or
representative thereof authorized to give a consent) consent to such change.
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After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section.
Section 9.02. With Consent of Holders. The Company and the Trustee
may amend this Indenture or the Securities without notice to any Securityholder
but with the written consent of the Holders of at least a majority in principal
amount of the Securities. Without the consent of each Securityholder affected,
however, an amendment may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Security;
(3) reduce the principal of or extend the Stated Maturity of any
Security;
(4) reduce the premium payable upon a required purchase (to the extent
the Company has at the time become obligated by the terms of the Indenture
to effect a required purchase) or the redemption of any Security or change
the time at which any Security may be redeemed in accordance with Article
3;
(5) make any Security payable in money other than that stated in the
Security;
(6) make any change in Article 10 or that adversely affects the rights
of any Securityholder under Article 10;
(7) make any change in Section 6.04 or 6.07 or the second sentence of
this Section; or
(8) make any change in any Subsidiary Guaranty that would adversely
affect the Securityholders.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent approves the substance thereof.
An amendment under this Section may not make any change that adversely
affects the rights under Article 10 or the fourth paragraph of Section 11.01 of
any holder of
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Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or any group or representative thereof authorized to give a
consent) consent to such change.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section.
Section 9.03. Compliance with Trust Indenture Act. Every amendment
to this Indenture or the Securities shall comply with the TIA as then in effect.
Section 9.04. Revocation and Effect of Consents and Waivers. A
consent to an amendment or a waiver by a Holder of a Security shall bind the
Holder and every subsequent Holder of that Security or portion of the Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent or waiver is not made on the Security. However, any
such Holder or subsequent Holder may revoke the consent or waiver as to such
Holder's Security or portion of the Security if the Trustee receives the notice
of revocation before the date the amendment or waiver becomes effective. After
an amendment or waiver becomes effective, it shall bind every Securityholder.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Securityholders entitled to give their consent or
take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Securityholders at such
record date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
Section 9.05. Notation on or Exchange of Securities. If an amendment
changes the terms of a Security, the Trustee may require the Holder of the
Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in
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exchange for the Security shall issue and the Trustee shall authenticate a new
Security that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such
amendment.
Section 9.06. Trustee To Sign Amendments. The Trustee shall sign any
amendment authorized pursuant to this Article 9 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 7.01) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that such
amendment is authorized or permitted by this Indenture.
Section 9.07. Payment for Consent. Neither the Company nor any
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Securities unless such consideration is
offered to be paid or agreed to be paid to all Holders that so consent, waive or
agree to amend in the time frame set forth in solicitation documents relating to
such consent, waiver or agreement.
ARTICLE 10
Subordination
-------------
Section 10.01. Agreement To Subordinate. The Company agrees, and
each Securityholder by accepting a Security agrees, that the Indebtedness
evidenced by the Securities is subordinated in right of payment, to the extent
and in the manner provided in this Article 10, to the prior payment of all
Senior Indebtedness of the Company or the applicable Subsidiary Guarantor,
whether outstanding on the Issue Date or thereafter incurred, including the
Company's and such Subsidiary Guarantor's obligations under the Credit
Agreement, and that the subordination is for the benefit of and enforceable by
the holders of Senior Indebtedness. The Securities shall in all respects rank
pari passu with all other Senior Subordinated Indebtedness of the Company and
only Indebtedness of the Company which is Senior Indebtedness shall rank senior
to the Securities in accordance with the provisions set forth herein. All
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provisions of this Article 10 shall be subject to Section 10.12.
Section 10.02. Liquidation, Dissolution, Bankruptcy. Upon any
payment or distribution of the assets of the Company to creditors upon a total
or partial liquidation or a total or partial dissolution of the Company or in
a bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its property:
(1) holders of Senior Indebtedness shall be entitled to receive
payment in full of the Senior Indebtedness before Securityholders shall be
entitled to receive any payment of principal of or interest on the
Securities; and
(2) until the Senior Indebtedness is paid in full, any payment or
distribution to which Securityholders would be entitled but for this
Article 10 shall be made to holders of Senior Indebtedness as their
interests may appear, except that Securityholders may receive shares of
stock and any debt securities that are subordinated to Senior
Indebtedness to at least the same extent as the Securities.
Section 10.03. Default on Designated Senior Indebtedness. The
Company may not pay the principal of, premium (if any) or interest on the
Securities or make any deposit pursuant to Section 8.01 and may not repurchase,
redeem or otherwise retire any Securities (collectively, "pay the Securities")
if (i) any Designated Senior Indebtedness is not paid when due or (ii) any other
default on Designated Senior Indebtedness occurs and the maturity of such
Designated Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, (x) the default has been cured or waived and any such
acceleration has been rescinded or (y) such Designated Senior Indebtedness has
been paid in full; provided, however, that the Company may pay the Securities
without regard to the foregoing if the Company and the Trustee receive written
notice approving such payment from the Representative of the Designated Senior
Indebtedness with respect to which either of the events set forth in clause (i)
or (ii) of this sentence has occurred and is continuing. During the continuance
of any default (other than a default described in clause (i) or (ii) of the
preceding sentence) with respect to any Designated Senior Indebtedness pursuant
to which the maturity thereof may be accelerated immediately without further
notice (except such notice as may be required to effect such acceleration) or
the expiration of any applicable grace periods, the Company may not pay the
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Securities for a period (a "Payment Blockage Period") commencing upon the
receipt by the Trustee (with a copy to the Company) of written notice (a
"Blockage Notice") of such default from the Representative of the holders of
such Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Trustee and the
Company from the Person or Persons who gave such Blockage Notice, (ii) because
the default giving rise to such Blockage Notice is no longer continuing or (iii)
because such Designated Senior Indebtedness has been repaid in full.
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the first sentence of this Section),
unless the holders of such Designated Senior Indebtedness or the Representative
of such holders shall have accelerated the maturity of such Designated Senior
Indebtedness, the Company shall resume payments on the Securities after the end
of such Payment Blockage Period. Not more than one Blockage Notice may be given
in any consecutive 360-day period, irrespective of the number of defaults with
respect to Designated Senior Indebtedness during such period; provided, however,
that if any Blockage Notice within such 360-day period is given by or on behalf
of any holders of Designated Senior Indebtedness (other than the lenders under
any Credit Agreement), the Representative of the lenders under any Credit
Agreement may give another Blockage Notice within such period; provided further,
however, that in no event may the total number of days during which any Payment
Blockage Period or Periods is in effect exceed 179 days in the aggregate during
any 360 consecutive day period. For purposes of this Section, no default or
event of default which existed or was continuing on the date of the commencement
of any Payment Blockage Period with respect to the Designated Senior
Indebtedness initiating such Payment Blockage Period shall be, or be made, the
basis of the commencement of a subsequent Payment Blockage Period by the
Representative of such Designated Senior Indebtedness, whether or not within a
period of 360 consecutive days, unless such default or event of default shall
have been cured or waived for a period of not less than 90 consecutive days.
Section 10.04. Acceleration of Payment of Securities. If payment of
the Securities is accelerated because of an Event of Default, the Company or the
Trustee shall promptly notify the holders of the Designated Senior Indebtedness
(or their Representative) of the acceleration.
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83
Section 10.05. When Distribution Must Be Paid Over. If a
distribution is made to Securityholders that because of this Article 10 should
not have been made to them, the Securityholders who receive the distribution
shall hold it in trust for holders of Senior Indebtedness and pay it over to
them as their interests may appear.
Section 10.06. Subrogation. After all Senior Indebtedness is paid in
full and until the Securities are paid in full, Securityholders shall be
subrogated to the rights of holders of Senior Indebtedness to receive
distributions applicable to Senior Indebtedness. A distribution made under this
Article 10 to holders of Senior Indebtedness which otherwise would have been
made to Securityholders is not, as between the Company and Securityholders, a
payment by the Company on Senior Indebtedness.
Section 10.07. Relative Rights. This Article 10 defines the relative
rights of Securityholders and holders of Senior Indebtedness. Nothing in this
Indenture shall:
(1) impair, as between the Company and Securityholders, the
obligation of the Company, which is absolute and unconditional, to pay
principal of and interest on the Securities in accordance with their terms;
or
(2) prevent the Trustee or any Securityholder from exercising its
available remedies upon a Default, subject to the rights of holders of
Senior Indebtedness to receive distributions otherwise payable to
Securityholders.
Section 10.08. Subordination May Not Be Impaired by Company. No
right of any holder of Senior Indebtedness to enforce the subordination of the
Indebtedness evidenced by the Securities shall be impaired by any act or failure
to act by the Company or by its failure to comply with this Indenture.
Section 10.9. Rights of Trustee and Paying Agent. Notwithstanding
Section 10.03, the Trustee or Paying Agent may continue to make payments on the
Securities and shall not be charged with knowledge of the existence of facts
that would prohibit the making of any such payments unless, not less than two
Business Days prior to the date of such payment, a Trust Officer of the Trustee
receives notice satisfactory to it that payments may not be made under this
Article 10. The Company, the Registrar or co-registrar, the Paying Agent, a
Representative or a holder of Senior
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Indebtedness may give the notice; provided, however, that, if an issue of Senior
Indebtedness has a Representative, only the Representative may give the notice.
The Trustee in its individual or any other capacity may hold Senior
Indebtedness with the same rights it would have if it were not Trustee. The
Registrar and co-registrar and the Paying Agent may do the same with like
rights. The Trustee shall be entitled to all the rights set forth in this
Article 10 with respect to any Senior Indebtedness which may at any time be held
by it, to the same extent as any other holder of Senior Indebtedness; and
nothing in Article 7 shall deprive the Trustee of any of its rights as such
holder. Nothing in this Article 10 shall apply to claims of, or payments to,
the Trustee under or pursuant to Section 7.07.
Section 10.10. Distribution or Notice to Representative. Whenever a
distribution is to be made or a notice given to holders of Senior Indebtedness,
the distribution may be made and the notice given to their Representative (if
any).
Section 10.11. Article 10 Not To Prevent Events of Default or Limit
Right To Accelerate. The failure to make a payment pursuant to the Securities
by reason of any provision in this Article 10 shall not be construed as
preventing the occurrence of a Default. Nothing in this Article 10 shall have
any effect on the right of the Securityholders or the Trustee to accelerate the
maturity of the Securities.
Section 10.12. Trust Moneys Not Subordinated. Notwithstanding
anything contained herein to the contrary, payment from the money or the
proceeds of U.S. Government Obligations deposited in trust with the Trustee in
accordance with the provisions of Article 8 for the payment of principal of and
interest on the Securities shall not be subordinated to the prior payment of any
Senior Indebtedness or subject to the restrictions set forth in this Article 10,
and none of the Securityholders shall be obligated to pay over any such amount
to the Company or any holder of Senior Indebtedness of the Company or any other
creditor of the Company.
Section 10.13. Trustee Entitled To Rely. Upon any payment or
distribution pursuant to this Article 10, the Trustee and the Securityholders
shall be entitled to rely (i) upon any order or decree of a court of competent
jurisdiction in which any proceedings of the nature referred to in Section 10.02
are pending, (ii) upon a certificate of
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85
the liquidating trustee or agent or other Person making such payment or
distribution to the Trustee or to the Securityholders or (iii) upon the
Representatives for the holders of Senior Indebtedness for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Indebtedness 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. In the event that the Trustee determines, in good faith, that evidence is
required with respect to the right of any Person as a holder of Senior
Indebtedness to participate in any payment or distribution pursuant to this
Article 10, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such Person, the extent to which such Person is entitled to participate
in such payment or Distribution and other facts pertinent to the rights of such
Person under this Article 10, and, if such evidence is not furnished, the
Trustee may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment. The provisions of Sections
7.01 and 7.02 shall be applicable to all actions or omissions of actions by the
Trustee pursuant to this Article 10.
Section 10.14. Trustee To Effectuate Subordination. Each
Securityholder by accepting a Security authorizes and directs the Trustee on his
behalf to take such action as may be necessary or appropriate to acknowledge or
effectuate the subordination between the Securityholders and the holders of
Senior Indebtedness as provided in this Article 10 and appoints the Trustee as
attorney-in-fact for any and all such purposes.
Section 10.15. Trustee Not Fiduciary for Holders of Senior
Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness. The Trustee undertakes to perform or to observe
only such of the covenants and obligations as are specifically set forth in this
Article 10, and no implied covenants or obligations with respect to such holders
of Senior Indebtedness shall be implied in this Indenture against the Trustee.
Section 10.16. Reliance by Holders of Senior Indebtedness on
Subordination Provisions. Each Securityholder by accepting a Security
acknowledges and agrees that the foregoing subordination provisions are, and are
intended to be, an inducement and a consideration to each holder of any Senior
Indebtedness, whether such Senior Indebtedness
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86
was created or acquired before or after the issuance of the Securities, to
acquire and continue to hold, or to continue to hold, such Senior Indebtedness
and such holder of Senior Indebtedness shall be deemed conclusively to have
relied on such subordination provisions in acquiring and continuing to hold, or
in continuing to hold, such Senior Indebtedness.
ARTICLE 11
Subsidiary Guaranty
-------------------
Section 11.01. Guarantee. Each Subsidiary Guarantor, as primary
obligor and not merely as surety, hereby irrevocably and unconditionally
guarantees, jointly and severally, on a senior subordinated basis to each Holder
and to the Trustee and its successors and assigns (a) the full and punctual
payment of principal of and interest on the Securities when due, whether at
Stated Maturity, by acceleration, by redemption or otherwise, and all other
monetary obligations of the Company under this Indenture and the Securities and
(b) the full and punctual performance within applicable grace periods of all
other obligations of the Company under this Indenture and the Securities (all
the foregoing being hereinafter collectively called the "Guaranteed
Obligations"). Each Subsidiary Guarantor further agrees that the Guaranteed
Obligations of the Company may be extended or renewed, in whole or in part,
without notice or further assent from such Subsidiary Guarantor, and that such
Subsidiary Guarantor shall remain bound under this Article 11 notwithstanding
any extension or renewal of any such Guaranteed Obligation.
Each Subsidiary Guarantor waives presentation to, demand of, payment
from and protest to the Company of any of the Guaranteed Obligations and also
waives notice of protest for nonpayment. Each Subsidiary Guarantor waives
notice of any default under the Securities or the Guaranteed Obligations. The
obligations of each Subsidiary Guarantor hereunder shall not be affected by (a)
the failure of any Holder or the Trustee to assert any claim or demand or to
enforce any right or remedy against the Company or any other Person under this
Indenture, the Securities or any other agreement or otherwise; (b) any extension
or renewal of any thereof; (c) any rescission, waiver, amendment or modification
of any of the terms or provisions of this Indenture, the Securities or any other
agreement; (d) the release of any security held by any Holder or the Trustee for
the Guaranteed Obligations or any of them; (e) the failure of any Holder or
Trustee to exercise any right or remedy against any other Subsidiary Guarantor
of the
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87
Guaranteed Obligations or (f) any change in the ownership of such Subsidiary
Guarantor.
Each Subsidiary Guarantor further agrees that its Subsidiary Guaranty
herein constitutes a guarantee of payment, performance and compliance when due
(and not a guarantee of collection) and waives any right to require that any
resort be had by any Holder or the Trustee to any security held for payment of
the Guaranteed Obligations.
Each Subsidiary Guaranty, as it relates to the principal of, premium
(if any) and interest on the Securities shall be, to the extent and manner set
forth in Article 10, subordinated in right of payment to the prior payment in
full of all Senior Indebtedness of such Subsidiary Guarantor and each such
Subsidiary Guarantor's Subsidiary Guaranty is made subject to such provisions of
this Indenture.
The obligations of each Subsidiary Guarantor hereunder shall not be
subject to any reduction, limitation, impairment or termination for any reason,
including any claim of waiver, release, surrender, alteration or compromise, and
shall not be subject to any defense of setoff, counterclaim, recoupment or
termination whatsoever or by reason of the invalidity, illegality or unenforce-
ability of the Guaranteed Obligations or otherwise. Without limiting the
generality of the foregoing, the obligations of each Subsidiary Guarantor herein
shall not be discharged or impaired or otherwise affected by the failure of any
Holder or the Trustee to assert any claim or demand or to enforce any remedy
under this Indenture, the Securities or any other agreement, by any waiver or
modification of any thereof, by any default, failure or delay, wilful or
otherwise, in the performance of the obligations, or by any other act or thing
or omission or delay to do any other act or thing which may or might in any
manner or to any extent vary the risk of such Subsidiary Guarantor or would
otherwise operate as a discharge of such Subsidiary Guarantor as a matter of law
or equity.
Each Subsidiary Guarantor further agrees that its Subsidiary Guaranty
shall continue to be effective or be reinstated, as the case may be, if at any
time payment, or any part thereof, of principal of or interest on any Guaranteed
Obligation is rescinded or must otherwise be restored by any Holder or the
Trustee upon the bankruptcy or reorganization of the Company or otherwise.
In furtherance of the foregoing and not in limitation of any other
right which any Holder or the
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88
Trustee has at law or in equity against any Subsidiary Guarantor by virtue
hereof, upon the failure of the Company to pay the principal of or interest on
any Guaranteed Obligation when and as the same shall become due, whether at
maturity, by acceleration, by redemption or otherwise, or to perform or comply
with any other Guaranteed Obligation, each Subsidiary Guarantor shall, upon
receipt of written demand by the Trustee, forthwith pay, or cause to be paid, in
cash, to the Holders or the Trustee an amount equal to the sum of (i) the unpaid
principal amount of such Guaranteed Obligations, (ii) accrued and unpaid
interest on such Guaranteed Obligations (but only to the extent not prohibited
by law) and (iii) all other monetary Guaranteed Obligations of the Company to
the Holders and the Trustee.
Each Subsidiary Guarantor agrees that it shall not be entitled to any
right of subrogation in relation to the Holders in respect of any Guaranteed
Obligations guaranteed hereby until payment in full of all Guaranteed
Obligations. Each Subsidiary Guarantor further agrees that, as between it, on
the one hand, and the Holders and the Trustee, on the other hand, (x) the
maturity of the Guaranteed Obligations Guaranteed hereby may be accelerated as
provided in Article 6 for the purposes of such Subsidiary Guarantor's Subsidiary
Guaranty, notwithstanding any stay, injunction or other prohibition preventing
such acceleration in respect of the Guaranteed Obligations Guaranteed hereby,
and (y) in the event of any declaration of acceleration of such Guaranteed
Obligations as provided in Article 6, such obligations (whether or not due and
payable) shall forthwith become due and payable by the Subsidiary Guarantor for
the purposes of this Section.
Each Subsidiary Guarantor also agrees to pay any and all costs and
expenses (including reasonable attorneys' fees) incurred by the Trustee or any
Holder in enforcing any rights under this Section.
Section 11.02. Limitation on Liability. Any term or provision of
this Indenture to the contrary notwithstanding, the maximum, aggregate amount
of the Guaranteed Obligations guaranteed hereunder by any Subsidiary Guarantor
shall not exceed the maximum amount that can, after giving effect to all other
contingent and fixed liabilities of such Subsidiary Guarantor (other than any
liabilities of such Subsidiary Guarantor with respect to any Subordinated
Obligation), be hereby guaranteed without rendering this Indenture, as it
relates to the Subsidiary Guarantor, voidable under applicable law relating to
fraudulent conveyance or fraudulent transfer or similar laws affecting the
rights of creditors generally.
<PAGE>
89
Section 11.03. Successors and Assigns. This Article 11 shall be
binding upon each Subsidiary Guarantor and its respective successors and assigns
and shall enure to the benefit of the successors and assigns of the Trustee and
the Holders and, in the event of any transfer or assignment of rights by any
Holder or the Trustee, the rights and privileges conferred upon that party in
this Indenture and in the Securities shall automatically extend to and be vested
in such transferee or assignee, all subject to the terms and conditions of this
Indenture.
Section 11.04. No Waiver. Neither a failure nor a delay on the part
of either the Trustee or the Holders in exercising any right, power or privilege
under this Article 11 shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise of any right,
power or privilege. The rights, remedies and benefits of the Trustee and the
Holders herein expressly specified are cumulative and not exclusive of any other
rights, remedies or benefits which either may have under this Article 11 at law,
in equity, by statute or otherwise.
Section 11.05. Modification. No modification, amendment or waiver of
any provision of this Article 11, nor the consent to any departure by any
Subsidiary Guarantor therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Trustee, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given. No notice to or demand on any Subsidiary Guarantor in any case shall
entitle such Subsidiary Guarantor to any other or further notice or demand in
the same, similar or other circumstances.
Section 11.06. Release of Subsidiary Guarantor. Upon the sale or
disposition (by merger or otherwise) of any Subsidiary Guarantor to an entity
which is neither the Company nor a Subsidiary Guarantor and which sale is other-
wise in compliance with the terms of this Indenture, such Subsidiary Guarantor
shall be deemed released from all obligations under this Article 11 without any
further action required on the part of the Trustee, or any Holder. At the
request of the Company, the Trustee shall execute and deliver an appropriate
instrument evidencing such release.
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90
ARTICLE 12
Miscellaneous
-------------
Section 12.01. Trust Indenture Act Controls. If any provision of
this Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
Section 12.02. Notices. Any notice or communication shall be in
writing and delivered in person or mailed by first-class mail addressed as
follows:
if to the Company:
Kelley Oil & Gas Corporation
601 Jefferson, Suite 1100
Houston, TX 77002
Attention of Corporate Secretary
if to the Trustee:
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
Attention of Corporate Trust Department
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be mailed
to the Securityholder at the Securityholder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so mailed
within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
Section 12.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA (S) 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The
<PAGE>
91
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA (S) 312(c).
Section 12.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take or refrain
from taking any action under this Indenture, the Company shall furnish to the
Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture relating
to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
Section 12.05. Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or opinion
has read such covenant or condition;
(2) 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;
(3) a statement that, in the opinion of such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
Section 12.06. When Securities Disregarded. In determining whether
the Holders of the required principal amount of Securities have concurred in any
direction, waiver or consent, Securities owned by the Company or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to be
outstanding, except that,
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92
for the purpose of determining whether the Trustee shall be protected in relying
on any such direction, waiver or consent, only Securities which the Trustee
knows are so owned shall be so disregarded. Also, subject to the foregoing,
only Securities outstanding at the time shall be considered in any such
determination.
Section 12.07. Rules by Trustee, Paying Agent and Registrar. The
Trustee may make reasonable rules for action by or a meeting of Securityholders.
The Registrar and the Paying Agent may make reasonable rules for their
functions.
Section 12.08. Legal Holidays. A "Legal Holiday" is a Saturday, a
Sunday or a day on which banking institutions are not required to be open in the
State of New York. If a payment date is a Legal Holiday, payment shall be made
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period. If a regular record date is a Legal Holiday,
the record date shall not be affected.
Section 12.09. Governing Law. This Indenture and the Securities
shall be governed by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the laws of another jurisdiction would be
required thereby.
Section 12.10. 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 the Securities or this Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Securityholder shall waive and release
all such liability. The waiver and release shall be part of the consideration
for the issue of the Securities.
Section 12.11. Successors. All agreements of the Company in this
Indenture and the Securities shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
Section 12.12. Multiple 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. One signed copy is enough to prove
this Indenture.
Section 12.13. Table of Contents; Headings. The table of contents,
cross-reference sheet and headings of the
<PAGE>
93
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not intended to be considered a part hereof and shall not
modify or restrict any of the terms or provisions hereof.
<PAGE>
94
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
KELLEY OIL & GAS CORPORATION,
by /S/ DAVID C. BAGGETT
------------------------------
Name: David C. Baggett
Title: Senior Vice
President and Chief
Financial Officer
KELLEY OIL CORPORATION,
by /S/ DAVID C. BAGGETT
-------------------------------
Name: David C. Baggett
Title: Senior Vice
President and Chief
Financial Officer
KELLEY OPERATING COMPANY, LTD.,
by Kelley Oil Corporation,
its General Partner,
by /S/ DAVID C. BAGGETT
--------------------------------
Name: David C. Baggett
Title: Senior Vice
President and Chief
Financial Officer
UNITED STATES TRUST COMPANY
OF NEW YORK, as Trustee,
by /S/ GERARD F. GANEY
---------------------------------
Name: Gerard F. Ganey
Title: Senior Vice President
<PAGE>
APPENDIX A
PROVISIONS RELATING TO ORIGINAL SECURITIES,
ADDITIONAL SECURITIES, PRIVATE EXCHANGE SECURITIES
AND EXCHANGE SECURITIES
1. Definitions
1.1 Definitions
For the purposes of this Appendix A the following terms shall have the
meanings indicated below:
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Regulation S Global Security or beneficial interest
therein, the rules and procedures of the Depositary for such Global Security,
Euroclear and Cedel, in each case to the extent applicable to such transaction
and as in effect from time to time.
"Cedel" means Cedel Bank, S.A., or any successor securities clearing
agency.
"Definitive Security" means a certificated Initial Security or
Exchange Security (bearing the Restricted Securities Legend if the transfer of
such Security is restricted by applicable law) that does not include the Global
Securities Legend.
"Depositary" means The Depository Trust Company, its nominees and
their respective successors.
"Euroclear" means the Euroclear Clearance System or any successor
securities clearing agency.
"Global Securities Legend" means the legend set forth under that
caption in Exhibit A to this Indenture.
"IAI" means an institutional "accredited investor" as described in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
"Initial Purchasers" means Chase Securities Inc. and Jefferies &
Company, Inc.
"Private Exchange" means an offer by the Company, pursuant to the
Registration Agreement, to issue and deliver to certain purchasers, in exchange
for the Initial Securities held by such purchasers as part of their initial
distribution, a like aggregate principal amount of Private Exchange Securities.
<PAGE>
2
"Private Exchange Securities" means the Securities of the Company
issued in exchange for Initial Securities pursuant to this Indenture in
connection with the Private Exchange pursuant to the Registration Agreement.
"Purchase Agreement" means (i) the Purchase Agreement dated May 26,
1998, among the Company, the Subsidiary Guarantors and the Initial Purchasers
and (ii) any other similar Purchase Agreement relating to Additional Securities.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Registered Exchange Offer" means the offer by the Company, pursuant
to the Registration Agreement, to certain Holders of Initial Securities, to
issue and deliver to such Holders, in exchange for their Initial Securities, a
like aggregate principal amount of Exchange Securities registered under the
Securities Act.
"Registration Agreement" means (i) the Registration Agreement dated
May 29, 1998, among the Company, the Subsidiary Guarantors and the Initial
Purchasers and (ii) any other similar Registration Agreement relating to
Additional Securities.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Securities" means all Initial Securities offered and
sold outside the United States in reliance on Regulation S.
"Restricted Period", with respect to any Securities, means the period
of 40 consecutive days beginning on and including the later of (i) the day on
which such Securities are first offered to persons other than distributors (as
defined in Regulation S under the Securities Act) in reliance on Regulation S
and (ii) the date on which such Securities are issued with respect to such
Securities.
"Restricted Securities Legend" means the legend set forth in Section
2.3(e)(i) herein.
"Rule 501" means Rule 501(a)(1), (2), (3) or (7) under the Securities
Act.
"Rule 144A" means Rule 144A under the Securities Act.
<PAGE>
3
"Rule 144A Securities" means all Initial Securities offered and sold
to QIBs in reliance on Rule 144A .
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Custodian" means the custodian with respect to a Global
Security (as appointed by the Depositary) or any successor person thereto, who
shall initially be the Trustee.
"Shelf Registration Statement" means a registration statement filed by
the Company in connection with the offer and sale of Initial Securities pursuant
to the Registration Agreement.
"Transfer Restricted Securities" means Definitive Securities and any
other Securities that bear or are required to bear the Restricted Securities
Legend.
1.2 Other Definitions
Term: Defined in Section:
---- ------------------
"Agent Members" 2.1(b)
"IAI Global Security 2.1(a)
"Global Security" 2.1(a)
"Rule 144A Global Security" 2.1(a)
"Regulation S Global Security" 2.1(a)
2. The Securities
2.1 Form and Dating
The Original Securities will be (i) offered and sold by the Company
pursuant to the Purchase Agreement and (ii) resold, initially only to (A) QIBs
in reliance on Rule 144A and (B) Persons other than U.S. Persons (as defined in
Regulation S) in reliance on Regulation S. Such Original Securities may
thereafter be transferred to, among others, QIBs, purchasers in reliance on
Regulation S and, except as set forth below, IAIs in accordance with Rule 501.
Additional Securities offered after the date hereof may be offered and sold by
the Company from time to time pursuant to one or more Purchase Agreements in
accordance with applicable law.
(a) Global Securities. Rule 144A Securities shall be issued
initially in the form of one or more permanent global Securities in definitive,
fully registered form
<PAGE>
4
(collectively, the "Rule 144A Global Security") and Regulation S Securities
shall be issued initially in the form of one or more global Securities
(collectively, the "Regulation S Global Security"), in each case without
interest coupons and bearing the Global Securities Legend and Restricted
Securities Legend, which shall be deposited on behalf of the purchasers of the
Securities represented thereby with the Securities Custodian, and registered in
the name of the Depositary or a nominee of the Depositary, duly executed by the
Company and authenticated by the Trustee as provided in this Indenture. One or
more global securities in definitive, fully registered form without interest
coupons and bearing the Global Securities Legend and the Restricted Securities
Legend (collectively, the "IAI Global Security") shall also be issued on the
Issue Date, deposited with the Securities Custodian, and registered in the name
of the Depositary or a nominee of the Depositary, duly executed by the Company
and authenticated by the Trustee as provided in this Indenture to accommodate
transfers of beneficial interests in the Securities to IAIs subsequent to the
initial distribution. Beneficial ownership interests in the Regulation S Global
Security will not be exchangeable for interests in the Rule 144A Global
Security, the IAI Global Security or any other Security without a Restricted
Securities Legend until the expiration of the Restricted Period. The Rule 144A
Global Security, the IAI Global Security and the Regulation S Global Security
are each referred to herein as a "Global Security" and are collectively referred
to herein as "Global Securities." The aggregate principal amount of the Global
Securities may from time to time be increased or decreased by adjustments made
on the records of the Trustee and the Depositary or its nominee as hereinafter
provided.
(b) Book-Entry Provisions. This Section 2.1(b) shall apply only to a
Global Security deposited with or on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance with
this Section 2.1(b) and pursuant to an order of the Company, authenticate and
deliver initially one or more Global Securities that (a) shall be registered in
the name of the Depositary for such Global Security or Global Securities or the
nominee of such Depositary and (b) shall be delivered by the Trustee to such
Depositary or pursuant to such Depositary's instructions or held by the Trustee
as Securities Custodian.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any Global Security held on
their behalf by the Depositary or by the Trustee as Securities Custodian or
<PAGE>
5
under such Global Security, and the Depositary may be treated by the Company,
the Trustee and any agent of the Company or the Trustee as the absolute owner of
such Global Security for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Company, the Trustee or any agent of
the Company or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the Depositary or impair, as between
the Depositary and its Agent Members, the operation of customary practices of
such Depositary governing the exercise of the rights of a holder of a beneficial
interest in any Global Security.
(c) Definitive Securities. Except as provided in Section 2.3 or 2.4,
owners of beneficial interests in Global Securities will not be entitled to
receive physical delivery of certificated Securities.
2.2 Authentication. The Trustee shall authenticate and make available for
delivery upon a written order of the Company signed by two Officers (1) Original
Securities for original issue on the date hereof in an aggregate principal
amount of $30,000,000, (2) subject to the terms of this Indenture, Additional
Securities in an aggregate principal amount of up to $50,000,000 and (3) the (A)
Exchange Securities for issue only in a Registered Exchange Offer and (B)
Private Exchange Securities for issue only in the Private Exchange, in the case
of each of (A) and (B) pursuant to the Registration Agreement and for a like
principal amount of Initial Securities exchanged pursuant thereto. Such order
shall specify the amount of the Securities to be authenticated, the date on
which the original issue of Securities is to be authenticated and whether the
Securities are to be Initial Securities, Exchange Securities or Private Exchange
Securities. The aggregate principal amount of Securities outstanding at any
time may not exceed $80,000,000 except as provided in Section 2.08 of this
Indenture.
2.3 Transfer and Exchange. (a) Transfer and Exchange of Definitive
Securities. When Definitive Securities are presented to the Registrar with a
request:
(x) to register the transfer of such Definitive Securities; or
(y) to exchange such Definitive Securities for an equal principal
amount of Definitive Securities of other authorized denominations,
the Registrar shall register the transfer or make the exchange as requested if
its reasonable requirements for such
<PAGE>
6
transaction are met; provided, however, that the Definitive Securities
surrendered for transfer or exchange:
(i) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Company and the Registrar,
duly executed by the Holder thereof or his attorney duly authorized in
writing; and
(ii) are accompanied by the following additional information and
documents, as applicable:
(A) if such Definitive Securities are being delivered to the
Registrar by a Holder for registration in the name of such Holder,
without transfer, a certification from such Holder to that effect (in
the form set forth on the reverse side of the Initial Security); or
(B) if such Definitive Securities are being transferred to the
Company, a certification to that effect (in the form set forth on the
reverse side of the Initial Security); or
(C) if such Definitive Securities are being transferred pursuant
to an exemption from registration in accordance with Rule 144 under
the Securities Act or in reliance upon another exemption from the
registration requirements of the Securities Act, (i) a certification
to that effect (in the form set forth on the reverse side of the
Initial Security) and (ii) if the Company so requests, an opinion of
counsel or other evidence reasonably satisfactory to it as to the
compliance with the restrictions set forth in the legend set forth in
Section 2.3(e)(i).
(b) Restrictions on Transfer of a Definitive Security for a
Beneficial Interest in a Global Security. A Definitive Security may not be
exchanged for a beneficial interest in a Global Security except upon
satisfaction of the requirements set forth below. Upon receipt by the Trustee
of a Definitive Security, duly endorsed or accompanied by a written instrument
of transfer in form reasonably satisfactory to the Company and the Registrar,
together with:
(i) certification (in the form set forth on the reverse side of the
Initial Security) that such Definitive Security is being transferred (A) to
a QIB in accordance with Rule 144A, (B) to an IAI that has furnished to the
Trustee a signed letter substantially in
<PAGE>
7
the form attached to Exhibit A or (C) outside the United States in an
offshore transaction within the meaning of Regulation S and in compliance
with Rule 904 under the Securities Act; and
(ii) written instructions directing the Trustee to make, or to direct
the Securities Custodian to make, an adjustment on its books and records
with respect to such Global Security to reflect an increase in the
aggregate principal amount of the Securities represented by the Global
Security, such instructions to contain information regarding the Depositary
account to be credited with such increase,
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Securities Custodian, the
aggregate principal amount of Securities represented by the Global Security to
be increased by the aggregate principal amount of the Definitive Security to be
exchanged and shall credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the Global Security
equal to the principal amount of the Definitive Security so canceled. If no
Global Securities are then outstanding and the Global Security has not been
previously exchanged for certificated securities pursuant to Section 2.4, the
Company shall issue and the Trustee shall authenticate, upon written order of
the Company in the form of an Officers' Certificate, a new Global Security in
the appropriate principal amount.
(c) Transfer and Exchange of Global Securities. (i) The transfer and
exchange of Global Securities or beneficial interests therein shall be effected
through the Depositary, in accordance with this Indenture (including applicable
restrictions on transfer set forth herein, if any) and the procedures of the
Depositary therefor. A transferor of a beneficial interest in a Global Security
shall deliver a written order given in accordance with the Depositary's
procedures containing information regarding the participant account of the
Depositary to be credited with a beneficial interest in such Global Security or
another Global Security and such account shall be credited in accordance with
such order with a beneficial interest in the applicable Global Security and the
account of the Person making the transfer shall be debited by an amount equal to
the beneficial interest in the Global Security being transferred. Transfers by
an owner of a beneficial interest in the Rule 144A Global Security or the IAI
Global Security to a transferee who takes delivery of such interest through the
Regulation S Global
<PAGE>
8
Security, whether before or after the expiration of the Restricted Period, will
be made only upon receipt by the Trustee of a certification from the transferor
to the effect that such transfer is being made in accordance with Regulation S
or (if available) Rule 144 under the Securities Act and that, if such transfer
is being made prior to the expiration of the Restricted Period, the interest
transferred will be held immediately thereafter through Euroclear or Cedel. In
the case of a transfer of a beneficial interest in either the Regulation S
Global Security or the Rule 144A Global Security for an interest in the IAI
Global Security, the transferee must furnish a signed letter substantially in
the form attached to Exhibit A to the Trustee.
(ii) If the proposed transfer is a transfer of a beneficial interest
in one Global Security to a beneficial interest in another Global Security,
the Registrar shall reflect on its books and records the date and an
increase in the principal amount of the Global Security to which such
interest is being transferred in an amount equal to the principal amount of
the interest to be so transferred, and the Registrar shall reflect on its
books and records the date and a corresponding decrease in the principal
amount of Global Security from which such interest is being transferred.
(iii) Notwithstanding any other provisions of this Appendix (other
than the provisions set forth in Section 2.4), a Global Security may not be
transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(iv) In the event that a Global Security is exchanged for Definitive
Securities pursuant to Section 2.4 prior to the consummation of the
Registered Exchange Offer or the effectiveness of the Shelf Registration
Statement with respect to such Securities, such Securities may be exchanged
only in accordance with such procedures as are substantially consistent
with the provisions of this Section 2.3 (including the certification
requirements set forth on the reverse of the Initial Securities intended to
ensure that such transfers comply with Rule 144A, Regulation S or such
other applicable exemption from registration under the Securities Act, as
the case may be) and such other procedures as may from time to time be
adopted by the Company.
<PAGE>
9
(d) Restrictions on Transfer of Regulation S Global Security. (i)
Prior to the expiration of the Restricted Period, interests in the Regulation S
Global Security may only be held through Euroclear or Cedel. During the
Restricted Period, beneficial ownership interests in the Regulation S Global
Security may only be sold, pledged or transferred through Euroclear or Cedel in
accordance with the Applicable Procedures and only (A) to the Company, (B) so
long as such security is eligible for resale pursuant to Rule 144A, to a person
whom the selling holder reasonably believes is a QIB that purchases for its own
account or for the account of a QIB to whom notice is given that the resale,
pledge or transfer is being made in reliance on Rule 144A, (C) in an offshore
transaction in accordance with Regulation S, (D) pursuant to an exemption from
registration under the Securities Act provided by Rule 144 (if applicable) under
the Securities Act, (E) to an IAI purchasing for its own account, or for the
account of such an IAI, in a minimum principal amount of Securities of $250,000
or (F) pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States. Prior to the expiration of the Restricted Period, transfers
by an owner of a beneficial interest in the Regulation S Global Security to a
transferee who takes delivery of such interest through the Rule 144A Global
Security or the IAI Global Security will be made only in accordance with
Applicable Procedures and upon receipt by the Trustee of a written certification
from the transferor of the beneficial interest in the form provided on the
reverse of the Initial Security to the effect that such transfer is being made
to (i) a person whom the transferor reasonably believes is a QIB within the
meaning of Rule 144A in a transaction meeting the requirements of Rule 144A or
(ii) an IAI purchasing for its own account, or for the account of such an IAI,
in a minimum principal amount of the Securities of $250,000. Such written
certification will no longer be required after the expiration of the Restricted
Period. In the case of a transfer of a beneficial interest in the Regulation S
Global Security for an interest in the IAI Global Security, the transferee must
furnish a signed letter substantially in the form attached to Exhibit A to the
Trustee.
(ii) Upon the expiration of the Restricted Period, beneficial
ownership interests in the Regulation S Global Security will be
transferable in accordance with applicable law and the other terms of this
Indenture.
(e) Legend.
<PAGE>
10
(i) Except as permitted by the following paragraphs (ii), (iii) or
(iv), each Security certificate evidencing the Global Securities and the
Definitive Securities (and all Securities issued in exchange therefor or
in substitution thereof) shall bear a legend in substantially the following
form (each defined term in the legend being defined as such for purposes of
the legend only):
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO,
SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO
OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE
"RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER
OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR
ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY
PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A
REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON
IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN
RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS
BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT
OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER
THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF
RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN
INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THE SECURITY FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN
EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR
INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN
CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F)
PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE
TRUSTEE'S RIGHT PRIOR
<PAGE>
11
TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON
THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
Each Definitive Security will also bear the following additional legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION
AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE
TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS."
(ii) Upon any sale or transfer of a Transfer Restricted Security that
is a Definitive Security, the Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Definitive Security that
does not bear the legends set forth above and rescind any restriction on
the transfer of such Transfer Restricted Security if the Holder certifies
in writing to the Registrar that its request for such exchange was made in
reliance on Rule 144 (such certification to be in the form set forth on the
reverse of the Initial Security).
(iii) After a transfer of any Original or Additional Securities or
Private Exchange Securities during the period of the effectiveness of a
Shelf Registration Statement with respect to such Original or Additional
Securities or Private Exchange Securities, as the case may be, all
requirements pertaining to the Restricted Securities Legend on such
Original or Additional Securities or such Private Exchange Securities will
cease to apply and the requirements that any such Original or Additional
Securities or such Private Exchange Securities be issued in global form
will continue to apply.
(iv) Upon the consummation of a Registered Exchange Offer with
respect to the Original or Additional Securities pursuant to which Holders
of such Original or Additional Securities are offered Exchange Securities
in exchange for their Original or Additional Securities, all requirements
pertaining to Original or Additional Securities that Original or Additional
Securities be issued in global form will continue to apply, and Exchange
Securities in global form without the Restricted Securities Legend will be
available to Holders
<PAGE>
12
that exchange such Initial Securities in such Registered Exchange Offer.
(v) Upon the consummation of a Private Exchange with respect to the
Original or Additional Securities pursuant to which Holders of such
Original or Additional Securities are offered Private Exchange Securities
in exchange for their Original or Additional Securities, all requirements
pertaining to such original or Additional Securities that Original or
Additional Securities be issued in global form will continue to apply, and
Private Exchange Securities in global form with the Restricted Securities
Legend will be available to Holders that exchange such Original or
Additional Securities in such Private Exchange.
(vi) Upon a sale or transfer after the expiration of the Restricted
Period of any Initial Security acquired pursuant to Regulation S, all
requirements that such Initial Security bear the Restricted Securities
Legend will cease to apply and the requirements requiring any such Initial
Security be issued in global form will continue to apply.
(vii) Any Additional Securities sold in a registered offering shall
not be required to bear the Restricted Securities Legend.
(f) Cancelation or Adjustment of Global Security. At such time as all
beneficial interests in a Global Security have either been exchanged for
Definitive Securities, transferred, redeemed, repurchased or canceled, such
Global Security shall be returned by the Depositary to the Trustee for
cancelation or retained and canceled by the Trustee. At any time prior to such
cancelation, if any beneficial interest in a Global Security is exchanged for
Definitive Securities, transferred in exchange for an interest in another Global
Security, redeemed, repurchased or canceled, the principal amount of Securities
represented by such Global Security shall be reduced and an adjustment shall be
made on the books and records of the Trustee (if it is then the Securities
Custodian for such Global Security) with respect to such Global Security, by the
Trustee or the Securities Custodian, to reflect such reduction.
(g) Obligations with Respect to Transfers and Exchanges of
Securities.
(i) To permit registrations of transfers and exchanges, the Company
shall execute and the Trustee
<PAGE>
13
shall authenticate, Definitive Securities and Global Securities at the
Registrar's request.
(ii) No service charge shall be made for any registration of transfer
or exchange, but the Company may require payment of a sum sufficient to
cover any transfer tax, assessments, or similar governmental charge payable
in connection therewith (other than any such transfer taxes, assessments or
similar governmental charge payable upon exchange or transfer pursuant to
Section 3.06, 4.06, 4.08 and 9.05).
(iii) Prior to the due presentation for registration of transfer of
any Security, the Company, the Trustee, the Paying Agent or the Registrar
may deem and treat the person in whose name a Security is registered as the
absolute owner of such Security for the purpose of receiving payment of
principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the
Company, the Trustee, the Paying Agent or the Registrar shall be affected
by notice to the contrary.
(iv) All Securities issued upon any transfer or exchange pursuant to
the terms of this Indenture shall evidence the same debt and shall be
entitled to the same benefits under this Indenture as the Securities
surrendered upon such transfer or exchange.
(h) No Obligation of the Trustee.
(i) The Trustee shall have no responsibility or obligation to any
beneficial owner of a Global Security, a member of, or a participant in the
Depositary or any other Person with respect to the accuracy of the records
of the Depositary or its nominee or of any participant or member thereof,
with respect to any ownership interest in the Securities or with respect to
the delivery to any participant, member, beneficial owner or other Person
(other than the Depositary) of any notice (including any notice of
redemption or repurchase) or the payment of any amount, under or with
respect to such Securities. All notices and communications to be given to
the Holders and all payments to be made to Holders under the Securities
shall be given or made only to the registered Holders (which shall be the
Depositary or its nominee in the case of a Global Security). The rights of
beneficial owners in any Global Security shall be exercised only through
the Depositary subject to the applicable rules and procedures of the
Depositary. The Trustee may rely and shall be fully protected in relying
upon information
<PAGE>
14
furnished by the Depositary with respect to its members, participants and
any beneficial owners.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer
imposed under this Indenture or under applicable law with respect to any
transfer of any interest in any Security (including any transfers between
or among Depositary participants, members or beneficial owners in any
Global Security) other than to require delivery of such certificates and
other documentation or evidence as are expressly required by, and to do so
if and when expressly required by, the terms of this Indenture, and to
examine the same to determine substantial compliance as to form with the
express requirements hereof.
2.4 Definitive Securities
(a) A Global Security deposited with the Depositary or with the
Trustee as Securities Custodian pursuant to Section 2.1 shall be transferred to
the beneficial owners thereof in the form of Definitive Securities in an
aggregate principal amount equal to the principal amount of such Global
Security, in exchange for such Global Security, only if such transfer complies
with Section 2.3 and (i) the Depositary notifies the Company that it is
unwilling or unable to continue as a Depositary for such Global Security or if
at any time the Depositary ceases to be a "clearing agency" registered under the
Exchange Act, and a successor depositary is not appointed by the Company within
90 days of such notice, or (ii) an Event of Default has occurred and is
continuing or (iii) the Company, in its sole discretion, notifies the Trustee in
writing that it elects to cause the issuance of certificated Securities under
this Indenture.
(b) Any Global Security that is transferable to the beneficial owners
thereof pursuant to this Section 2.4 shall be surrendered by the Depositary to
the Trustee, to be so transferred, in whole or from time to time in part,
without charge, and the Trustee shall authenticate and deliver, upon such
transfer of each portion of such Global Security, an equal aggregate principal
amount of Definitive Securities of authorized denominations. Any portion of a
Global Security transferred pursuant to this Section shall be executed,
authenticated and delivered only in denominations of $1,000 and any integral
multiple thereof and registered in such names as the Depositary shall direct.
Any certificated Initial Security in the form of a Definitive Security delivered
in exchange for an interest in the Global Security shall, except
<PAGE>
15
as otherwise provided by Section 2.3(e), bear the Restricted Securities Legend.
(c) Subject to the provisions of Section 2.4(b), the registered
Holder of a Global Security may grant proxies and otherwise authorize any
Person, including Agent Members and Persons that may hold interests through
Agent Members, to take any action which a Holder is entitled to take under this
Indenture or the Securities.
(d) In the event of the occurrence of any of the events specified in
Section 2.4(a)(i), (ii) or (iii), the Company will promptly make available to
the Trustee a reasonable supply of Definitive Securities in fully registered
form without interest coupons.
<PAGE>
EXHIBIT A
[FORM OF FACE OF INITIAL SECURITY]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY 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 IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS 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.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO
LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT
OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE
<PAGE>
2
144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES
WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN
"ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7)
UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING
THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL
ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE
SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR
OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES
ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S
RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR
(F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE
REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
Each Definitive Security will also bear the following additional legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION
AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE
TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS."
<PAGE>
3
NO. $
CUSIP NO.:
ISIN:
10 3/8% Senior Subordinated Note Due 2006, Series C
KELLEY OIL & GAS CORPORATION, a Delaware corporation, promises to pay to
, or registered assigns, the principal sum of
Dollars on October 15, 2006.
Interest Payment Dates: April 15 and October 15.
Record Dates: April 1 and October 1.
<PAGE>
4
Additional provisions of this Security are set forth on the other side
of this Security.
KELLEY OIL & GAS CORPORATION,
by _______________________
Authorized Officer
_______________________
Authorized Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
UNITED STATES TRUST
COMPANY OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred [Seal]
to in the Indenture.
by
______________________
Authorized Signatory
Dated:
<PAGE>
5
[FORM OF REVERSE SIDE OF INITIAL SECURITY]
10 3/8% Senior Subordinated Note Due 2006, Series C
1. Interest
Kelley Oil & Gas Corporation, a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on the
principal amount of this Security at the rate per annum shown above; provided,
however, that if by [ ] neither the Registered Exchange Offer is
consummated nor, if required in lieu thereof pursuant to the Registration
Agreement, the Shelf Registration Statement is declared effective by the
Commission, interest will accrue on this Security from and including such date
until such date as either the Registered Exchange Offer is consummated or the
Shelf Registration Statement is declared effective by the Commission at a rate
of 0.50% per annum in excess of the interest rate per annum shown above;
provided further, however, that if by [ ] neither the Registered
Exchange Offer is consummated nor, if required in lieu thereof pursuant to the
Registration Agreement, the Shelf Registration Statement is declared effective
by the Commission, interest will accrue on this Security from and including such
date until such date as either the Registered Exchange Offer is consummated or
the Shelf Registration Statement is declared effective by the Commission at a
rate of 1.00% per annum in excess of the interest rate per annum shown above.
The Company will pay interest semiannually on April 15, and October 15 of each
year. Interest on the Securities will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from [ ].
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Company shall pay interest on overdue principal at the rate borne
by the Securities plus 1% per annum, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
2. Method of Payment
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the April 1 or October 1 next preceding the interest payment date
even if Securities are canceled after the record date and on or before the
interest payment date. Holders must
<PAGE>
6
surrender Securities to a Paying Agent to collect principal payments. The
Company will pay principal and interest in money of the United States that at
the time of payment is legal tender for payment of public and private debts.
Payments in respect of the Securities represented by a Global Security
(including principal, premium and interest) will be made by wire transfer of
immediately available funds to the accounts specified by The Depository Trust
Company. The Company will make all payments in respect of a certificated
Security (including principal, premium and interest), by mailing a check to the
registered address of each Holder thereof; provided, however, that payments on a
certificated Security will be made by wire transfer to a U.S. dollar account
maintained by the payee with a bank in the United States if such Holder elects
payment by wire transfer by giving written notice to the Trustee or the Paying
Agent to such effect designating such account no later than 30 days immediately
preceding the relevant due date for payment (or such other date as the Trustee
may accept in its discretion).
3. Paying Agent and Registrar
Initially, United States Trust Company of New York, a New York banking
corporation ("Trustee"), will act as Paying Agent and Registrar. The Company
may appoint and change any Paying Agent, Registrar or co-registrar without
notice. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
The Company issued the Securities under an Indenture dated as of May
29, 1998 ("Indenture"), between the Company and the Trustee. The terms of the
Securities 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.C.
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Terms defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture. The Securities are subject to all such terms, and
Securityholders are referred to the Indenture and the Act for a statement of
those terms.
The Securities are general unsecured obligations of the Company
limited to $80,000,000 aggregate principal amount (subject to Section 2.08 of
the Indenture). The Indenture imposes certain limitations on the Incurrence of
Indebtedness by the Company and certain of its Subsidiaries, the payment of
<PAGE>
7
dividends and other distributions on the Capital Stock of the Company and
certain of its Subsidiaries, the purchase or redemption of Capital Stock of the
Company and of certain Capital Stock of such Subsidiaries, the sale or transfer
of assets and Subsidiary stock, the creation of Liens, the entering into of
Sale/Leaseback Transactions and transactions with Affiliates. In addition, the
Indenture limits the ability of the Company and certain of its Subsidiaries to
restrict distributions and dividends from Subsidiaries. The Indenture also
restricts the ability of the Company and any Subsidiary Guarantor to consolidate
or merge with or into, or to transfer all or substantially all their assets to,
another person.
The Indenture also provides that the Company shall cause each
Subsidiary Guarantor, and each Restricted Subsidiary of the Company (other than
the Programs) that has total net assets as of the end of the most recent fiscal
year (as set forth on the balance sheet of such Restricted Subsidiary prepared
in accordance with GAAP) equal to or greater than the greater of $2.5 million
and one percent (1%) of Adjusted Consolidated Net Tangible Assets as of such
date, to Guarantee the Securities pursuant to a Subsidiary Guaranty. Any such
Subsidiary Guaranty will secure the due and punctual payment of the principal of
and interest, if any, on the Securities and all other amounts payable by the
Company under the Indenture and the Securities when and as the same shall be due
and payable, whether at maturity, by acceleration or otherwise. Any Subsidiary
Guaranty will unconditionally guarantee the Obligations on a senior subordinated
basis pursuant to the terms of the Indenture.
5. Optional Redemption
Except as set forth in the next paragraph, the Securities shall not be
redeemable at the option of the Company prior to October 15, 2001. Thereafter,
the Securities shall be redeemable, at the Company's option, in whole or in
part, at any time or from time to time at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on October 15 of the years set
forth below:
<TABLE>
<CAPTION>
Period Percentage
- ---------------------- -----------
<S> <C>
2001 105.188%
</TABLE>
<PAGE>
8
<TABLE>
<CAPTION>
Period Percentage
- ---------------------- -----------
<S> <C>
2002 102.594%
2003 and thereafter 100.000%
</TABLE>
In addition, at any time and from time to time prior to October 15,
1999, the Company may redeem in the aggregate up to 35% of the principal amount
of Securities with the proceeds of one or more Equity Offerings following which
there is a Public Market, at a redemption price (expressed as a percentage of
principal amount) of 110.375% plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that either at least $18.0 million aggregate principal amount of Securities must
remain outstanding after each such redemption or such redemption must retire the
Securities in their entirety.
Notwithstanding the preceding two paragraphs, the Company will not be
permitted to redeem the Existing Securities unless, substantially concurrently
with such redemption, the Company redeems an aggregate principal amount of
Securities (rounded to the nearest integral multiple of $1,000) equal to the
product of: (1) a fraction, the numerator of which is the aggregate principal
amount of Existing Securities to be so redeemed and the denominator of which is
the aggregate principal amount of Existing Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
Securities outstanding immediately prior to such proposed redemption. Similarly,
the Company will not be permitted to redeem the Securities unless, substantially
concurrently with such redemption, the Company redeems an aggregate principal
amount of Existing Securities (rounded to the nearest integral multiple of
$1,000) equal to the product of: (1) a fraction, the numerator of which is the
aggregate principal amount of Securities to be so redeemed and the denominator
of which is the aggregate principal amount of Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
Existing Securities outstanding immediately prior to such proposed redemption.
6. 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 of Securities to be redeemed
at his registered address. Securities in denominations larger than $1,000 may be
redeemed in part but only in whole multiples of $1,000. If money
<PAGE>
9
sufficient to pay the redemption price of and accrued interest on all Securities
(or portions thereof) to be redeemed on the redemption date is deposited with
the Paying Agent on or before the redemption date and certain other conditions
are satisfied, on and after such date interest ceases to accrue on such
Securities (or such portions thereof) called for redemption.
7. Put Provisions
Upon a Change of Control, any Holder of Securities will have the
right, subject to certain conditions, to cause the Company to repurchase all or
any part of the Securities of such Holder at a repurchase price equal to 101% of
the principal amount of the Securities to be repurchased plus accrued interest
to the date of repurchase (subject to the right of holders of record on the
relevant record date to receive interest due on the related interest payment
date) as provided in, and subject to the terms of, the Indenture.
8. Subordination
The Securities are subordinated to Senior Indebtedness, as defined in
the Indenture. To the extent provided in the Indenture, Senior Indebtedness
must be paid before the Securities may be paid. The Company agrees, and each
Securityholder by accepting a Security agrees, to the subordination provisions
contained in the Indenture and authorizes the Trustee to give it effect and
appoints the Trustee as attorney-in-fact for such purpose.
9. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in denominations
of $1,000 (or in the case of Definitive Securities sold to institutional
accredited investors as described in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, minimum denominations of $250,000) and whole multiples of
$1,000. A Holder may transfer or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements or transfer documents and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar need not register
the transfer of or exchange any Securities selected for redemption (except, in
the case of a Security to be redeemed in part, the portion of the Security not
to be redeemed) or any Securities for a period of 15 days
<PAGE>
10
before a selection of Securities to be redeemed or 15 days before an interest
payment date.
10. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner of
it for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Discharge and Defeasance
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
13. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount of the Securities then
outstanding and (ii) any default or noncompliance with any provisions may be
waived with the written consent of the Holders of at least a majority in
principal amount of the Securities then outstanding. Subject to certain
exceptions set forth in the Indenture, without notice to or the consent of any
Securityholder, the Company and the Trustee may amend the Indenture or the
Securities to cure any ambiguity, omission, defect or inconsistency, or to
comply with Article 5 of the Indenture, or to provide for uncertificated
Securities in addition to or in place of certificated Securities (provided that
the uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code), or to make any
change to the subordination provisions of the Indenture that would limit
<PAGE>
11
or terminate the benefits available to any holder of Senior Indebtedness (or its
Representative), or to add guarantees with respect to the Securities, or to
secure the Securities, or to add to the covenants of the Company for the benefit
of the Holders, or to surrender any right or power conferred on the Company, or
to make any change that does not adversely affect the rights of any
Securityholder, or to comply with any requirement of the SEC in connection with
qualifying the Indenture under the Act. No amendment may be made to the
subordination provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or their representative) consent to such change.
14. Defaults and Remedies
Under the Indenture, Events of Default include (i) default for 30 days
in payment of interest on the Securities when due; (ii) default in payment of
principal on the Securities at maturity, upon redemption pursuant to paragraph
5 or 6 of the Securities, upon declaration or otherwise, or failure by the
Company to redeem or purchase Securities when required; (iii) failure by the
Company to comply with its obligations under certain covenants, (iv) failure by
the Company to comply with other agreements in the Indenture or the Securities,
in certain cases subject to notice and lapse of time; (v) certain accelerations
(including failure to pay within any grace period after final maturity) of other
Indebtedness of the Company or any Significant Subsidiary (other than Limited
Recourse Indebtedness) if the amount accelerated (or so unpaid) exceeds $10.0
million; (vi) certain events of bankruptcy, insolvency or reorganization with
respect to the Company or a Significant Subsidiary; (vii) any judgment or decree
for the payment of money in excess of $10.0 million is rendered against the
Company or a Significant Subsidiary, remains outstanding for a period of 60 days
following such judgment or decree and is not discharged, waived or stayed within
10 days after notice or (viii) a Subsidiary Guaranty ceases to be in full force
and effect (other than in accordance with the terms of such Subsidiary Guaranty)
or a Subsidiary Guarantor denies or disaffirms its obligations under its
Subsidiary Guaranty if such default continues for a period of 10 days after
notice thereof to the Company. If an Event of Default occurs and is continuing,
the Trustee or the Holders of at least 25% in principal amount of the
outstanding Securities may declare the principal of and accrued but unpaid
interest on all the Securities to be due and payable immediately. Certain
events of bankruptcy, insolvency or reorganization are Events of Default which
will result in the Securities being due and payable immediately
<PAGE>
12
upon the occurrence of such Events of Default. A default under clauses (iii)
(except for the covenants referred to in the preceding sentence), (iv), (vii) or
(viii) will not constitute an Event of Default until the Trustee or the Holders
of 25% in principal amount of the outstanding Securities notifies the Company of
the default and the Company does not cure such default within the time specified
after receipt of such notice.
Securityholders may not enforce the Indenture or the Securities except
as provided in the Indenture. The Trustee may refuse to enforce the Indenture
or the Securities unless it receives reasonable indemnity or security. Subject
to certain limitations, Holders of a majority in principal amount of the
Securities may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Securityholders notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in the interest of the Holders.
15. Trustee Dealings with the Company
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Company
or the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Security,
each Securityholder waives and releases all such liability. The waiver and
release are part of the consideration for the issue of the Securities.
17. Authentication
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
<PAGE>
13
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
20. Holders' Compliance with Registration Agreement
Each Holder of a Security, by acceptance hereof, acknowledges and
agrees to the provisions of the Registration Agreement, including, without
limitation, the obligations of the Holders with respect to a registration and
the indemnification of the Company to the extent provided therein.
21. Governing Law
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
<PAGE>
14
The Company will furnish to any Securityholder upon written request
and without charge to the Securityholder a copy of the Indenture. Requests may
be made to:
Kelley Oil & Gas Corporation
601 Jefferson, Suite 1100
Houston, Texas 77002
Attention of Manager, Investor Relations
<PAGE>
15
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint _________________________ agent to transfer this
Security 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 other side of this Security.
Signature Guarantee: _______________________________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the
requirements of the Registrar, which requirements
include membership or participation in the Securities
Transfer Agents Medallion Program ("STAMP") or such
other "signature guarantee program" as may be
determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.)
<PAGE>
16
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER RESTRICTED SECURITIES
In connection with any transfer of any of the Securities evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act after the later of the date of original issuance
of such Securities and the last date, if any, on which such Securities were
owned by the Company or any Affiliate of the Company, the undersigned confirms
that such Securities are being transferred in accordance with its terms:
CHECK ONE BOX BELOW:
(1) [_] to the Company or any of its Subsidiaries; or
(2) [_] pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) [_] inside the United States to a "qualified institutional buyer" (as
defined in Rule 144A under the Securities Act of 1933) that
purchases for its own account or for the account of a qualified
institutional buyer to whom notice is given that such transfer is
being made in reliance on Rule 144A, in each case pursuant to and
in compliance with Rule 144A under the Securities Act of 1933; or
(4) [_] inside the United States to an institutional "accredited
investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of
Regulation D under the Securities Act of 1933) that, prior to
such transfer, furnishes to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter can be obtained from the Trustee) and, if such
transfer is in respect of an aggregate principal amount of
Securities at the time of transfer of less than $250,000, an
opinion of counsel acceptable to the Company that such transfer
is in compliance with the Securities Act of 1933; or
(5) [_] outside the United States in an offshore transaction within the
meaning of Regulation S under the Securities Act in compliance
with Rule 904 under the Securities Act of 1933; or
<PAGE>
17
(6) [_] pursuant to another available exemption from registration
provided by Rule 144 under the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register any
of the Securities evidenced by this certificate in the name of any person
other than the registered holder thereof; provided, however, that if box
(4) or (5) is checked, the Trustee may require, prior to registering any
such transfer of the Securities, such legal opinions, certifications and
other information as the Company has reasonably requested to confirm that
such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act of 1933, such as the exemption provided by Rule 144 under such Act.
________________________
Signature
Signature Guarantee: ______________________________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the
requirements of the Registrar, which requirements
include membership or participation in the Securities
Transfer Agents Medallion Program ("STAMP") or such
other "signature guarantee program" as may be
determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.)
<PAGE>
18
[TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED]
The undersigned represents and warrants that it is purchasing this
Security for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Company as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Dated: ________________ ___________________________________
NOTICE: To be executed by
an executive officer
<PAGE>
19
OPTION OF HOLDER TO ELECT PURCHASE
If you elect to have this Security purchased by the Company pursuant
to Section 4.06 or 4.08 of the Indenture, check the box:
[_]
If you elect to have only part of this Security purchased by the
Company pursuant to Section 4.06 or 4.08 of the Indenture, check the box and
state the amount in principal amount at maturity:
[_] $ ________________
Date: _______________ Your Signature:_________________________________
(Sign exactly as your name
appears on the other side of
this Security.)
Signature Guarantee: ______________________________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the
requirements of the Registrar, which requirements
include membership or participation in the Securities
Transfer Agents Medallion Program ("STAMP") or such
other "signature guarantee program" as may be
determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.)
<PAGE>
20
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The following increases or decreases in this Global Security have been
made:
<TABLE>
<CAPTION>
Principal Amount
Amount of decrease Amount of increase at Maturity of Signature of
in Principal in Principal this Global authorized officer
Amount at Maturity Amount at Security following of Trustee or
of this Global Maturity of this such decrease or Securities
Date of Exchange Security Global Security increase Custodian
- ------------------- ------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT B
[FORM OF FACE OF EXCHANGE SECURITY]
[1/]
[2/]
NO. $
CUSIP NO.:
ISIN:
10 3/8% Senior Subordinated Note Due 2006, Series C
KELLEY OIL & GAS CORPORATION, a Delaware corporation, promises to pay
to , or registered assigns, the principal sum of
Dollars on October 15, 2006.
Interest Payment Dates: April 15 and October 15.
Record Dates: April 1 and October 1.
<PAGE>
2
Additional provisions of this Security are set forth on the other side of this
Security.
KELLEY OIL & GAS CORPORATION,
by_______________________
Authorized Officer
_______________________
Authorized Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
UNITED STATES TRUST
COMPANY OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred [Seal]
to in the Indenture.
by _____________________________
Authorized Signatory
Dated:
<PAGE>
3
- -------
/1/ [If the Security is to be issued in global form add the Global
Securities Legend from Exhibit A and the attachment from such Exhibit A
captioned "[TO BE ATTACHED TO GLOBAL SECURITIES] - SCHEDULE OF INCREASES OR
DECREASES IN GLOBAL SECURITY".]
/2/ [If the Security is a Private Exchange Security issued in a
Private Exchange to an Initial Purchaser holding an unsold portion of its
initial allotment, add the Restricted Securities Legend from Exhibit A and
replace the Assignment Form included in this Exhibit B with the Assignment Form
included in such Exhibit A.]
<PAGE>
4
[FORM OF REVERSE SIDE OF EXCHANGE SECURITY]
10 3/8% Senior Subordinated Note Due 2006, Series C
1. Interest
Kelley Oil & Gas Corporation, a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on the
principal amount of this Security at the rate per annum shown above; provided,
however, that if by [ ], neither the Registered Exchange Offer is
consummated nor, if required in lieu thereof pursuant to the Registration
Agreement, the Shelf Registration Statement is declared effective by the
Commission, interest will accrue on this Security from and including such date
until such date as either the Registered Exchange Offer is consummated or the
Shelf Registration Statement is declared effective by the Commission at a rate
of 0.50% per annum in excess of the interest rate per annum shown above;
provided further, however, that if by [ ], neither the Registered
Exchange Offer is consummated nor, if required in lieu thereof pursuant to the
Registration Agreement, the Shelf Registration Statement is declared effective
by the Commission, interest will accrue on this Security from and including such
date until such date as either the Registered Exchange Offer is consummated or
the Shelf Registration Statement is declared effective by the Commission at a
rate of 1.00% per annum in excess of the interest rate per annum shown
above. /3/] The Company will pay interest semiannually on April 15 and October
15 of each year. Interest on the Securities will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from
[ ]. Interest will be computed on the basis of a 360-day year of twelve
30-day months. The Company shall pay interest on overdue principal at the rate
borne by the Securities plus 1.00% per annum, and it shall pay interest on
overdue installments of interest at the same rate to the extent lawful.
- -----------
/3/ Insert if at the time of issuance of the Exchange Security neither the
Registered Exchange Offer has been consummated nor a Shelf Registration
Statement has been declared effective in accordance with the Registration
Agreement.
<PAGE>
5
2. Method of Payment
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the April 1 or October 1 next preceding the interest payment date
even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in
money of the United States that at the time of payment is legal tender for
payment of public and private debts. Payments in respect of Securities
(including principal, premium and interest) will be made by wire transfer of
immediately available funds to the accounts specified by the holders thereof or,
if no U.S. dollar account maintained by the payee with a bank in the United
States is designated by any holder to the Trustee or the Paying Agent at least
30 days prior to the relevant due date for payment (or such other date as the
Trustee may accept in its discretion), by mailing a check to the registered
address of such holder.
3. Paying Agent and Registrar
Initially, United States Trust Company of New York, a New York banking
corporation ("Trustee"), will act as Paying Agent and Registrar. The Company
may appoint and change any Paying Agent, Registrar or co-registrar without
notice. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
The Company issued the Securities under an Indenture dated as of May
29, 1998 ("Indenture"), between the Company and the Trustee. The terms of the
Securities 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.C.
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Terms defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture. The Securities are subject to all such terms, and
Securityholders are referred to the Indenture and the Act for a statement of
those terms.
The Securities are general unsecured obligations of the Company
limited to $80,000,000 aggregate principal amount (subject to Section 2.08 of
the Indenture). The
<PAGE>
6
Indenture imposes certain limitations on the Incurrence of Indebtedness by the
Company and certain of its Subsidiaries, the payment of dividends and other
distributions on the Capital Stock of the Company and certain of its
Subsidiaries, the purchase or redemption of Capital Stock of the Company and of
certain Capital Stock of such Subsidiaries, the sale or transfer of assets and
Subsidiary stock, the creation of Liens, the entering into of Sale/Leaseback
Transactions and transactions with Affiliates. In addition, the Indenture
limits the ability of the Company and certain of its Subsidiaries to restrict
distributions and dividends from Subsidiaries. The Indenture also restricts the
ability of the Company and any Subsidiary Guarantor to consolidate or merge with
or into, or to transfer all or substantially all their assets to, another
person.
The Indenture also provides that the Company shall cause each
Subsidiary Guarantor, and each Restricted Subsidiary of the Company (other than
the Programs) that has total net assets as of the end of the most recent fiscal
year (as set forth on the balance sheet of such Restricted Subsidiary prepared
in accordance with GAAP) equal to or greater than the greater of $2.5 million
and one percent (1%) of Adjusted Consolidated Net Tangible Assets as of such
date, to Guarantee the Securities pursuant to a Subsidiary Guaranty. Any such
Subsidiary Guaranty will secure the due and punctual payment of the principal of
and interest, if any, on the Securities and all other amounts payable by the
Company under the Indenture and the Securities when and as the same shall be due
and payable, whether at maturity, by acceleration or otherwise. Any Subsidiary
Guaranty will unconditionally guarantee the Obligations on a senior subordinated
basis pursuant to the terms of the Indenture.
5. Optional Redemption
Except as set forth in the next paragraph, the Securities shall not be
redeemable at the option of the Company prior to October 15, 2001. Thereafter,
the Securities shall be redeemable, at the Company's option, in whole or in
part, at any time or from time to time at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to the
redemption date (subject to the right of Holders of record on the
<PAGE>
7
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period commencing on October 15 of the
years set forth below:
<TABLE>
<CAPTION>
Period Percentage
- ---------------------- -----------
<S> <C>
2001 105.188%
2002 102.594%
2003 and thereafter 100.000%
</TABLE>
In addition, at any time and from time to time prior to October 15,
1999, the Company may redeem in the aggregate up to 35% of the principal amount
of Securities with the proceeds of one or more Equity Offerings following which
there is a Public Market, at a redemption price (expressed as a percentage of
principal amount) of 110.375% plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that either at least $18.0 million aggregate principal amount of Securities must
remain outstanding after each such redemption or such redemption must retire the
Securities in their entirety.
Notwithstanding the preceding two paragraphs, the Company will not be
permitted to redeem the Existing Securities unless, substantially concurrently
with such redemption, the Company redeems an aggregate principal amount of
Securities (rounded to the nearest integral multiple of $1,000) equal to the
product of: (1) a fraction, the numerator of which is the aggregate principal
amount of Existing Securities to be so redeemed and the denominator of which is
the aggregate principal amount of Existing Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
Securities outstanding immediately prior to such proposed redemption. Similarly,
the Company will not be permitted to redeem the Securities unless, substantially
concurrently with such redemption, the Company redeems an aggregate principal
amount of Existing Securities (rounded to the nearest integral multiple of
$1,000) equal to the product of: (1) a fraction, the numerator of which is the
aggregate principal amount of Securities to be so redeemed and the denominator
of which is the aggregate principal amount of Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
<PAGE>
8
Existing Securities outstanding immediately prior to such proposed redemption.
6. 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 of Securities to be redeemed
at his registered address. Securities in denominations larger than $1,000 may
be redeemed in part but only in whole multiples of $1,000. If money sufficient
to pay the redemption price of and accrued interest on all Securities (or
portions thereof) to be redeemed on the redemption date is deposited with the
Paying Agent on or before the redemption date and certain other conditions are
satisfied, on and after such date interest ceases to accrue on such Securities
(or such portions thereof) called for redemption.
7. Put Provisions
Upon a Change of Control, any Holder of Securities will have the
right, subject to certain conditions, to cause the Company to repurchase all or
any part of the Securities of such Holder at a repurchase price equal to 101% of
the principal amount of the Securities to be repurchased plus accrued interest
to the date of repurchase (subject to the right of holders of record on the
relevant record date to receive interest due on the related interest payment
date) as provided in, and subject to the terms of, the Indenture.
8. Subordination
The Securities are subordinated to Senior Indebtedness, as defined in
the Indenture. To the extent provided in the Indenture, Senior Indebtedness
must be paid before the Securities may be paid. The Company agrees, and each
Securityholder by accepting a Security agrees, to the subordination provisions
contained in the Indenture and authorizes the Trustee to give it effect and
appoints the Trustee as attorney-in-fact for such purpose.
9. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in denominations
of $1,000 (or in the case of Definitive Securities sold to institutional
accredited investors as described in Rule 501(a)(1), (2), (3) or (7)
<PAGE>
9
under the Securities Act, minimum denominations of $250,000) and whole multiples
of $1,000. A Holder may transfer or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements or transfer documents and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar need not register
the transfer of or exchange any Securities selected for redemption (except, in
the case of a Security to be redeemed in part, the portion of the Security not
to be redeemed) or any Securities for a period of 15 days before a selection of
Securities to be redeemed or 15 days before an interest payment date.
10. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner of
it for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Discharge and Defeasance
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
13. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount of the Securities then
outstanding and (ii) any default or noncompliance with any provisions may be
waived with the written consent of the Holders of at least a majority in
principal amount of the Securities then outstanding. Subject to certain
exceptions
<PAGE>
10
set forth in the Indenture, without notice to or the consent of any
Securityholder, the Company and the Trustee may amend the Indenture or the
Securities to cure any ambiguity, omission, defect or inconsistency, or to
comply with Article 5 of the Indenture, or to provide for uncertificated
Securities in addition to or in place of certificated Securities (provided that
the uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code), or to make any
change to the subordination provisions of the Indenture that would limit or
terminate the benefits available to any holder of Senior Indebtedness (or its
Representative), or to add guarantees with respect to the Securities, or to
secure the Securities, or to add to the covenants of the Company for the benefit
of the Holders, or to surrender any right or power conferred on the Company, or
to make any change that does not adversely affect the rights of any
Securityholder, or to comply with any requirement of the SEC in connection with
qualifying the Indenture under the Act. No amendment may be made to the
subordination provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or their Representative) consent to such change.
14. Defaults and Remedies
Under the Indenture, Events of Default include (i) default for 30 days
in payment of interest on the Securities when due; (ii) default in payment of
principal on the Securities at maturity, upon redemption pursuant to paragraph 5
or 6 of the Securities, upon declaration or otherwise, or failure by the Company
to redeem or purchase Securities when required; (iii) failure by the Company to
comply with its obligations under certain covenants, (iv) failure by the Company
to comply with other agreements in the Indenture or the Securities, in certain
cases subject to notice and lapse of time; (v) certain accelerations (including
failure to pay within any grace period after final maturity) of other
Indebtedness of the Company or any Significant Subsidiary (other than Limited
Recourse Indebtedness) if the amount accelerated (or so unpaid) exceeds $10.0
million; (vi) certain events of bankruptcy, insolvency or reorganization with
respect to the Company or a Significant Subsidiary; (vii) any judgment or decree
for the payment of money in excess of $10.0 million is rendered against the
Company or a Significant Subsidiary, remains outstanding for a period of 60 days
following such judgment or decree and is not discharged, waived or stayed within
10
<PAGE>
11
days after notice or (viii) a Subsidiary Guaranty ceases to be in full force and
effect (other than in accordance with the terms of such Subsidiary Guaranty) or
a Subsidiary Guarantor denies or disaffirms its obligations under its Subsidiary
Guaranty if such default continues for a period of 10 days after notice thereof
to the Company. If an Event of Default occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount of the outstanding Securities
may declare the principal of and accrued but unpaid interest on all the
Securities to be due and payable immediately. Certain events of bankruptcy,
insolvency or reorganization are Events of Default which will result in the
Securities being due and payable immediately upon the occurrence of such Events
of Default. A default under clauses (iii) (except for the covenants referred to
in the preceding sentence), (iv), (vii) or (viii) will not constitute an Event
of Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Securities notifies the Company of the default and the Company does
not cure such default within the time specified after receipt of such notice.
Securityholders may not enforce the Indenture or the Securities except
as provided in the Indenture. The Trustee may refuse to enforce the Indenture
or the Securities unless it receives reasonable indemnity or security. Subject
to certain limitations, Holders of a majority in principal amount of the
Securities may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Securityholders notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in the interest of the Holders.
15. Trustee Dealings with the Company
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Company
or the Trustee shall not have any liability for any obligations of the Company
under the
<PAGE>
12
Securities or the Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Security, each
Securityholder waives and releases all such liability. The waiver and release
are part of the consideration for the issue of the Securities.
17. Authentication
This Security shall not be valid until an authorized signatory of
the Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation
is made as to the accuracy of such numbers either as printed on the Securities
or as contained in any notice of redemption and reliance may be placed only on
the other identification numbers placed thereon.
20. Holders' Compliance with Registration Agreement
Each Holder of a Security, by acceptance hereof, acknowledges and
agrees to the provisions of the Registration Agreement, including, without
limitation, the obligations of the Holders with respect to a registration and
the indemnification of the Company to the extent provided therein.
<PAGE>
13
21. Governing Law
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
<PAGE>
14
The Company will furnish to any Securityholder upon written request
and without charge to the Securityholder a copy of the Indenture. Requests
may be made to:
Kelley Oil & Gas Corporation
601 Jefferson, Suite 1100
Houston, Texas 77002
Attention of Manager, Investor Relations
<PAGE>
15
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint _____________________ agent to transfer this Security 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 other side of this Security.
Signature Guarantee: ______________________________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the
requirements of the Registrar, which requirements
include membership or participation in the Securities
Transfer Agents Medallion Program ("STAMP") or such
other "signature guarantee program" as may be
determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.)
<PAGE>
16
OPTION OF HOLDER TO ELECT PURCHASE
If you elect to have this Security purchased by the Company pursuant
to Section 4.06 or 4.08 of the Indenture, check the box:
[_]
If you elect to have only part of this Security purchased by the
Company pursuant to Section 4.06 or 4.08 of the Indenture, check the box and
state the amount in principal amount at maturity:
[_]
$ ________________
Date: _______________ Your Signature: _____________________________________
(Sign exactly as your
name appears on the other
side of this Security.)
Signature Guarantee: ______________________________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the
requirements of the Registrar, which requirements
include membership or participation in the Securities
Transfer Agents Medallion Program ("STAMP") or such
other "signature guarantee program" as may be
determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.)
<PAGE>
17
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The following increases or decreases in this Global Security have been
made:
<TABLE>
<CAPTION>
Principal Amount
Amount of decrease Amount of increase at Maturity of Signature of
in Principal in Principal this Global authorized officer
Amount at Maturity Amount at Security following of Trustee or
of this Global Maturity of this such decrease or Securities
Date of Exchange Security Global Security increase Custodian
- ------------------- ------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT 4.8
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY 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 IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS 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.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO
LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT
OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS
AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION
S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING
OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN
INSTITUTIONAL ACCREDITED INVESTOR
<PAGE>
2
ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN
INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF
THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR
FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND
THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE.
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH
TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH
THE FOREGOING RESTRICTIONS.
<PAGE>
3
No. C-1 Up to $30,000,000
CUSIP No.: 487906AE9
10 3/8% Senior Subordinated Note Due 2006, Series C
KELLEY OIL & GAS CORPORATION, a Delaware corporation, promises to pay to Cede &
Co., or registered assigns, the principal sum set forth in the Schedule of
Increases and Decreases on the reverse side of this Security on October 15,
2006.
Interest Payment Dates: April 15 and October 15.
Record Dates: April 1 and October 1.
<PAGE>
4
Additional provisions of this Security are set forth on the other side
of this Security.
KELLEY OIL & GAS CORPORATION,
by /s/ David C. Baggett
-----------------------
Authorized Officer
/s/ Thomas E. Baker
-----------------------
Authorized Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
UNITED STATES TRUST
COMPANY OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred [Seal]
to in the Indenture.
by /s/ Gerard F. Ganey
--------------------
Authorized Signatory
Dated: May 29,1998
<PAGE>
5
10 3/8% Senior Subordinated Note Due 2006, Series C
1. Interest
--------
Kelley Oil & Gas Corporation, a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on the
principal amount of this Security at the rate per annum shown above; provided,
however, that if by November 29, 1998, neither the Registered Exchange Offer is
consummated nor, if required in lieu thereof pursuant to the Registration
Agreement, the Shelf Registration Statement is declared effective by the
Commission, interest will accrue on this Security from and including such date
until such date as either the Registered Exchange Offer is consummated or the
Shelf Registration Statement is declared effective by the Commission at a rate
of 0.50% per annum in excess of the interest rate per annum shown above;
provided further, however, that if by May 29, 1999, neither the Registered
Exchange Offer is consummated nor, if required in lieu thereof pursuant to the
Registration Agreement, the Shelf Registration Statement is declared effective
by the Commission, interest will accrue on this Security from and including such
date until such date as either the Registered Exchange Offer is consummated or
the Shelf Registration Statement is declared effective by the Commission at a
rate of 1.00% per annum in excess of the interest rate per annum shown above.
The Company will pay interest semiannually on April 15, and October 15 of each
year. Interest on the Securities will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from May 29, 1998.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Company shall pay interest on overdue principal at the rate borne by
the Securities plus 1% per annum, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
2. Method of Payment
-----------------
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the April 1 or October 1 next preceding the interest payment date
even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in
<PAGE>
6
money of the United States that at the time of payment is legal tender for
payment of public and private debts. Payments in respect of the Securities
represented by a Global Security (including principal, premium and interest)
will be made by wire transfer of immediately available funds to the accounts
specified by The Depository Trust Company. The Company will make all payments
in respect of a certificated Security (including principal, premium and
interest), by mailing a check to the registered address of each Holder thereof;
provided, however, that payments on a certificated Security will be made by wire
transfer to a U.S. dollar account maintained by the payee with a bank in the
United States if such Holder elects payment by wire transfer by giving written
notice to the Trustee or the Paying Agent to such effect designating such
account no later than 30 days immediately preceding the relevant due date for
payment (or such other date as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
--------------------------
Initially, United States Trust Company of New York, a New York banking
corporation ("Trustee"), will act as Paying Agent and Registrar. The Company
may appoint and change any Paying Agent, Registrar or co-registrar without
notice. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Securities under an Indenture dated as of May
29, 1998 ("Indenture"), between the Company and the Trustee. The terms of the
Securities 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.C.
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Terms defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture. The Securities are subject to all such terms, and
Securityholders are referred to the Indenture and the Act for a statement of
those terms.
The Securities are general unsecured obligations of the Company
limited to $80,000,000 aggregate principal amount (subject to Section 2.08 of
the Indenture). The Indenture imposes certain limitations on the Incurrence of
Indebtedness by the Company and certain of its Subsidiaries, the payment of
dividends and other distributions on the
<PAGE>
7
Capital Stock of the Company and certain of its Subsidiaries, the purchase or
redemption of Capital Stock of the Company and of certain Capital Stock of such
Subsidiaries, the sale or transfer of assets and Subsidiary stock, the creation
of Liens, the entering into of Sale/Leaseback Transactions and transactions with
Affiliates. In addition, the Indenture limits the ability of the Company and
certain of its Subsidiaries to restrict distributions and dividends from
Subsidiaries. The Indenture also restricts the ability of the Company and any
Subsidiary Guarantor to consolidate or merge with or into, or to transfer all or
substantially all their assets to, another person.
The Indenture also provides that the Company shall cause each
Subsidiary Guarantor, and each Restricted Subsidiary of the Company (other than
the Programs) that has total net assets as of the end of the most recent fiscal
year (as set forth on the balance sheet of such Restricted Subsidiary prepared
in accordance with GAAP) equal to or greater than the greater of $2.5 million
and one percent (1%) of Adjusted Consolidated Net Tangible Assets as of such
date, to Guarantee the Securities pursuant to a Subsidiary Guaranty. Any such
Subsidiary Guaranty will secure the due and punctual payment of the principal of
and interest, if any, on the Securities and all other amounts payable by the
Company under the Indenture and the Securities when and as the same shall be due
and payable, whether at maturity, by acceleration or otherwise. Any Subsidiary
Guaranty will unconditionally guarantee the Obligations on a senior subordinated
basis pursuant to the terms of the Indenture.
5. Optional Redemption
-------------------
Except as set forth in the next paragraph, the Securities shall not be
redeemable at the option of the Company prior to October 15, 2001. Thereafter,
the Securities shall be redeemable, at the Company's option, in whole or in
part, at any time or from time to time at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month
<PAGE>
8
period commencing on October 15 of the years set forth below:
Period Percentage
------ ----------
2001............................... 105.188%
2002............................... 102.594%
2003 and thereafter................ 100.000%
In addition, at any time and from time to time prior to October 15,
1999, the Company may redeem in the aggregate up to 35% of the principal amount
of Securities with the proceeds of one or more Equity Offerings following which
there is a Public Market, at a redemption price (expressed as a percentage of
principal amount) of 110.375% plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that either at least $18.0 million aggregate principal amount of Securities must
remain outstanding after each such redemption or such redemption must retire the
Securities in their entirety.
Notwithstanding the preceding two paragraphs, the Company will not be
permitted to redeem the Existing Securities unless, substantially concurrently
with such redemption, the Company redeems an aggregate principal amount of
Securities (rounded to the nearest integral multiple of $1,000) equal to the
product of: (1) a fraction, the numerator of which is the aggregate principal
amount of Existing Securities to be so redeemed and the denominator of which is
the aggregate principal amount of Existing Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
Securities outstanding immediately prior to such proposed redemption. Similarly,
the Company will not be permitted to redeem the Securities unless, substantially
concurrently with such redemption, the Company redeems an aggregate principal
amount of Existing Securities (rounded to the nearest integral multiple of
$1,000) equal to the product of: (1) a fraction, the numerator of which is the
aggregate principal amount of Securities to be so redeemed and the denominator
of which is the aggregate principal amount of Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
Existing Securities outstanding immediately prior to such proposed redemption.
<PAGE>
9
6. 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 of Securities to be redeemed
at his registered address. Securities in denominations larger than $1,000 may
be redeemed in part but only in whole multiples of $1,000. If money sufficient
to pay the redemption price of and accrued interest on all Securities (or
portions thereof) to be redeemed on the redemption date is deposited with the
Paying Agent on or before the redemption date and certain other conditions are
satisfied, on and after such date interest ceases to accrue on such Securities
(or such portions thereof) called for redemption.
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Securities will have the
right, subject to certain conditions, to cause the Company to repurchase all or
any part of the Securities of such Holder at a repurchase price equal to 101% of
the principal amount of the Securities to be repurchased plus accrued interest
to the date of repurchase (subject to the right of holders of record on the
relevant record date to receive interest due on the related interest payment
date) as provided in, and subject to the terms of, the Indenture.
8. Subordination
-------------
The Securities are subordinated to Senior Indebtedness, as defined in
the Indenture. To the extent provided in the Indenture, Senior Indebtedness
must be paid before the Securities may be paid. The Company agrees, and each
Securityholder by accepting a Security agrees, to the subordination provisions
contained in the Indenture and authorizes the Trustee to give it effect and
appoints the Trustee as attorney-in-fact for such purpose.
9. Denominations; Transfer; Exchange
---------------------------------
The Securities are in registered form without coupons in denominations
of $1,000 (or in the case of Definitive Securities sold to institutional
accredited investors as described in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, minimum denominations of $250,000) and whole multiples of
$1,000. A Holder may transfer or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to
<PAGE>
10
furnish appropriate endorsements or transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for redemption
(except, in the case of a Security to be redeemed in part, the portion of the
Security not to be redeemed) or any Securities for a period of 15 days before a
selection of Securities to be redeemed or 15 days before an interest payment
date.
10. Persons Deemed Owners
---------------------
The registered Holder of this Security may be treated as the owner of
it for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Discharge and Defeasance
------------------------
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount of the Securities then
outstanding and (ii) any default or noncompliance with any provisions may be
waived with the written consent of the Holders of at least a majority in
principal amount of the Securities then outstanding. Subject to certain
exceptions set forth in the Indenture, without notice to or the consent of any
Securityholder, the Company and the Trustee may amend the Indenture or the
Securities to cure any ambiguity, omission, defect or inconsistency, or to
comply with
<PAGE>
11
Article 5 of the Indenture, or to provide for uncertificated Securities in
addition to or in place of certificated Securities (provided that the
uncertificated Securities are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Securities are
described in Section 163(f)(2)(B) of the Code), or to make any change to the
subordination provisions of the Indenture that would limit or terminate the
benefits available to any holder of Senior Indebtedness (or its Representative),
or to add guarantees with respect to the Securities, or to secure the
Securities, or to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power conferred on the Company, or to make
any change that does not adversely affect the rights of any Securityholder, or
to comply with any requirement of the SEC in connection with qualifying the
Indenture under the Act. No amendment may be made to the subordination
provisions of the Indenture that adversely affects the rights of any holder of
Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or their representative) consent to such change.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) default for 30 days
in payment of interest on the Securities when due; (ii) default in payment of
principal on the Securities at maturity, upon redemption pursuant to paragraph 5
or 6 of the Securities, upon declaration or otherwise, or failure by the Company
to redeem or purchase Securities when required; (iii) failure by the Company to
comply with its obligations under certain covenants, (iv) failure by the Company
to comply with other agreements in the Indenture or the Securities, in certain
cases subject to notice and lapse of time; (v) certain accelerations (including
failure to pay within any grace period after final maturity) of other
Indebtedness of the Company or any Significant Subsidiary (other than Limited
Recourse Indebtedness) if the amount accelerated (or so unpaid) exceeds $10.0
million; (vi) certain events of bankruptcy, insolvency or reorganization with
respect to the Company or a Significant Subsidiary; (vii) any judgment or decree
for the payment of money in excess of $10.0 million is rendered against the
Company or a Significant Subsidiary, remains outstanding for a period of 60 days
following such judgment or decree and is not discharged, waived or stayed within
10 days after notice or (viii) a Subsidiary Guaranty ceases to be in full force
and effect (other than in accordance with the terms of such Subsidiary Guaranty)
or a Subsidiary Guarantor denies or disaffirms its obligations under its
<PAGE>
12
Subsidiary Guaranty if such default continues for a period of 10 days after
notice thereof to the Company. If an Event of Default occurs and is continuing,
the Trustee or the Holders of at least 25% in principal amount of the
outstanding Securities may declare the principal of and accrued but unpaid
interest on all the Securities to be due and payable immediately. Certain
events of bankruptcy, insolvency or reorganization are Events of Default which
will result in the Securities being due and payable immediately upon the
occurrence of such Events of Default. A default under clauses (iii) (except for
the covenants referred to in the preceding sentence), (iv), (vii) or (viii) will
not constitute an Event of Default until the Trustee or the Holders of 25% in
principal amount of the outstanding Securities notifies the Company of the
default and the Company does not cure such default within the time specified
after receipt of such notice.
Securityholders may not enforce the Indenture or the Securities except
as provided in the Indenture. The Trustee may refuse to enforce the Indenture
or the Securities unless it receives reasonable indemnity or security. Subject
to certain limitations, Holders of a majority in principal amount of the
Securities may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Securityholders notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in the interest of the Holders.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
or the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Security,
each Securityholder waives
<PAGE>
13
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Securities.
17. Authentication
--------------
This Security shall not be valid until an authorized signatory of
the Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
18. Abbreviations
-------------
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation
is made as to the accuracy of such numbers either as printed on the Securities
or as contained in any notice of redemption and reliance may be placed only on
the other identification numbers placed thereon.
20. Holders' Compliance with Registration Agreement
-----------------------------------------------
Each Holder of a Security, by acceptance hereof, acknowledges and
agrees to the provisions of the Registration Agreement, including, without
limitation, the obligations of the Holders with respect to a registration and
the indemnification of the Company to the extent provided therein.
<PAGE>
14
21. Governing Law
-------------
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
<PAGE>
15
The Company will furnish to any Securityholder upon written request
and without charge to the Securityholder a copy of the Indenture. Requests
may be made to:
Kelley Oil & Gas Corporation
601 Jefferson, Suite 1100
Houston, Texas 77002
Attention of Manager, Investor Relations
<PAGE>
16
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint _______________________ agent to transfer this Security
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 other side of this Security.
Signature Guarantee: _____________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the requirements
of the Registrar, which requirements include membership or
participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee
program" as may be determined by the Registrar in addition
to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.)
<PAGE>
17
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER RESTRICTED SECURITIES
In connection with any transfer of any of the Securities evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act after the later of the date of original issuance
of such Securities and the last date, if any, on which such Securities were
owned by the Company or any Affiliate of the Company, the undersigned confirms
that such Securities are being transferred in accordance with its terms:
CHECK ONE BOX BELOW:
(1) [_] to the Company or any of its Subsidiaries; or
(2) [_] pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) [_] inside the United States to a "qualified institutional buyer" (as
defined in Rule 144A under the Securities Act of 1933) that
purchases for its own account or for the account of a qualified
institutional buyer to whom notice is given that such transfer is
being made in reliance on Rule 144A, in each case pursuant to and
in compliance with Rule 144A under the Securities Act of 1933; or
(4) [_] inside the United States to an institutional "accredited investor"
(as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D
under the Securities Act of 1933) that, prior to such transfer,
furnishes to the Trustee a signed letter containing certain
representations and agreements (the form of which letter can be
obtained from the Trustee) and, if such transfer is in respect of
an aggregate principal amount of Securities at the time of
transfer of less than $250,000, an opinion of counsel acceptable
to the Company that such transfer is in compliance with the
Securities Act of 1933; or
(5) [_] outside the United States in an offshore transaction within the
meaning of
<PAGE>
18
Regulation S under the Securities Act in compliance with Rule 904
under the Securities Act of 1933; or
(6) [_] pursuant to another available exemption from registration provided
by Rule 144 under the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register any
of the Securities evidenced by this certificate in the name of any person
other than the registered holder thereof; provided, however, that if box
(4) or (5) is checked, the Trustee may require, prior to registering any
such transfer of the Securities, such legal opinions, certifications and
other information as the Company has reasonably requested to confirm that
such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act of 1933, such as the exemption provided by Rule 144 under such Act.
________________________
Signature
Signature Guarantee: _____________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the requirements
of the Registrar, which requirements include membership or
participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee
program" as may be determined by the Registrar in addition
to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.)
<PAGE>
19
[TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED]
The undersigned represents and warrants that it is purchasing this
Security for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Company as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Dated: ________________ ___________________________________
NOTICE: To be executed by
an executive officer
<PAGE>
20
OPTION OF HOLDER TO ELECT PURCHASE
If you elect to have this Security purchased by the Company pursuant
to Section 4.06 or 4.08 of the Indenture, check the box:
[_]
If you elect to have only part of this Security purchased by the
Company pursuant to Section 4.06 or 4.08 of the Indenture, check the box and
state the amount in principal amount at maturity:
[_] $ ______________
Date: _______________ Your Signature: __________________________
(Sign exactly as your
name appears on the other
side of this Security.)
Signature Guarantee: _____________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the requirements
of the Registrar, which requirements include membership or
participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee
program" as may be determined by the Registrar in addition
to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.)
<PAGE>
21
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $30,000,000.
The following increases or decreases in this Global Security have been made:
<TABLE>
<CAPTION>
Principal Amount
Amount of decrease Amount of increase at Maturity of Signature of
in Principal in Principal this Global authorized officer
Amount at Maturity Amount at Security following of Trustee or
of this Global Maturity of this such decrease or Securities
Date of Exchange Security Global Security increase Custodian
- ---------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY 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 IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS 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.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO
LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT
OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS
AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION
S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING
OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN
INSTITUTIONAL ACCREDITED INVESTOR
<PAGE>
2
ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN
INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF
THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR
FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND
THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE.
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH
TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH
THE FOREGOING RESTRICTIONS.
<PAGE>
3
No. C-1 Up to $30,000,000
CUSIP No.: U24569AB8
ISIN: USU24569AB86
10 3/8% Senior Subordinated Note Due 2006, Series C
KELLEY OIL & GAS CORPORATION, a Delaware corporation, promises to pay to Cede &
Co., or registered assigns, the principal sum set forth in the Schedule of
Increases and Decreases on the reverse side of this Security on October 15,
2006.
Interest Payment Dates: April 15 and October 15.
Record Dates: April 1 and October 1.
<PAGE>
4
Additional provisions of this Security are set forth on the other side
of this Security.
KELLEY OIL & GAS CORPORATION,
by /s/ David C. Baggett
-----------------------
Authorized Officer
/s/ Thomas E. Baker
-----------------------
Authorized Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
UNITED STATES TRUST
COMPANY OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred [Seal]
to in the Indenture.
by /s/ Gerard F. Ganey
______________________
Authorized Signatory
Dated: May 29, 1998
<PAGE>
5
10 3/8% Senior Subordinated Note Due 2006, Series C
1. Interest
--------
Kelley Oil & Gas Corporation, a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on the
principal amount of this Security at the rate per annum shown above; provided,
however, that if by November 29, 1998, neither the Registered Exchange Offer is
consummated nor, if required in lieu thereof pursuant to the Registration
Agreement, the Shelf Registration Statement is declared effective by the
Commission, interest will accrue on this Security from and including such date
until such date as either the Registered Exchange Offer is consummated or the
Shelf Registration Statement is declared effective by the Commission at a rate
of 0.50% per annum in excess of the interest rate per annum shown above;
provided further, however, that if by May 29, 1999, neither the Registered
Exchange Offer is consummated nor, if required in lieu thereof pursuant to the
Registration Agreement, the Shelf Registration Statement is declared effective
by the Commission, interest will accrue on this Security from and including such
date until such date as either the Registered Exchange Offer is consummated or
the Shelf Registration Statement is declared effective by the Commission at a
rate of 1.00% per annum in excess of the interest rate per annum shown above.
The Company will pay interest semiannually on April 15, and October 15 of each
year. Interest on the Securities will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from May 29, 1998.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Company shall pay interest on overdue principal at the rate borne
by the Securities plus 1% per annum, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
2. Method of Payment
-----------------
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the April 1 or October 1 next preceding the interest payment date
even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in
<PAGE>
6
money of the United States that at the time of payment is legal tender for
payment of public and private debts. Payments in respect of the Securities
represented by a Global Security (including principal, premium and interest)
will be made by wire transfer of immediately available funds to the accounts
specified by The Depository Trust Company. The Company will make all payments
in respect of a certificated Security (including principal, premium and
interest), by mailing a check to the registered address of each Holder thereof;
provided, however, that payments on a certificated Security will be made by wire
transfer to a U.S. dollar account maintained by the payee with a bank in the
United States if such Holder elects payment by wire transfer by giving written
notice to the Trustee or the Paying Agent to such effect designating such
account no later than 30 days immediately preceding the relevant due date for
payment (or such other date as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
--------------------------
Initially, United States Trust Company of New York, a New York banking
corporation ("Trustee"), will act as Paying Agent and Registrar. The Company
may appoint and change any Paying Agent, Registrar or co-registrar without
notice. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Securities under an Indenture dated as of May
29, 1998 ("Indenture"), between the Company and the Trustee. The terms of the
Securities 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.C.
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Terms defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture. The Securities are subject to all such terms, and
Securityholders are referred to the Indenture and the Act for a statement of
those terms.
The Securities are general unsecured obligations of the Company
limited to $80,000,000 aggregate principal amount (subject to Section 2.08 of
the Indenture). The Indenture imposes certain limitations on the Incurrence of
Indebtedness by the Company and certain of its Subsidiaries, the payment of
dividends and other distributions on the
<PAGE>
7
Capital Stock of the Company and certain of its Subsidiaries, the purchase or
redemption of Capital Stock of the Company and of certain Capital Stock of such
Subsidiaries, the sale or transfer of assets and Subsidiary stock, the
creation of Liens, the entering into of Sale/Leaseback Transactions and
transactions with Affiliates. In addition, the Indenture limits the ability of
the Company and certain of its Subsidiaries to restrict distributions and
dividends from Subsidiaries. The Indenture also restricts the ability of the
Company and any Subsidiary Guarantor to consolidate or merge with or into, or to
transfer all or substantially all their assets to, another person.
The Indenture also provides that the Company shall cause each
Subsidiary Guarantor, and each Restricted Subsidiary of the Company (other than
the Programs) that has total net assets as of the end of the most recent fiscal
year (as set forth on the balance sheet of such Restricted Subsidiary prepared
in accordance with GAAP) equal to or greater than the greater of $2.5 million
and one percent (1%) of Adjusted Consolidated Net Tangible Assets as of such
date, to Guarantee the Securities pursuant to a Subsidiary Guaranty. Any such
Subsidiary Guaranty will secure the due and punctual payment of the principal of
and interest, if any, on the Securities and all other amounts payable by the
Company under the Indenture and the Securities when and as the same shall be due
and payable, whether at maturity, by acceleration or otherwise. Any Subsidiary
Guaranty will unconditionally guarantee the Obligations on a senior subordinated
basis pursuant to the terms of the Indenture.
5. Optional Redemption
-------------------
Except as set forth in the next paragraph, the Securities shall not be
redeemable at the option of the Company prior to October 15, 2001. Thereafter,
the Securities shall be redeemable, at the Company's option, in whole or in
part, at any time or from time to time at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month
<PAGE>
8
period commencing on October 15 of the years set forth below:
Period Percentage
------ ----------
2001....................... 105.188%
2002....................... 102.594%
2003 and thereafter........ 100.000%
In addition, at any time and from time to time prior to October 15,
1999, the Company may redeem in the aggregate up to 35% of the principal amount
of Securities with the proceeds of one or more Equity Offerings following which
there is a Public Market, at a redemption price (expressed as a percentage of
principal amount) of 110.375% plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that either at least $18.0 million aggregate principal amount of Securities must
remain outstanding after each such redemption or such redemption must retire the
Securities in their entirety.
Notwithstanding the preceding two paragraphs, the Company will not be
permitted to redeem the Existing Securities unless, substantially concurrently
with such redemption, the Company redeems an aggregate principal amount of
Securities (rounded to the nearest integral multiple of $1,000) equal to the
product of: (1) a fraction, the numerator of which is the aggregate principal
amount of Existing Securities to be so redeemed and the denominator of which is
the aggregate principal amount of Existing Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
Securities outstanding immediately prior to such proposed redemption. Similarly,
the Company will not be permitted to redeem the Securities unless, substantially
concurrently with such redemption, the Company redeems an aggregate principal
amount of Existing Securities (rounded to the nearest integral multiple of
$1,000) equal to the product of: (1) a fraction, the numerator of which is the
aggregate principal amount of Securities to be so redeemed and the denominator
of which is the aggregate principal amount of Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
Existing Securities outstanding immediately prior to such proposed redemption.
<PAGE>
9
6. 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 of Securities to be redeemed
at his registered address. Securities in denominations larger than $1,000 may
be redeemed in part but only in whole multiples of $1,000. If money sufficient
to pay the redemption price of and accrued interest on all Securities (or
portions thereof) to be redeemed on the redemption date is deposited with the
Paying Agent on or before the redemption date and certain other conditions are
satisfied, on and after such date interest ceases to accrue on such Securities
(or such portions thereof) called for redemption.
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Securities will have the
right, subject to certain conditions, to cause the Company to repurchase all or
any part of the Securities of such Holder at a repurchase price equal to 101% of
the principal amount of the Securities to be repurchased plus accrued interest
to the date of repurchase (subject to the right of holders of record on the
relevant record date to receive interest due on the related interest payment
date) as provided in, and subject to the terms of, the Indenture.
8. Subordination
-------------
The Securities are subordinated to Senior Indebtedness, as defined in
the Indenture. To the extent provided in the Indenture, Senior Indebtedness
must be paid before the Securities may be paid. The Company agrees, and each
Securityholder by accepting a Security agrees, to the subordination provisions
contained in the Indenture and authorizes the Trustee to give it effect and
appoints the Trustee as attorney-in-fact for such purpose.
9. Denominations; Transfer; Exchange
---------------------------------
The Securities are in registered form without coupons in denominations
of $1,000 (or in the case of Definitive Securities sold to institutional
accredited investors as described in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, minimum denominations of $250,000) and whole multiples of
$1,000. A Holder may transfer or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to
<PAGE>
10
furnish appropriate endorsements or transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for redemption
(except, in the case of a Security to be redeemed in part, the portion of the
Security not to be redeemed) or any Securities for a period of 15 days before a
selection of Securities to be redeemed or 15 days before an interest payment
date.
10. Persons Deemed Owners
---------------------
The registered Holder of this Security may be treated as the owner of
it for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Discharge and Defeasance
------------------------
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount of the Securities then
outstanding and (ii) any default or noncompliance with any provisions may be
waived with the written consent of the Holders of at least a majority in
principal amount of the Securities then outstanding. Subject to certain
exceptions set forth in the Indenture, without notice to or the consent of any
Securityholder, the Company and the Trustee may amend the Indenture or the
Securities to cure any ambiguity, omission, defect or inconsistency, or to
comply with
<PAGE>
11
Article 5 of the Indenture, or to provide for uncertificated Securities in
addition to or in place of certificated Securities (provided that the
uncertificated Securities are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Securities are
described in Section 163(f)(2)(B) of the Code), or to make any change to the
subordination provisions of the Indenture that would limit or terminate the
benefits available to any holder of Senior Indebtedness (or its Representative),
or to add guarantees with respect to the Securities, or to secure the
Securities, or to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power conferred on the Company, or to make
any change that does not adversely affect the rights of any Securityholder, or
to comply with any requirement of the SEC in connection with qualifying the
Indenture under the Act. No amendment may be made to the subordination
provisions of the Indenture that adversely affects the rights of any holder of
Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or their representative) consent to such change.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) default for 30 days
in payment of interest on the Securities when due; (ii) default in payment of
principal on the Securities at maturity, upon redemption pursuant to paragraph 5
or 6 of the Securities, upon declaration or otherwise, or failure by the Company
to redeem or purchase Securities when required; (iii) failure by the Company to
comply with its obligations under certain covenants, (iv) failure by the Company
to comply with other agreements in the Indenture or the Securities, in certain
cases subject to notice and lapse of time; (v) certain accelerations (including
failure to pay within any grace period after final maturity) of other
Indebtedness of the Company or any Significant Subsidiary (other than Limited
Recourse Indebtedness) if the amount accelerated (or so unpaid) exceeds $10.0
million; (vi) certain events of bankruptcy, insolvency or reorganization with
respect to the Company or a Significant Subsidiary; (vii) any judgment or decree
for the payment of money in excess of $10.0 million is rendered against the
Company or a Significant Subsidiary, remains outstanding for a period of 60 days
following such judgment or decree and is not discharged, waived or stayed within
10 days after notice or (viii) a Subsidiary Guaranty ceases to be in full force
and effect (other than in accordance with the terms of such Subsidiary Guaranty)
or a Subsidiary Guarantor denies or disaffirms its obligations under its
<PAGE>
12
Subsidiary Guaranty if such default continues for a period of 10 days after
notice thereof to the Company. If an Event of Default occurs and is continuing,
the Trustee or the Holders of at least 25% in principal amount of the
outstanding Securities may declare the principal of and accrued but unpaid
interest on all the Securities to be due and payable immediately. Certain
events of bankruptcy, insolvency or reorganization are Events of Default which
will result in the Securities being due and payable immediately upon the
occurrence of such Events of Default. A default under clauses (iii) (except for
the covenants referred to in the preceding sentence), (iv), (vii) or (viii) will
not constitute an Event of Default until the Trustee or the Holders of 25% in
principal amount of the outstanding Securities notifies the Company of the
default and the Company does not cure such default within the time specified
after receipt of such notice.
Securityholders may not enforce the Indenture or the Securities except
as provided in the Indenture. The Trustee may refuse to enforce the Indenture
or the Securities unless it receives reasonable indemnity or security. Subject
to certain limitations, Holders of a majority in principal amount of the
Securities may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Securityholders notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in the interest of the Holders.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
or the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Security,
each Securityholder waives
<PAGE>
13
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Securities.
17. Authentication
--------------
This Security shall not be valid until an authorized signatory of
the Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
18. Abbreviations
-------------
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation
is made as to the accuracy of such numbers either as printed on the Securities
or as contained in any notice of redemption and reliance may be placed only on
the other identification numbers placed thereon.
20. Holders' Compliance with Registration Agreement
-----------------------------------------------
Each Holder of a Security, by acceptance hereof, acknowledges and
agrees to the provisions of the Registration Agreement, including, without
limitation, the obligations of the Holders with respect to a registration and
the indemnification of the Company to the extent provided therein.
<PAGE>
14
21. Governing Law
-------------
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
<PAGE>
15
The Company will furnish to any Securityholder upon written request
and without charge to the Securityholder a copy of the Indenture. Requests
may be made to:
Kelley Oil & Gas Corporation
601 Jefferson, Suite 1100
Houston, Texas 77002
Attention of Manager, Investor Relations
<PAGE>
16
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint _______________________ agent to transfer this Security
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 other side of this Security.
Signature Guarantee: _____________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the requirements
of the Registrar, which requirements include membership or
participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee
program" as may be determined by the Registrar in addition
to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.)
<PAGE>
17
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER RESTRICTED SECURITIES
In connection with any transfer of any of the Securities evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act after the later of the date of original issuance
of such Securities and the last date, if any, on which such Securities were
owned by the Company or any Affiliate of the Company, the undersigned confirms
that such Securities are being transferred in accordance with its terms:
CHECK ONE BOX BELOW:
(1) [_] to the Company or any of its Subsidiaries; or
(2) [_] pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) [_] inside the United States to a "qualified institutional buyer" (as
defined in Rule 144A under the Securities Act of 1933) that
purchases for its own account or for the account of a qualified
institutional buyer to whom notice is given that such transfer is
being made in reliance on Rule 144A, in each case pursuant to and
in compliance with Rule 144A under the Securities Act of 1933; or
(4) [_] inside the United States to an institutional "accredited investor"
(as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D
under the Securities Act of 1933) that, prior to such transfer,
furnishes to the Trustee a signed letter containing certain
representations and agreements (the form of which letter can be
obtained from the Trustee) and, if such transfer is in respect of
an aggregate principal amount of Securities at the time of
transfer of less than $250,000, an opinion of counsel acceptable
to the Company that such transfer is in compliance with the
Securities Act of 1933; or
(5) [_] outside the United States in an offshore transaction within the
meaning of
<PAGE>
18
Regulation S under the Securities Act in compliance with Rule 904
under the Securities Act of 1933; or
(6) [_] pursuant to another available exemption from registration provided
by Rule 144 under the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register any
of the Securities evidenced by this certificate in the name of any person
other than the registered holder thereof; provided, however, that if box
(4) or (5) is checked, the Trustee may require, prior to registering any
such transfer of the Securities, such legal opinions, certifications and
other information as the Company has reasonably requested to confirm that
such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act of 1933, such as the exemption provided by Rule 144 under such Act.
________________________
Signature
Signature Guarantee: _____________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the requirements
of the Registrar, which requirements include membership or
participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee
program" as may be determined by the Registrar in addition
to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.)
<PAGE>
19
[TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED]
The undersigned represents and warrants that it is purchasing this
Security for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Company as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Dated: ________________ ___________________________________
NOTICE: To be executed by
an executive officer
<PAGE>
20
OPTION OF HOLDER TO ELECT PURCHASE
If you elect to have this Security purchased by the Company pursuant
to Section 4.06 or 4.08 of the Indenture, check the box:
[_]
If you elect to have only part of this Security purchased by the
Company pursuant to Section 4.06 or 4.08 of the Indenture, check the box and
state the amount in principal amount at maturity:
[_] $ _____________
Date: _______________ Your Signature: ________________________
(Sign exactly as your
name appears on the other
side of this Security.)
Signature Guarantee: _____________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the requirements
of the Registrar, which requirements include membership or
participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee
program" as may be determined by the Registrar in addition
to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.)
<PAGE>
21
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $0. The
following increases or decreases in this Global Security have been made:
<TABLE>
<CAPTION>
Principal Amount
Amount of decrease Amount of increase at Maturity of Signature of
in Principal in Principal this Global authorized officer
Amount at Maturity Amount at Security following of Trustee or
of this Global Maturity of this such decrease or Securities
Date of Exchange Security Global Security increase Custodian
- ---------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY 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 IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS 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.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO
LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT
OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS
AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION
S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING
OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN
INSTITUTIONAL ACCREDITED INVESTOR
<PAGE>
2
ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN
INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF
THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR
FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND
THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE.
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH
TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH
THE FOREGOING RESTRICTIONS.
<PAGE>
3
No. C-1 Up to $30,000,000
CUSIP No.: 487906AF6
10 3/8% Senior Subordinated Note Due 2006, Series C
KELLEY OIL & GAS CORPORATION, a Delaware corporation, promises to pay to CEDE &
CO., or registered assigns, the principal sum set forth in the Schedule of
Increases and Decreases on the reverse side of this Security on October 15,
2006.
Interest Payment Dates: April 15 and October 15.
Record Dates: April 1 and October 1.
<PAGE>
4
Additional provisions of this Security are set forth on the other side
of this Security.
KELLEY OIL & GAS CORPORATION,
by /s/ David C. Baggett
-----------------------
Authorized Officer
by /s/ Thomas E. Baker
-----------------------
Authorized Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
UNITED STATES TRUST
COMPANY OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred [Seal]
to in the Indenture.
by /s/ Gerard F. Ganey
______________________
Authorized Signatory
Dated: May 29, 1998
<PAGE>
5
10 3/8% Senior Subordinated Note Due 2006, Series C
1. Interest
--------
Kelley Oil & Gas Corporation, a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on the
principal amount of this Security at the rate per annum shown above; provided,
however, that if by November 29, 1998, neither the Registered Exchange Offer is
consummated nor, if required in lieu thereof pursuant to the Registration
Agreement, the Shelf Registration Statement is declared effective by the
Commission, interest will accrue on this Security from and including such date
until such date as either the Registered Exchange Offer is consummated or the
Shelf Registration Statement is declared effective by the Commission at a rate
of 0.50% per annum in excess of the interest rate per annum shown above;
provided further, however, that if by May 29, 1999, neither the Registered
Exchange Offer is consummated nor, if required in lieu thereof pursuant to the
Registration Agreement, the Shelf Registration Statement is declared effective
by the Commission, interest will accrue on this Security from and including such
date until such date as either the Registered Exchange Offer is consummated or
the Shelf Registration Statement is declared effective by the Commission at a
rate of 1.00% per annum in excess of the interest rate per annum shown above.
The Company will pay interest semiannually on April 15, and October 15 of each
year. Interest on the Securities will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from May 29, 1998.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Company shall pay interest on overdue principal at the rate borne
by the Securities plus 1% per annum, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
2. Method of Payment
-----------------
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the April 1 or October 1 next preceding the interest payment date
even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in
<PAGE>
6
money of the United States that at the time of payment is legal tender for
payment of public and private debts. Payments in respect of the Securities
represented by a Global Security (including principal, premium and interest)
will be made by wire transfer of immediately available funds to the accounts
specified by The Depository Trust Company. The Company will make all payments
in respect of a certificated Security (including principal, premium and
interest), by mailing a check to the registered address of each Holder thereof;
provided, however, that payments on a certificated Security will be made by wire
transfer to a U.S. dollar account maintained by the payee with a bank in the
United States if such Holder elects payment by wire transfer by giving written
notice to the Trustee or the Paying Agent to such effect designating such
account no later than 30 days immediately preceding the relevant due date for
payment (or such other date as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
--------------------------
Initially, United States Trust Company of New York, a New York banking
corporation ("Trustee"), will act as Paying Agent and Registrar. The Company
may appoint and change any Paying Agent, Registrar or co-registrar without
notice. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Securities under an Indenture dated as of May
29, 1998 ("Indenture"), between the Company and the Trustee. The terms of the
Securities 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.C.
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Terms defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture. The Securities are subject to all such terms, and
Securityholders are referred to the Indenture and the Act for a statement of
those terms.
The Securities are general unsecured obligations of the Company
limited to $80,000,000 aggregate principal amount (subject to Section 2.08 of
the Indenture). The Indenture imposes certain limitations on the Incurrence of
Indebtedness by the Company and certain of its Subsidiaries, the payment of
dividends and other distributions on the
<PAGE>
7
Capital Stock of the Company and certain of its Subsidiaries, the purchase or
redemption of Capital Stock of the Company and of certain Capital Stock of such
Sub sidiaries, the sale or transfer of assets and Subsidiary stock, the
creation of Liens, the entering into of Sale/Leaseback Transactions and
transactions with Affiliates. In addition, the Indenture limits the ability of
the Company and certain of its Subsidiaries to restrict distributions and
dividends from Subsidiaries. The Indenture also restricts the ability of the
Company and any Subsidiary Guarantor to consolidate or merge with or into, or to
transfer all or substantially all their assets to, another person.
The Indenture also provides that the Company shall cause each
Subsidiary Guarantor, and each Restricted Subsidiary of the Company (other than
the Programs) that has total net assets as of the end of the most recent fiscal
year (as set forth on the balance sheet of such Restricted Subsidiary prepared
in accordance with GAAP) equal to or greater than the greater of $2.5 million
and one percent (1%) of Adjusted Consolidated Net Tangible Assets as of such
date, to Guarantee the Securities pursuant to a Subsidiary Guaranty. Any such
Subsidiary Guaranty will secure the due and punctual payment of the principal of
and interest, if any, on the Securities and all other amounts payable by the
Company under the Indenture and the Securities when and as the same shall be due
and payable, whether at maturity, by acceleration or otherwise. Any Subsidiary
Guaranty will unconditionally guarantee the Obligations on a senior subordinated
basis pursuant to the terms of the Indenture.
5. Optional Redemption
-------------------
Except as set forth in the next paragraph, the Securities shall not be
redeemable at the option of the Company prior to October 15, 2001. Thereafter,
the Securities shall be redeemable, at the Company's option, in whole or in
part, at any time or from time to time at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month
<PAGE>
8
period commencing on October 15 of the years set forth below:
Period Percentage
------ ----------
2001....................... 105.188%
2002....................... 102.594%
2003 and thereafter........ 100.000%
In addition, at any time and from time to time prior to October 15,
1999, the Company may redeem in the aggregate up to 35% of the principal amount
of Securities with the proceeds of one or more Equity Offerings following which
there is a Public Market, at a redemption price (expressed as a percentage of
principal amount) of 110.375% plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that either at least $18.0 million aggregate principal amount of Securities must
remain outstanding after each such redemption or such redemption must retire the
Securities in their entirety.
Notwithstanding the preceding two paragraphs, the Company will not be
permitted to redeem the Existing Securities unless, substantially concurrently
with such redemption, the Company redeems an aggregate principal amount of
Securities (rounded to the nearest integral multiple of $1,000) equal to the
product of: (1) a fraction, the numerator of which is the aggregate principal
amount of Existing Securities to be so redeemed and the denominator of which is
the aggregate principal amount of Existing Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
Securities outstanding immediately prior to such proposed redemption. Similarly,
the Company will not be permitted to redeem the Securities unless, substantially
concurrently with such redemption, the Company redeems an aggregate principal
amount of Existing Securities (rounded to the nearest integral multiple of
$1,000) equal to the product of: (1) a fraction, the numerator of which is the
aggregate principal amount of Securities to be so redeemed and the denominator
of which is the aggregate principal amount of Securities outstanding immediately
prior to such proposed redemption and (2) the aggregate principal amount of
Existing Securities outstanding immediately prior to such proposed redemption.
<PAGE>
9
6. 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 of Securities to be redeemed
at his registered address. Securities in denominations larger than $1,000 may
be redeemed in part but only in whole multiples of $1,000. If money sufficient
to pay the redemption price of and accrued interest on all Securities (or
portions thereof) to be redeemed on the redemption date is deposited with the
Paying Agent on or before the redemption date and certain other conditions are
satisfied, on and after such date interest ceases to accrue on such Securities
(or such portions thereof) called for redemption.
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Securities will have the
right, subject to certain conditions, to cause the Company to repurchase all or
any part of the Securities of such Holder at a repurchase price equal to 101% of
the principal amount of the Securities to be repurchased plus accrued interest
to the date of repurchase (subject to the right of holders of record on the
relevant record date to receive interest due on the related interest payment
date) as provided in, and subject to the terms of, the Indenture.
8. Subordination
-------------
The Securities are subordinated to Senior Indebtedness, as defined in
the Indenture. To the extent provided in the Indenture, Senior Indebtedness
must be paid before the Securities may be paid. The Company agrees, and each
Securityholder by accepting a Security agrees, to the subordination provisions
contained in the Indenture and authorizes the Trustee to give it effect and
appoints the Trustee as attorney-in-fact for such purpose.
9. Denominations; Transfer; Exchange
---------------------------------
The Securities are in registered form without coupons in denominations
of $1,000 (or in the case of Definitive Securities sold to institutional
accredited investors as described in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, minimum denominations of $250,000) and whole multiples of
$1,000. A Holder may transfer or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to
<PAGE>
10
furnish appropriate endorsements or transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for redemption
(except, in the case of a Security to be redeemed in part, the portion of the
Security not to be redeemed) or any Securities for a period of 15 days before a
selection of Securities to be redeemed or 15 days before an interest payment
date.
10. Persons Deemed Owners
---------------------
The registered Holder of this Security may be treated as the owner of
it for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Discharge and Defeasance
------------------------
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount of the Securities then
outstanding and (ii) any default or noncompliance with any provisions may be
waived with the written consent of the Holders of at least a majority in
principal amount of the Securities then outstanding. Subject to certain
exceptions set forth in the Indenture, without notice to or the consent of any
Securityholder, the Company and the Trustee may amend the Indenture or the
Securities to cure any ambiguity, omission, defect or inconsistency, or to
comply with
<PAGE>
11
Article 5 of the Indenture, or to provide for uncertificated Securities in
addition to or in place of certificated Securities (provided that the
uncertificated Securities are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Securities are
described in Section 163(f)(2)(B) of the Code), or to make any change to the
subordination provisions of the Indenture that would limit or terminate the
benefits available to any holder of Senior Indebtedness (or its Representative),
or to add guarantees with respect to the Securities, or to secure the
Securities, or to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power conferred on the Company, or to make
any change that does not adversely affect the rights of any Securityholder, or
to comply with any requirement of the SEC in connection with qualifying the
Indenture under the Act. No amendment may be made to the subordination
provisions of the Indenture that adversely affects the rights of any holder of
Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or their representative) consent to such change.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) default for 30 days
in payment of interest on the Securities when due; (ii) default in payment of
principal on the Securities at maturity, upon redemption pursuant to paragraph 5
or 6 of the Securities, upon declaration or otherwise, or failure by the Company
to redeem or purchase Securities when required; (iii) failure by the Company to
comply with its obligations under certain covenants, (iv) failure by the Company
to comply with other agreements in the Indenture or the Securities, in certain
cases subject to notice and lapse of time; (v) certain accelerations (including
failure to pay within any grace period after final maturity) of other
Indebtedness of the Company or any Significant Subsidiary (other than Limited
Recourse Indebtedness) if the amount accelerated (or so unpaid) exceeds $10.0
million; (vi) certain events of bankruptcy, insolvency or reorganization with
respect to the Company or a Significant Subsidiary; (vii) any judgment or decree
for the payment of money in excess of $10.0 million is rendered against the
Company or a Significant Subsidiary, remains outstanding for a period of 60 days
following such judgment or decree and is not discharged, waived or stayed within
10 days after notice or (viii) a Subsidiary Guaranty ceases to be in full force
and effect (other than in accordance with the terms of such Subsidiary Guaranty)
or a Subsidiary Guarantor denies or disaffirms its obligations under its
<PAGE>
12
Subsidiary Guaranty if such default continues for a period of 10 days after
notice thereof to the Company. If an Event of Default occurs and is continuing,
the Trustee or the Holders of at least 25% in principal amount of the
outstanding Securities may declare the principal of and accrued but unpaid
interest on all the Securities to be due and payable immediately. Certain
events of bankruptcy, insolvency or reorganization are Events of Default which
will result in the Securities being due and payable immediately upon the
occurrence of such Events of Default. A default under clauses (iii) (except for
the covenants referred to in the preceding sentence), (iv), (vii) or (viii) will
not constitute an Event of Default until the Trustee or the Holders of 25% in
principal amount of the outstanding Securities notifies the Company of the
default and the Company does not cure such default within the time specified
after receipt of such notice.
Securityholders may not enforce the Indenture or the Securities except
as provided in the Indenture. The Trustee may refuse to enforce the Indenture
or the Securities unless it receives reasonable indemnity or security. Subject
to certain limitations, Holders of a majority in principal amount of the
Securities may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Securityholders notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in the interest of the Holders.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
or the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Security,
each Securityholder waives
<PAGE>
13
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Securities.
17. Authentication
--------------
This Security shall not be valid until an authorized signatory of
the Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
18. Abbreviations
-------------
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation
is made as to the accuracy of such numbers either as printed on the Securities
or as contained in any notice of redemption and reliance may be placed only on
the other identification numbers placed thereon.
20. Holders' Compliance with Registration Agreement
-----------------------------------------------
Each Holder of a Security, by acceptance hereof, acknowledges and
agrees to the provisions of the Registration Agreement, including, without
limitation, the obligations of the Holders with respect to a registration and
the indemnification of the Company to the extent provided therein.
<PAGE>
14
21. Governing Law
-------------
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
<PAGE>
15
The Company will furnish to any Securityholder upon written request
and without charge to the Securityholder a copy of the Indenture. Requests
may be made to:
Kelley Oil & Gas Corporation
601 Jefferson, Suite 1100
Houston, Texas 77002
Attention of Manager, Investor Relations
<PAGE>
16
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint _______________________ agent to transfer this Security
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 other side of this Security.
Signature Guarantee: ____________________________________
(Signature must be guaranteed by an
"eligible guarantor institution", that
is, a bank, stockbroker, saving and
loan association or credit union
meeting the requirements of the
Registrar, which requirements include
membership or participation in the
Securities Transfer Agents Medallion
Program ("STAMP") or such other
"signature guarantee program" as may
be determined by the Registrar in
addition to, or in substitution for,
STAMP, all in accordance with the
Securities Exchange Act of 1934, as
amended.)
<PAGE>
17
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER RESTRICTED SECURITIES
In connection with any transfer of any of the Securities evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act after the later of the date of original issuance
of such Securities and the last date, if any, on which such Securities were
owned by the Company or any Affiliate of the Company, the undersigned confirms
that such Securities are being transferred in accordance with its terms:
CHECK ONE BOX BELOW:
(1) [_] to the Company or any of its Subsidiaries; or
(2) [_] pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) [_] inside the United States to a "qualified institutional buyer" (as
defined in Rule 144A under the Securities Act of 1933) that
purchases for its own account or for the account of a qualified
institutional buyer to whom notice is given that such transfer is
being made in reliance on Rule 144A, in each case pursuant to and
in compliance with Rule 144A under the Securities Act of 1933; or
(4) [_] inside the United States to an institutional "accredited investor"
(as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D
under the Securities Act of 1933) that, prior to such transfer,
furnishes to the Trustee a signed letter containing certain
representations and agreements (the form of which letter can be
obtained from the Trustee) and, if such transfer is in respect of
an aggregate principal amount of Securities at the time of
transfer of less than $250,000, an opinion of counsel acceptable
to the Company that such transfer is in compliance with the
Securities Act of 1933; or
(5) [_] outside the United States in an offshore transaction within the
meaning of
<PAGE>
18
Regulation S under the Securities Act in compliance with Rule 904
under the Securities Act of 1933; or
(6) [_] pursuant to another available exemption from registration provided
by Rule 144 under the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register any
of the Securities evidenced by this certificate in the name of any person
other than the registered holder thereof; provided, however, that if box
(4) or (5) is checked, the Trustee may require, prior to registering any
such transfer of the Securities, such legal opinions, certifications and
other information as the Company has reasonably requested to confirm that
such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act of 1933, such as the exemption provided by Rule 144 under such Act.
________________________
Signature
Signature Guarantee: _____________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the requirements
of the Registrar, which requirements include membership or
participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee
program" as may be determined by the Registrar in addition
to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.)
<PAGE>
19
[TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED]
The undersigned represents and warrants that it is purchasing this
Security for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Company as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Dated: ________________ ___________________________________
NOTICE: To be executed by
an executive officer
<PAGE>
20
OPTION OF HOLDER TO ELECT PURCHASE
If you elect to have this Security purchased by the Company pursuant
to Section 4.06 or 4.08 of the Indenture, check the box:
[_]
If you elect to have only part of this Security purchased by the
Company pursuant to Section 4.06 or 4.08 of the Indenture, check the box and
state the amount in principal amount at maturity:
[_] $ ____________
Date: _______________ Your Signature: _____________________________
(Sign exactly as your
name appears on the other
side of this Security.)
Signature Guarantee: _____________________________________
(Signature must be guaranteed by an "eligible guarantor
institution", that is, a bank, stockbroker, saving and
loan association or credit union meeting the requirements
of the Registrar, which requirements include membership or
participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee
program" as may be determined by the Registrar in addition
to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.)
<PAGE>
21
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $0. The
following increases or decreases in this Global Security have been made:
<TABLE>
<CAPTION>
Principal Amount
Amount of decrease Amount of increase at Maturity of Signature of
in Principal in Principal this Global authorized officer
Amount at Maturity Amount at Security following of Trustee or
of this Global Maturity of this such decrease or Securities
Date of Exchange Security Global Security increase Custodian
- ---------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT 21.1
Kelley Oil Corporation
Kelley Operating Company Ltd.
Petrofunds Inc.
Concorde Gas Marketing, Inc.
Concorde Gas Intrastate Inc.
Kelley Partners 1994 Development Drilling Program
Kelley Partners 1992 Development Drilling Program
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Kelley Oil & Gas
Corporation on Form S-4 of our reports dated February 6, 1998 and March 6,
1998 appearing in the Prospectus, which is part of this Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Houston, Texas
August 14, 1998
<PAGE>
EXHIBIT 23.2
<TABLE>
<S> <C>
H.J. GRUY AND ASSOCIATES, INC.
- -----------------------------------------------------------------------------------------
1200 Smith Street, Suite 3040, Houston, Texas 77002 . Fax (713) 739-6112 . (713) 739-1000
</TABLE>
CONSENT OF H.J. GRUY AND ASSOCIATES, INC.
We hereby consent to the use of the name H.J. Gruy and Associates, Inc. and of
references to H.J. Gruy and Associates, Inc. under the caption "EXPERTS," and of
information contained in our reserve report dated February 18, 1998, prepared
for Kelley Oil & Gas Corporation, in the Registration Statement on Form S-4 of
Kelley Oil & Gas Corporation.
H.J. GRUY AND ASSOCIATES, INC.
/s/ MARILYN WILSON
Marilyn Wilson, PE
President
Houston, Texas
August 14, 1998
<PAGE>
EXHIBIT 24.1
KELLEY OIL & GAS CORPORATION
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the individual whose signature appears
below constitutes and appoints John F. Bookout, David C. Baggett and Thomas E.
Baker, and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his own name,
place and stead, in any and all capacities to sign a Registration Statement
on Form S-4 to be filed with the Securities Exchange Commission with respect to
the 10 3/8% Senior Subordinated Notes due 2006 Series D of Kelley Oil & Gas
Corporation (the "Company") to be issued and exchanged for the 10 3/8% Senior
Subordinated Notes due 2006 Series C of the Company, in the aggregate
principal amount of $30,000,000, and any and all amendments (including post-
effective amendments) to the Registration Statement, and to file the same and
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
/s/ JOHN F. BOOKOUT
-------------------------------------
John F. Bookout
July 16, 1998
<PAGE>
KELLEY OIL & GAS CORPORATION
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the individual whose signature appears
below constitutes and appoints John F. Bookout, David C. Baggett and Thomas E.
Baker, and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his own name,
place and stead, in any and all capacities to sign a Registration Statement
on Form S-4 to be filed with the Securities Exchange Commission with respect to
the 10 3/8% Senior Subordinated Notes due 2006 Series D of Kelley Oil & Gas
Corporation (the "Company") to be issued and exchanged for the 10 3/8% Senior
Subordinated Notes due 2006 Series C of the Company, in the aggregate
principal amount of $30,000,000, and any and all amendments (including post-
effective amendments) to the Registration Statement, and to file the same and
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
/s/ MARK W. WOODS
-------------------------------------
Mark W. Woods
July 20, 1998
<PAGE>
KELLEY OIL & GAS CORPORATION
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the individual whose signature appears
below constitutes and appoints John F. Bookout, David C. Baggett and Thomas E.
Baker, and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his own name,
place and stead, in any and all capacities to sign a Registration Statement
on Form S-4 to be filed with the Securities Exchange Commission with respect to
the 10 3/8% Senior Subordinated Notes due 2006 Series D of Kelley Oil & Gas
Corporation (the "Company") to be issued and exchanged for the 10 3/8% Senior
Subordinated Notes due 2006 Series C of the Company, in the aggregate
principal amount of $30,000,000, and any and all amendments (including post-
effective amendments) to the Registration Statement, and to file the same and
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
/s/ WILLIAM J. MURRAY
-------------------------------------
William J. Murray
July 20, 1998
<PAGE>
KELLEY OIL & GAS CORPORATION
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the individual whose signature appears
below constitutes and appoints John F. Bookout, David C. Baggett and Thomas E.
Baker, and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his own name,
place and stead, in any and all capacities to sign a Registration Statement
on Form S-4 to be filed with the Securities Exchange Commission with respect to
the 10 3/8% Senior Subordinated Notes due 2006 Series D of Kelley Oil & Gas
Corporation (the "Company") to be issued and exchanged for the 10 3/8% Senior
Subordinated Notes due 2006 Series C of the Company, in the aggregate
principal amount of $30,000,000, and any and all amendments (including post-
effective amendments) to the Registration Statement, and to file the same and
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
/s/ JOHN J. CONKLIN, JR.
-------------------------------------
John J. Conklin, Jr.
July 20, 1998
<PAGE>
KELLEY OIL & GAS CORPORATION
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the individual whose signature appears
below constitutes and appoints John F. Bookout, David C. Baggett and Thomas E.
Baker, and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his own name,
place and stead, in any and all capacities to sign a Registration Statement
on Form S-4 to be filed with the Securities Exchange Commission with respect to
the 10 3/8% Senior Subordinated Notes due 2006 Series D of Kelley Oil & Gas
Corporation (the "Company") to be issued and exchanged for the 10 3/8% Senior
Subordinated Notes due 2006 Series C of the Company, in the aggregate
principal amount of $30,000,000, and any and all amendments (including post-
effective amendments) to the Registration Statement, and to file the same and
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
/s/ OGDEN M. PHIPPS
-------------------------------------
Ogden M. Phipps
July 20, 1998
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
KELLEY OIL & GAS CORPORATION
Offer to Exchange all outstanding 10 3/8% Senior Subordinated Notes Due 2006,
Series C, for 10 3/8% Senior Subordinated Notes Due 2006, Series D
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
Deliver to United States Trust Company of New York
(the "Exchange Agent")
BY HAND DELIVERY: BY OVERNIGHT COURIER: BY REGISTERED OR
United States Trust United States Trust Company CERTIFIED MAIL:
Company of New York United States Trust
of New York 770 Broadway Company
111 Broadway 13th Floor of New York
Lower Level New York, NY 10003 Box 843
New York, NY 10005 Attn: Corporate Trust Service Peter Cooper Station
Attn: Corporate Trust Window New York, NY 10276
Attn: Corporate Trust
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
United States Trust Company of New York
(212) 420-6152
Confirm: (800) 548-6565
For Information:
(800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
The undersigned hereby acknowledges receipt of the Prospectus dated ,
1998 (the "Prospectus") of Kelley Oil & Gas Company (the "Company") and this
Letter of Transmittal, which together constitute the Company's offer (the
"Exchange Offer") to exchange an aggregate principal amount of $30,000,000 of
its 10 3/8% Senior Subordinated Notes Due 2006, Series D (the "Notes"), which
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 an equal principal amount of its outstanding 10 3/8%
Senior Subordinated Notes Due 2006, Series C (the "Outstanding Notes"), in
integral multiples of $1,000. The term "Expiration Date" means 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. Capitalized terms used but
not defined herein have the respective meanings given to them in the
Prospectus.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS RELATING
TO THE PROCEDURE FOR TENDERING AND REQUESTS FOR ADDITIONAL COPIES OF THE
PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE
AGENT. QUESTIONS RELATING TO THE EXCHANGE OFFER AND REQUESTS FOR ASSISTANCE OR
FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE
DIRECTED TO THE COMPANY.
<PAGE>
List below the Outstanding Notes to which this Letter of Transmittal
relates. If the space indicated below is inadequate, additional information
should be listed on a separately signed schedule affixed hereto.
DESCRIPTION OF OUTSTANDING NOTES TENDERED HEREBY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) AGGREGATE PRINCIPAL AMOUNT
EXACTLY AS NAME(S) APPEAR(S) ON NOTE(S) NOTE AMOUNT REPRESENTED TENDERED**
(PLEASE FILL IN) NUMBERS* BY OUTSTANDING NOTES (IF LESS THAN ALL)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ $
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
TOTAL $ $
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry Holders.
** Unless otherwise indicated, the Holder will be deemed to have tendered
the full aggregate principal amount represented by such Outstanding
Notes. All tenders must be in integral multiples of $1,000.
This Letter of Transmittal is to be used (i) if certificates of Outstanding
Notes are to be tendered herewith, (ii) if delivery of Outstanding 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 or (iii)
tender of the Outstanding Notes is to be made according to the guaranteed
delivery procedures described in the Prospectus under the caption "The
Exchange Offer--Guaranteed Delivery Procedures". See Instruction 2. Delivery
of documents to a book-entry transfer facility does not constitute delivery to
the Exchange Agent. It is understood that participants in DTC's book-entry
system (the "Book-Entry Transfer Facility") will, in accordance with DTC's
Automated Tender Offer Program procedures and in lieu of physical delivery to
the Exchange Agent of a Letter of Transmittal, electronically acknowledge
receipt of, and agree to be bound by, the terms of this Letter of Transmittal.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Outstanding 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. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their
Outstanding Notes must complete this letter in its entirety.
[_] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK-
ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution__________________________________________________
[_] The Depository Trust Company
Account Number_________________________________________________________________
Transaction Code Number________________________________________________________
Holders whose Outstanding Notes are not immediately available or who cannot
deliver their Outstanding Notes and all other documents required hereby to the
Exchange Agent on or prior to the Expiration Date may tender their Outstanding
Notes according to the guaranteed delivery procedure set forth in the
Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures". See Instruction 2.
2
<PAGE>
[_] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)________________________________________________
Date of Execution of Notice of Guaranteed Delivery_____________________________
Name of Eligible Institution that Guaranteed Delivery__________________________
If delivered by book-entry transfer:
Account Number________________________________________________________________
Transaction Code Number_______________________________________________________
[_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name___________________________________________________________________________
Address________________________________________________________________________
3
<PAGE>
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of the
Outstanding Notes indicated above. Subject to, and effective upon, the
acceptance for exchange of such Outstanding Notes tendered hereby, the
undersigned hereby exchanges, assigns and transfers to, or upon the order of,
the Company all right, title and interest in and to such Outstanding Notes as
are being tendered hereby, including all rights to accrual of interest thereon
on and after the date of issuance of the Notes. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that the
Exchange Agent acts as the agent of the Company in connection with the
Exchange Offer) to cause the Outstanding Notes to be assigned, transferred and
exchanged. The undersigned represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Outstanding Notes and
to acquire Notes issuable upon the exchange of such tendered Outstanding
Notes, and that when the same are accepted for exchange, the Company will
acquire good and unencumbered title to the tendered Outstanding Notes, free
and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim.
The undersigned represents to the Company that (i) the Notes acquired
pursuant to the Exchange Offer are being obtained in the ordinary course of
business of the person receiving such Notes, whether or not such person is the
undersigned, and (ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the
distribution of such Notes. If the undersigned or the person receiving the
Notes covered hereby is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of the
Notes. If the undersigned is a broker-dealer that will receive Notes, it
represents that the Outstanding Notes to be exchanged for the Notes were
acquired as a result of market-making activities or other trading activities.
If the undersigned or the person receiving the Notes covered hereby is a
broker-dealer that is receiving the Notes for its own account in exchange for
Outstanding Notes that were acquired as a result of market-making activities
or other trading activities, the undersigned acknowledges that it or such
other person will deliver a prospectus in connection with any resale of such
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The undersigned and any such other person
acknowledge that, if they are participating in the Exchange Offer for the
purpose of distributing the Notes, (i) they cannot rely on the position of the
staff of the Securities and Exchange Commission enunciated in Exxon Capital
Holdings Corporation (available May 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991) or similar no-action letters and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with the
resale transaction and (ii) failure to comply with such requirements in such
instance could result in the undersigned or any such other person incurring
liability under the Securities Act for which such persons are not indemnified
by the Company. If the undersigned or the person receiving the Notes covered
by this letter is an affiliate (as defined under Rule 405 of the Securities
Act) of the Company, the undersigned represents to the Company that (i) the
undersigned understands and acknowledges that such Notes may not be offered
for resale, resold or otherwise transferred by the undersigned or such other
person without registration under the Securities Act or an exemption therefrom
and (ii) the undersigned or such other person will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company
to be necessary or desirable to
4
<PAGE>
complete the exchange, assignment and transfer of tendered Outstanding Notes
or transfer ownership of such Outstanding Notes on the account books
maintained by the Book-Entry Transfer Facility. The undersigned further agrees
that acceptance of any tendered Outstanding Notes by the Company and the
issuance of Notes in exchange therefor shall constitute performance in full by
the Company of its obligations under the Registration Agreement and that the
Company shall have no further obligations or liabilities thereunder for the
registration of the Outstanding Notes or the Notes.
The Exchange Offer is subject to certain conditions set forth in the
Prospectus under the caption "The Exchange Offer--Conditions". The undersigned
recognizes that as a result of these conditions (which may be waived, in whole
or in part, by the Company), as more particularly set forth in the Prospectus,
the Company may not be required to exchange any of the Outstanding Notes
tendered hereby and, in such event, the Outstanding Notes not exchanged will
be returned to the undersigned at the address shown below the signature of the
undersigned.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Tendered Outstanding Notes may be
withdrawn at any time prior to the Expiration Date.
Unless otherwise indicated in the box entitled "Special Registration
Instructions" or the box entitled "Special Delivery Instructions" in this
Letter of Transmittal, certificates for all Notes delivered in exchange for
tendered Outstanding Notes, and any Outstanding Notes delivered herewith but
not exchanged, will be registered in the name of the undersigned and shall be
delivered to the undersigned at the address shown below the signature of the
undersigned. If a Note is to be issued to a person other than the person(s)
signing this Letter of Transmittal, or if the Note is to be mailed to someone
other than the person(s) signing this Letter of Transmittal or to the
person(s) signing this Letter of Transmittal at an address different than the
address shown on this Letter of Transmittal, the appropriate boxes of this
Letter of Transmittal should be completed. IF OUTSTANDING NOTES ARE
SURRENDERED BY HOLDER(S) THAT HAVE COMPLETED EITHER THE BOX ENTITLED "SPECIAL
REGISTRATION INSTRUCTIONS" OR THE BOX ENTITLED "SPECIAL DELIVERY INSTRUCTIONS"
IN THIS LETTER OF TRANSMITTAL, SIGNATURE(S) ON THIS LETTER OF TRANSMITTAL MUST
BE GUARANTEED BY AN ELIGIBLE INSTITUTION (SEE INSTRUCTION 4).
5
<PAGE>
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 5) (SEE INSTRUCTION 5)
To be completed ONLY if the Notes
To be completed ONLY if the Notes are to be sent to someone other
are to be issued in the name of than the undersigned, or to the
someone other than the undersigned. undersigned at an address other
than that shown under "Description
of Outstanding Notes Tendered
Hereby."
Issue Note to:
Name: ______________________________ Mail Exchange Note to:
Name: _____________________________
Address: ___________________________
Address:___________________________
------------------------------------
(Please Print or Type) -----------------------------------
(Please Print or Type)
REGISTERED HOLDER(S) OF OUTSTANDING NOTES SIGN HERE
(In addition, complete Substitute Form W-9 Below)
X __________________________________________________________________________
X __________________________________________________________________________
(Signature(s) of Registered Holder(s))
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
the Outstanding Notes or on a security position listing as the owner of the
Outstanding Notes or by person(s) authorized to become registered holder(s)
by properly completed bond powers transmitted herewith. If signature is by
attorney-in-fact, trustee, executor, administrator, guardian, officer of a
corporation or other person acting in a fiduciary capacity, please provide
the following information.
(Please Print or Type):
Name and Capacity (full title): ____________________________________________
Address (including zip): ___________________________________________________
Area Code and Telephone Number: ____________________________________________
Dated: _____________________________________________________________________
SIGNATURE GUARANTY (If required--See Instruction 4)
Authorized Signature: ______________________________________________________
(Signature of Representative of Signature
Guarantor)
Name and Title: ____________________________________________________________
Name of Firm: ______________________________________________________________
Area Code and Telephone Number: ____________________________________________
(Please Print or Type)
Dated:
6
<PAGE>
PAYOR'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK
THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED
Please provide your social security number or other taxpayer identification
number on the following Substitute Form W-9 and certify therein that you are
not subject to backup withholding.
PART 1--Please provide your
TIN in the box at right and ----------------------
SUBSTITUTE certify by signing and dating Social Security Number
below. or Employer
FORM W-9 Identification Number
PART 2--CERTIFICATION--Under -----------------------
penalties of perjury, I
certify (1) that the number PART 3--
shown on this form is my
correct taxpayer Exempt from backup
DEPARTMENT OF THE identification number and (2) withholding [_]
TREASURY that I am not subject to -----------------------
INTERNAL REVENUE backup withholding under the
SERVICE provisions of Section PART 4--
3406(a)(1)(C) of the Internal
Revenue Code either because Awaiting TIN [_]
(a) I have not been notified
that I am subject to backup
withholding as a result of
failure to report all
interest or dividends or (b)
the Internal Revenue Service
has notified me that I am no
PAYOR'S REQUEST FOR longer subject to backup
TAXPAYER withholding.
IDENTIFICATION
NUMBER ("TIN") Signature ______________Dated:
- -------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY INTEREST OR OTHER REPORTABLE PAYMENTS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 4 OF SUBSTITUTE FORM W-9.
- -------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered
an application to receive a taxpayer identification number to the
appropriate Internal Revenue Service Center or Social Security
Administration Office, or (b) I intend to mail or deliver an application in
the near future. I understand that if I do not provide a taxpayer
identification number within 60 days, 31% of all reportable payments made
to me thereafter will be withheld until I provide a number. Moreover, I
understand that during this 60-day period, 31% of all reportable interest
payments made to me will be withheld commencing 7 business days after the
payor receives this Certificate of Awaiting Tax Identification Number and
terminating on the date I provide a certified TIN to the payor.
-------------------------------------- ------------------------------
Signature Date
7
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
All physically delivered Outstanding Notes or any confirmation of a book-
entry transfer to the Exchange Agent's account at the Book-Entry Transfer
Facility of Outstanding Notes tendered by book-entry transfer, as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile thereof, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at any of its addresses
set forth herein on or prior to the Expiration Date (as defined in the
Prospectus). THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE
OUTSTANDING NOTES AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK
OF THE HOLDER, AND EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, BE USED.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal
(or facsimile thereof), shall waive any right to receive notice of the
acceptance of the Outstanding Notes for exchange.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH HEREIN, OR INSTRUCTIONS VIA A
FACSIMILE NUMBER OTHER THAN THE ONES SET FORTH HEREIN, WILL NOT CONSTITUTE A
VALID DELIVERY.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their
Outstanding Notes and (i) whose Outstanding Notes are not immediately
available or (ii) who cannot deliver their Outstanding Notes, this Letter of
Transmittal or any other required documents to the Exchange Agent (or complete
the procedures for book-entry transfer) prior to the Expiration Date, may
effect a tender if:
(a) the tender is made through a member firm of a registered national
securities exchange 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 17 Ad-15 under the Securities Exchange Act of 1934, as
amended (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 transmission, mail or hand delivery)
setting forth the name and address of the Holder, the registration
number(s) of such Outstanding Notes and the principal amount of Outstanding
Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the Expiration Date, this Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Outstanding Notes (or a
confirmation of book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility) and any other
documents required by this 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), as well as all tendered Outstanding Notes in proper
form for transfer (or a confirmation of book-entry transfer of such
Outstanding Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility) and all other documents required by this Letter of
Transmittal, are received by the Exchange Agent within five New York Stock
Exchange 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 Outstanding Notes according to the
guaranteed delivery procedures set forth
8
<PAGE>
above. Any Holder who wishes to tender Outstanding Notes pursuant to the
guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery relating to such Outstanding
Notes prior to the Expiration Date. Failure to complete the guaranteed
delivery procedures outlined above will not, of itself, affect the validity or
effect a revocation of any Letter of Transmittal form properly completed and
executed by a Holder who attempted to use the guaranteed delivery procedures.
3. PARTIAL TENDERS; WITHDRAWALS.
If less than the entire principal amount of Outstanding Notes evidenced by a
submitted certificate is tendered, the tendering Holder should fill in the
principal amount tendered in the column entitled "Principal Amount Tendered"
of the box entitled "Description of Outstanding Notes Tendered Hereby". A
newly issued Outstanding Note for the principal amount of Outstanding Notes
submitted but not tendered will be sent to such Holder as soon as practicable
after the Expiration Date. All Outstanding Notes delivered to the Exchange
Agent will be deemed to have been tendered in full unless otherwise indicated.
Tenders of Outstanding Notes will be accepted only in integral multiples of
$1,000.
Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date, after which tenders of Outstanding
Notes are irrevocable. To be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Exchange
Agent. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Outstanding Notes to be withdrawn (the "Depositor"), (ii)
identify the Outstanding Notes to be withdrawn (including the note number(s)
and principal amount of such Outstanding Notes, or, in the case of Outstanding
Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited), (iii) be signed by the
Holder in the same manner as the original signature on this Letter of
Transmittal (including any required signature guaranties) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Outstanding Notes register the transfer of such Outstanding Notes into the
name of the person withdrawing the tender and (iv) specify the name in which
any such Outstanding 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 notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Outstanding Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Notes will be issued with respect thereto unless the
Outstanding Notes so withdrawn are validly retendered. Any Outstanding Notes
that have been tendered but 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.
4. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS;
GUARANTY OF SIGNATURES.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of the Outstanding Notes tendered hereby, the signature
must correspond with the name(s) as written on the face of the certificates
without alteration or enlargement or any change whatsoever. If this Letter of
Transmittal is signed by a participant in the Book-Entry Transfer Facility,
the signature must correspond with the name as it appears on the security
position listing as the holder of the Outstanding Notes.
If any of the Outstanding Notes tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Outstanding Notes registered in different names are tendered,
it will be necessary to complete, sign and submit as many separate copies of
this Letter of Transmittal as there are different registrations of Outstanding
Notes.
9
<PAGE>
Signatures on this Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution unless the
Outstanding Notes tendered hereby are tendered (i) by a registered Holder who
has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
If this Letter of Transmittal is signed by the registered Holder or Holders
of Outstanding Notes (which term, for the purposes described herein, shall
include a participant in the Book-Entry Transfer Facility whose name appears
on a security listing as the holder of the Outstanding Notes) listed and
tendered hereby, no endorsements of the tendered Outstanding Notes or separate
written instruments of transfer or exchange are required. In any other case,
the registered Holder (or acting Holder) must either properly endorse the
Outstanding Notes or transmit properly completed bond powers with this Letter
of Transmittal (in either case, executed exactly as the name(s) of the
registered Holder(s) appear(s) on the Outstanding Notes, and, with respect to
a participant in the Book-Entry Transfer Facility whose name appears on a
security position listing as the owner of Outstanding Notes, exactly as the
name of the participant appears on such security position listing), with the
signature on the Outstanding Notes or bond power guaranteed by an Eligible
Institution (except where the Outstanding Notes are tendered for the account
of an Eligible Institution).
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS.
Tendering Holders should indicate, in the applicable box, the name and
address (or account at the Book-Entry Transfer Facility) in which the Notes or
substitute Outstanding Notes for principal amounts not tendered or not
accepted for exchange are to be issued (or deposited), if different from the
names and addresses or accounts of the person signing this Letter of
Transmittal. In the case of issuance in a different name, the employer
identification number or social security number of the person named must also
be indicated and the tendering Holder should complete the applicable box.
If no instructions are given, the Notes (and any Outstanding Notes not
tendered or not accepted) will be issued in the name of and sent to the acting
Holder of the Outstanding Notes or deposited at such Holder's account at the
Book-Entry Transfer Facility.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
and exchange of Outstanding Notes to it or its order pursuant to the Exchange
Offer. If, however, certificates representing the Notes or the Outstanding
Notes for the principal amounts not tendered or accepted for exchange are to
be delivered to, or are to be issued in the name of, any person other than the
person signing this Letter of Transmittal, or if a transfer tax is imposed for
any other reason, other than the transfer and exchange of Outstanding Notes to
the Company or its order pursuant to the Exchange Offer, the amount of any
such transfer taxes (whether imposed on the registered Holder or any other
person) will be payable by the tendering Holder. If satisfactory evidence of
payment of such taxes or exception therefrom is not submitted herewith, the
amount of such transfer taxes will be billed directly to such tendering
Holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer stamps to be affixed to the Outstanding Notes listed in this Letter
of Transmittal.
10
<PAGE>
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive, in whole or in part, any
of the conditions to the Exchange Offer set forth in the Prospectus.
8. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES.
Any Holder whose Outstanding Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
9. REQUEST FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number(s) set
forth above. In addition, all questions relating to the Exchange Offer, as
well as requests for assistance or additional copies of the Prospectus and
this Letter of Transmittal, may be directed to the Company at 601 Jefferson,
Suite 1100, Houston, Texas 77002, Attention: Investor Relations Manager
(telephone: (713) 652-5200).
10. VALIDITY AND FORM.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding 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 Outstanding Notes not properly tendered
or any Outstanding Notes the Company's acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Outstanding Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Outstanding 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 Outstanding Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Outstanding Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering Holders as soon as practicable
following the Expiration Date.
IMPORTANT TAX INFORMATION
Under federal income tax law, a holder receiving interest on Exchange Notes
is required to provide the payor of interest with such holder's correct TIN on
Substitute Form W-9 herein. If such holder is an individual, the TIN is the
holder's social security number. The Certificate of Awaiting Taxpayer
Identification Number should be completed if the holder has not been issued a
TIN and has applied for a number or intends to apply for a number in the near
future. The payor is required to report to the Internal Revenue Service the
amount of reportable interest paid to the holder on Notes. If the payor is not
provided with the correct TIN, the holder may be subject to a $50 penalty
imposed by the Internal Revenue Service. In addition, interest payments that
are made to such holder on Notes may be subject to backup withholding.
Certain holders (including, among others, all corporations and certain
foreign individuals and foreign entities) are not subject to these backup
withholding and reporting requirements. For a foreign
11
<PAGE>
holder to qualify as an exempt recipient, that holder must submit to the payor
of interest a properly completed Internal Revenue Service Form W-8, signed
under penalties of perjury, attesting to that holder's exempt status. Such
forms can be obtained from the Exchange Agent.
If backup withholding applies, the payor is required to withhold 31% of any
amounts otherwise payable to the holder. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be applied for with the
Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on interest payments to be made to a holder
with respect to Notes, the holder is required to notify the payor of his or
her correct TIN by completing the form herein certifying that the TIN provided
on Substitute Form W-9 is correct (or that such holder is awaiting a TIN) and
that (i) such holder has not been notified by the Internal Revenue Service
that he or she is subject to backup withholding as a result of failure to
report all interest or dividends or (ii) the Internal Revenue Service has
notified such holder that he or she is no longer subject to backup
withholding.
WHAT NUMBER TO GIVE THE PAYOR
Each holder is required to give the payor the social security number or
employer identification number of the record holder(s) of the Notes. If Notes
are in more than one name or are not in the name of the actual holder, consult
the attached Guidelines for Certifying TIN for additional guidance on which
number to report.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
If the holder of Notes has not been issued a TIN and has applied for a
number or intends to apply for a number in the near future, write "Applied
For" in the space for the TIN on Substitute Form W-9, check the box in Part 4,
sign and date the form and the Certificate of Awaiting Taxpayer Identification
Number and return them to the Exchange Agent. If such certificate is completed
and the payor of interest on the Notes is not provided with the TIN within 60
days, the payor will withhold 31% of all payments made thereafter until a TIN
is provided to the payor. Moreover, even if a TIN is provided within such 60-
day period, the payor is required to withhold 31% of any reportable interest
payments made to the payee 7 days following receipt by the payor of the
Certificate of Awaiting Tax Identification Number. The payor must refund these
amounts withheld if it receives the payee's certified TIN within the 60-day
period and the payee was not otherwise subject to backup withholding during
the period.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE THEREOF
(TOGETHER WITH OUTSTANDING NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND
ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
12
<PAGE>
KELLEY OIL & GAS CORPORATION
NOTICE OF GUARANTEED DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTY)
As set forth in the Prospectus dated , 1998 (the "Prospectus") of
Kelley Oil & Gas Corporation (the "Company") in the section entitled "The
Exchange Offer--Guaranteed Delivery Procedures" and in the accompanying Letter
of Transmittal (the "Letter of Transmittal") and Instruction 2 thereto, this
form or one substantially equivalent hereto must be used to accept the
Exchange Offer if certificates representing the Company's 10 3/8% Senior
Subordinated Notes Due 2006, Series C (the "Outstanding Notes") are not
immediately available to the Holder thereof or time will not permit the Holder
to deliver its Outstanding Notes or other required documents to the Exchange
Agent, or to complete the procedures for book-entry transfer, before the
Expiration Date. Capitalized terms used but not defined herein have the
respective meanings given to them in the Prospectus. This form may be
delivered by hand or sent by overnight courier, facsimile transmission or
registered or certified mail to the Exchange Agent and must be received by the
Exchange Agent before 5:00 p.m., New York City time on , 1998.
To United States Trust Company of New York
(the "Exchange Agent")
BY HAND DELIVERY: BY OVERNIGHT COURIER: BY REGISTERED OR
United States Trust United States Trust Company CERTIFIED MAIL:
Company of New York United States Trust Company
of New York 770 Broadway of New York
111 Broadway 13th Floor Box 843
Lower Level New York, NY 10003 Peter Cooper Station
New York, NY 10005 Attn: Corporate Trust Service New York, NY 10276
Attn: Corporate Trust Window Attn: Corporate Trust
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
United States Trust Company of New York
(212) 420-6152
Confirm: (800) 548-6565
FOR INFORMATION:
(800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
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 INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTY MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER
OF TRANSMITTAL FOR GUARANTY OF SIGNATURES.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to Kelley Oil & Gas Corporation, the
principal amount of the Outstanding Notes listed below, upon the terms of and
subject to the conditions set forth in the Prospectus and the related Letter of
Transmittal and the instructions thereto (which together constitute the
"Exchange Offer"), receipt of which is hereby acknowledged, pursuant to the
guaranteed delivery procedures set forth in the Prospectus, as follows:
PRINCIPAL AMOUNT TENDERED
NOTE AGGREGATE PRINCIPAL (MUST BE IN INTEGRAL MULTIPLES OF
NOS. AMOUNT OF NOTE(S) $1,000)
- ---- ------------------- -------------------------------
- ------------------- ------------------------- -------------------------------
- ------------------- ------------------------- -------------------------------
- ------------------- ------------------------- -------------------------------
- ------------------- ------------------------- -------------------------------
The Book-Entry Transfer Sign Here
Facility
Account Number (if the X
Outstanding Notes will be -------------------------------------
tendered by book-entry
transfer)
X
-------------------------------------
- ------------------------------- Signature(s)
Account Number
-------------------------------------
- ------------------------------- Number and Street or P.O. Box
Principal Amount Tendered
(must be in integral multiples -------------------------------------
of $1,000) City, State, Zip Code
Dated: ________________________, 1998
<PAGE>
GUARANTY
(NOT TO BE USED FOR SIGNATURE GUARANTY)
The undersigned, a member firm of a registered national securities exchange,
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office in the United States,
guarantees (a) that the above named person(s) "own(s)" the principal amount of
10 3/8% Senior Subordinated Notes due 2006, Series C, of Kelley Oil & Gas
Corporation (the "Outstanding Notes") tendered hereby within the meaning of
Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (b) that
such tender of such Outstanding Notes complies with Rule 14e-4 and (c) to
deliver to the Exchange Agent the certificates representing the Outstanding
Notes tendered hereby or confirmation of book-entry transfer of such
Outstanding Notes into the Exchange Agent's account at The Depository Trust
Company, in proper form for transfer, together with the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any
required signature guaranties and any other required documents, within five
New York Stock Exchange trading days after the Expiration Date.
Name of Firm __________________ Title________________________________
Authorized Signature __________ Address______________________________
Zip Code
Name __________________________
Please Type or Print Area Code and Telephone No.__________
Dated:_________________________, 1998
NOTE: DO NOT SEND ORIGINAL NOTES WITH THIS FORM. ORIGINAL NOTES SHOULD
BE SENT ONLY WITH A LETTER OF TRANSMITTAL.
